After the best-ever start to the year for Chinese stocks, the rampant stock market is going to run out of puff soon, Goldman Sachs reckons, but there is still upside to be had.
"Chinese equities have enjoyed the best start of the year in history," the bank pointed out in a note to clients, with the MSCI China index gaining 19% since the start of 2025, outperforming developing and emerging markets 18 and 14 percentage points, respectively.
"The 29% trough-to-peak surge ranks the third most significant rally in history," the bank notes, only trailing the post-2008 and Covid reopening recoveries.
Optimism about China's role in the AI revolution has helped lift the market, with a "positive narrative shift of China technology", as well as the confirmation of a pro-growth policy bias at the ongoing government 'two sessions' policy meeting.
The bank sees these factors also aided by "more benign" US-China relations so far under the new US administration than were previously feared by investors.
With index valuations charging closer towards what analysts think is a "fair" earnings multiple target and several positive domestic catalysts having materialized, Goldman now expects "the bull run to slow and profit-taking pressures to emerge as the US-China policy and geopolitical calendar turns active once again in the coming weeks".
AI remains a key driver, with DeepSeek-R1 and other models reinforcing confidence, as Goldman Sachs projects "a 15–20% equity valuation boost from AI adoption."
US-China tensions loom, but markets have "shrugged off the latest tariffs" amid measured Chinese responses.
Unlike 2023’s liquidity-driven rally, this one is "more sustainable, backed by earnings growth and innovation."
A-shares traded in Shanghai and Shenzen have lagged H-shares traded in Hong Kong by around 15 percentage points, but history suggests "mean-reversion is likely," especially with easing private sector regulations.
Goldman Sachs overall stayed with an 'overweight' rating China, favouring stocks focused on AI, consumer proxies and "laggard sectors like retail and media for tactical upside".