Earnings-Driven Bull Case for China Equities in 2026

The Chinese equity market is poised for a pivotal shift in 2026, as Goldman Sachs' 20% MSCI China target hinges on a transition from sentiment-driven gains to earnings-led growth. While 2025 saw market rotation fueled by speculative optimism and policy hopes, 2026 is expected to be defined by structural catalysts: AI-driven profit acceleration, anti-involution reforms, and a valuation re-rating. These factors, combined with a realistic assessment of China's undervalued equities, form a compelling bull case for investors willing to navigate geopolitical risks.

Structural Catalysts: AI and Anti-Involution Policies

Goldman Sachs Research underscores artificial intelligence as a cornerstone of China's profit growth. Hyperscaler AI companies are projected to invest over $527 billion in 2026, spurring demand for semiconductors, cloud infrastructure, and data centers.

This surge in capital expenditure is expected to translate into corporate earnings expansion, with profit growth rates reaching 14% in 2026 and 12% in 2027. The firm attributes this to AI's role in enhancing productivity and enabling new revenue streams across sectors such as fintech, healthcare, and manufacturing.

Parallel to technological advancements, China's anti-involution policies aim to address overcapacity and restore profitability in key industries. By imposing production cuts, pricing floors, and mergers in sectors like steel, cement, and electric vehicles, the government seeks to eliminate inefficient operations and consolidate market power. These measures align with the 15th Five-Year Plan's emphasis on modernizing traditional industries and fostering high-value-added sectors. For instance, the phase-out of outdated EV manufacturing capacity is expected to stabilize pricing and margins, creating a more sustainable competitive landscape.

Valuation Realism: A 10% Re-Rating Opportunity

Chinese equities remain significantly undervalued relative to global peers, presenting a compelling re-rating opportunity. Goldman Sachs estimates that a normalization of valuation multiples could add 10 percentage points to market gains in 2026. This potential re-rating is underpinned by improving corporate governance, a more favorable regulatory environment, and the global shift toward AI-driven growth. For example, tech and consumer discretionary sectors, which have historically traded at discounts, could see multiple expansion as earnings visibility improves.

Contrasting 2025 and 2026: Sentiment vs. Earnings

The 2025 rally in Chinese equities was largely sentiment-driven, fueled by hopes of policy easing and a soft landing narrative. However, Goldman Sachs warns that this dynamic may not sustain in 2026, as investors increasingly demand earnings validation. The firm's 2026 outlook hinges on structural improvements rather than macroeconomic stabilization. For instance, while China's GDP growth is forecast to reach 4.8% in 2026, driven by export resilience, the focus for equities will be on sector-specific earnings momentum from AI adoption and policy-driven consolidation.

Geopolitical Risks and Mitigation Strategies

Persistent geopolitical tensions, including high tariffs and supply chain realignments, remain a drag on investor confidence. Goldman Sachs acknowledges that AI's global diffusion could exacerbate trade frictions, particularly as China seeks to secure access to critical technologies. However, the firm argues that structural reforms and a stronger export sector will mitigate these risks. Investors are advised to focus on sectors with domestic demand resilience, such as healthcare and education, while hedging against currency volatility through diversified portfolios.

Actionable Insights for Investors

For those positioning for 2026, the bull case rests on three pillars:
1. Overweight in AI-Enabled Sectors: Prioritize companies with exposure to AI infrastructure, semiconductors, and cloud computing.
2. Anti-Involution Beneficiaries: Target firms in consolidated industries (e.g., EVs, renewables) where margin expansion is likely.
3. Valuation Arbitrage: Seek undervalued equities with strong earnings visibility, particularly in tech and consumer discretionary.

While geopolitical risks cannot be ignored, the combination of profit acceleration and valuation realism provides a durable foundation for long-term gains. As Goldman Sachs' 20% target suggests, 2026 could mark a turning point for China equities-a shift from speculative bets to earnings-driven growth.