Currently, the valuation of A-shares is at a historical low, but the peak price-to-earnings (P/E) ratio in each previous bull market has been decreasing, indicating that the market is gradually maturing and becoming more rational. The sustainability of the market trend depends on whether profitability is enhanced.

The A-share market has recently regained its popularity, and many investors are concerned about how much further it can rise. However, predicting market trends is difficult, and the author can only provide an analysis based on fundamentals.

Fundamentals depend on the current valuation level and the future growth rate of performance. The latter is also hard to predict, so we can only pay more attention to the current market valuation and profitability.

Profitability is more important

First, let's look at the equal-weighted rolling P/E ratio. Equal-weighted means that all constituent stocks are not averaged based on market capitalization, but simply averaged. The reason for looking at equal-weighted is that the net profit of bank stocks in A-shares accounts for nearly 40%, and their P/E is very low. If not equal-weighted, it would greatly lower the P/E. Rolling refers to TTM, which is the performance of the last four quarters.

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As of October 15, the equal-weighted rolling P/E of the CSI 300 Index is about 28.44 times, at the 18.58% percentile in history. In other words, it is lower than the valuation level of 81.42% of the time in history, at a relatively low level. Historically, the highest P/E during a major bull market can reach 45-50 times, with about 58%-76% room for growth. The resistance level is around 35 times P/E. However, history may not necessarily repeat itself.

For the CSI 500 Index, as of October 15, the equal-weighted rolling P/E is 36.07 times, at the 22.14% percentile in history. During a bull market, the highest P/E has reached over 80 times, with about 120% room for growth. The resistance level is around 42 times.

As of October 15, the equal-weighted rolling P/E of the CSI 1000 Index is 43.74 times, at the 22.10% percentile in history. Historically, during a bull market, the highest P/E has reached over 100 times, with about 128% room for growth. The resistance level is around 50 times.

We can compare this with the U.S. S&P 500 Index. As of October 15, the equal-weighted rolling P/E is 27.14 times, at one of the highest historical levels (98.94% percentile), equivalent to the valuation level at the peak of a bull market. The P/E of A-share main indexes is not cheaper than that of U.S. stocks. It's just that U.S. stocks have been historically low in valuation and relatively high now, while A-shares have been historically high in valuation and relatively low now.

Let's look at the price-to-book ratio (P/B). As of October 15, the equal-weighted P/B of the CSI 300 Index is 3.06 times, with a historical percentile of 32.31%. The equal-weighted P/B of the CSI 500 Index is 2.72 times, with a historical percentile of 20.33%. The equal-weighted P/B of the CSI 1000 Index is 2.83 times, with a historical percentile of 13.37%.In a booming bull market, it can also be stipulated that secondary investors holding 5% of the freely tradable shares of new and secondary new stocks are considered as holding 5% of the total share capital, requiring a trading halt announcement and compliance with various corresponding restrictive measures.

At the same time, reform the Shanghai Composite Index to a market capitalization weighted index of 100-300 constituent stocks, with dividends requiring adjustment for stock splits. At the peak of the bull market, fully promote short selling and securities lending, allowing ordinary people's holdings to be eligible for securities lending.