J.P. Morgan: Seeing favorable odds for Chinese stocks after pullback: valuations fall, policy-backed funds return

How much cushion do valuations provide after the pullback?

JPMorgan believes the pullback following the first-half rally in 2026 has significantly reduced valuations and leverage. Although near-term volatility may persist, the scope for further declines in Chinese equities is narrowing.
The MSCI China Index trades at 9.3 times expected earnings over the next 12 months, close to the low of around 8.5 times before the “9·24” rally in 2024. On that basis, the bank estimates downside of about 9% from multiple compression if valuations return to that low.
The technology correction has been especially pronounced: the MSCI China A Information Technology Index’s forward price-to-earnings ratio fell from 47 times in June 2026 to 22 times, returning to its end-2024 level. JPMorgan believes AI capital expenditure commitments remain in place, earnings gains are spreading through the supply chain, and the recent pullback has been driven more by fund flows.

JPMorgan uses flows into major ETFs as a proxy for central government-backed funds: approximately 327 billion yuan flowed in during the second half of 2026, including around 176 billion yuan in October. The bank believes this signals a policy desire to limit declines and temper volatility.
The bank says these purchases equal only about 23% of outflows in the first half, leaving room for further buying. Historically, in the three months after large ETF inflows, the CSI 300 and MSCI China indices rose by an average of about 4% and 5%, respectively; outcomes varied by period, however. For example, both fell 11% after the inflows in August 2023.
Other funding channels remain weak: year-to-date southbound net inflows in 2026 total 429 billion Hong Kong dollars, only about 30% of the full-year 2025 figure. The approximately negative 340-basis-point spread between Chinese and US 10-year government bond yields also puts pressure on offshore funding conditions.

Exports supported overall growth: exports rose 21% year on year in the first three quarters of 2026, while third-quarter GDP grew 4.5% year on year, slightly above the market consensus of 4.4%. But consumption, housing, investment and credit creation remain weak; JPMorgan believes overall growth is resilient, which also reduces the likelihood of large-scale stimulus in the near term.
The bar for earnings expectations is high. The IBES consensus forecasts MSCI China Index earnings per share growth of 14% and 13% in 2026 and 2027, respectively, whereas actual year-on-year growth in the first and second quarters of 2026 was negative 8% and positive 4%, respectively. The breadth of forward earnings revisions has fallen to a year-to-date low of negative 19%.
US and EU trade restrictions targeting advanced manufacturing, including new energy vehicles and AI hardware, could affect both exports and index earnings. Tighter tax oversight and further increases in US Treasury yields or oil prices are also among the market risks JPMorgan lists.

Once the market stabilizes, the bank favors A-shares over H-shares and large caps over small caps: A-shares benefit more directly from advanced manufacturing upgrades and have better access to policy-backed funding, while large-cap valuations have corrected more noticeably and related ETF inflows can provide support.
Its sector strategy is a “barbell” allocation: a core overweight in information technology for AI growth, alongside overweights in financials, energy and healthcare to diversify risk through dividends, defensiveness and lower correlation with AI.
Banks’ expected dividend yield is around 5%, a spread of approximately 3.3 percentage points over China’s 10-year government bond yield. However, the bank dividend yield is already below its 10-year average of 6.1%. Earnings estimates for the energy sector have been revised upward, but its forward price-to-earnings ratio is already at the 74th percentile of its five-year range.
The bank is underweight consumer staples and real estate, citing weak household confidence, the continuing property downturn, and an unclear demand recovery and earnings catalysts.

JPMorgan notes that Chinese equities have historically tended to be weak ahead of US midterm elections and to recover after the event risk passes; the 2026 election is scheduled for 3 November.
The Central Economic Work Conference in December will set the direction for growth and policy in 2027. The bank is also watching whether domestic AI development can accelerate again as foundry and memory constraints ease, and whether more policy support emerges as exports slow.