UBS: A-share Q1 Earnings Recover Significantly, Margins Improve, Upgrade Full-Year Growth Expectation to 11%

Overview

This research report is UBS's review of earnings and strategy analysis for A-shares in Q1 2026. The core conclusion points out that A-share earnings saw a significant rebound in Q1 2026, especially for non-financial enterprises excluding finance, whose profit growth rate rose sharply from a low level in 2025 to 11.8%. This recovery was primarily driven by the expansion of global AI demand, the theme of technological self-reliance, and price and profit recovery in upstream and midstream industries promoted by domestic "anti-intense competition" policies. Based on this strong opening, UBS has raised its A-share 2026 full-year earnings growth expectation from 8% to 11%, and believes that earnings recovery will become the main force driving A-shares to achieve a "slow bull" market trajectory, structurally continuing to favor growth sectors.

Core views

Firstly, looking at overall earnings data, A-share total net profit in Q1 2026 grew 7.2% year-on-year, a pace significantly faster than the 3.8% full-year 2025 rate. A more critical highlight lies in the differentiation and improvement of earnings structure: the non-financial sector achieved high YoY growth of 11.8% in Q1, forming a strong contrast with the weak 0.8% growth of 2025 only; while financial industry growth remained relatively moderate at 2.2%. Specific breakdown shows bank sector benefited from improved macro environment with net profit growing 3%; while non-bank financial sector, affected by March market pullback, insurance business profit declined leading to an overall drop of 1%. Secondly, in terms of profit margins and capital expenditure, non-financial industry gross margin (GPM) and net margin (NPM) both improved year-on-year, reversing the downtrend since 2020, indicating aggregate demand (total demand) and corporate profitability are recovering. In capital expenditure, non-financial enterprise CAPEX grew 3.4% YoY, among which transportation, non-ferrous metals, defense, electronics, and computer five industries had the fastest capex growth rates, reaching as high as 52%, 45%, 40%, 37%, and 29% respectively, showing clear expansion willingness. Finally, industry and segment performance presented significant differentiation. Benefiting from rapid development of Artificial Intelligence (AI) and global technological independence trends, tech-related segments showed explosive earnings growth, with net profit increasing by 124%, 74%, and 53% in computer, electronics, and electrical equipment industries respectively. In contrast, consumer sector performance was weak, with food & beverage, home appliances, and auto earnings declining by 2%, 8%, and 22% respectively. From block indices, ChiNext and STAR Market far exceeded Main Board, growing 23% and 205% respectively, confirming innovation and new quality productive forces have a strong pulling effect on tech earnings.

Analysis framework

The report adopted a typical "top-down" combined with "volume-price breakdown" analysis framework. First, through comparison of macro and meso data (e.g., Overall A-share vs Non-financial A-share, Q1 single quarter vs full year), identify that the core driver of earnings recovery comes from the non-financial department of real economy. Secondly, apply industrial chain transmission logic, mapping "anti-intense competition" policy to positive PPI and profit recovery in upstream and midstream industries. At the same time, combine technical cycle (AI wave) and policy cycle (self-reliance), explain the internal logic of tech segment high growth. Finally, verify corporate confidence in future demand through Capital Expenditure (CAPEX) data, thus deriving judgment on subsequent market trend (slow bull).

Methodology notes

• Industry/Industrial Analysis FrameworkSupply-demand framework

  Deduce improvement in industry supply-demand pattern by observing changes in PPI (Producer Price Index)

  The report mentions that the "anti-excessive competition" action drove PPI to turn positive, subsequently driving profit rebound in upstream and midstream industries. This means when supply-side constraints strengthen or demand-side warms up, product price increases will directly improve enterprise profit margins, which is an important indicator for judging turning points of cyclic stocks and investment sectors.

• Valuation MethodPE/PEG valuation

  Adjust valuation center using earnings forecast revisions (Earnings Revisions)

  The report adjusted full-year earnings expectation from 8% to 11% based on first-quarter actual performance. In valuation logic, upward revision of numerator side (earnings) expectations usually directly improves reasonable stock valuation levels, which is the core basis for institutions to conduct dynamic valuation adjustments.

Key data

• A-share Overall Q1 Net Profit YoY Growth+7.2%Significantly faster than 2025 full-year 3.8% growth rate
• Non-financial A-share Q1 Net Profit YoY Growth+11.8%Strong rebound compared to 2025 full-year 0.8%, main driving force
• Computer Industry Q1 Net Profit YoY Growth+124%Benefited from global AI development demand
• STAR Market Q1 Net Profit YoY Growth+205%Typical representative of new quality productive forces and innovation driven
• Upgraded 2026 A-share Full-Year Earnings Growth Expectation11%Previous expectation was 8%

Impact & implications

The report believes that substantive recovery in earnings fundamentals will provide solid bottom support for A-share market, pushing market towards "slow bull" trend. Since earnings growth is concentrated in technology and non-bank finance areas, market style will continue to lean towards growth. For investors, should focus on benefiting AI industry chain, domestic substitution, and supply-side reform beneficiary upstream resource sectors. Conversely, traditional consumer sectors still face pressure currently, need to wait for further confirmation from demand side.

Risks

• Global economic recession leading to external demand contraction
• Domestic economic recovery falling short of expectations
• Geopolitical risks intensifying

What to watch

• Sustainability of PPI data in following months
• Actual implementation status of tech industry capital expenditure
• When consumer sector earnings hit bottom and recover