Investor confidence in Chinese earnings’ growth remains the missing ingredient to drive a sustained stock market rally in the world’s second-largest economy, already barraged by government stimulus measures and the overhang of U.S. tensions. “For Chinese equities to meaningfully outperform, we need to see the policy announcements result in an actual easing of deflationary pressures and a rebound in corporate earnings, both of which will take time,” Aaron Costello, head of Asia at Cambridge Associates, said in an email Thursday. The CSI 300 index dipped 1% last week, tumbling 2.4% on Friday alone, after Beijing reaffirmed plans for increasing the deficit next year and expanding economic support , but didn’t reveal details. China typically announces its GDP target and fiscal plans at a parliamentary meeting in March. Stocks are now almost 12% below the 52-week high reached in early October. “It is clear that China is setting the stage to increase stimulus in 2025, potentially to counteract any adverse trade policies from the incoming Trump administration,” Costello said. Cambridge Associates is neutral on Chinese stocks, wanting to see more evidence of a pickup in growth. Improving earnings Yet despite the broad pressure on the economy, earnings in specific industries are forecast to improve. Chinese medical device companies can see earnings widen next year, especially after the Ministry of Finance earlier this month set a draft of plans that would make it 20% cheaper for local governments to buy domestically produced products versus foreign ones, HSBC analysts said in a Dec. 10 report. While the public comment period closes in early January, implementation is unclear. “With recovery of China’s hospital procurement for medical equipment from September, we foresee a growth rebound for the China medical device sector in 2025,” the HSBC analysts said. Shanghai-traded United Imaging can see earnings grow 46% in 2025, reversing this year’s losses, they predict. Snibe, traded in the Shenzhen market, can see 19% earnings growth, with Mindray profits expected to climb 15%. HSBC rates all three stocks a buy. The new policy favoring domestic brands underscores China’s desire to reduce its reliance on exports to the U.S. and American-made high-tech products. The Biden administration has restricted Chinese companies from buying advanced semiconductors made in the U.S., while President-elect Donald Trump has vowed across-the-board, 10% tariffs on Chinese imports . But the exact nature of the next administration’s policy toward China is unclear. After ringing the opening bell at the New York Stock Exchange on Thursday, Trump also told CNBC’s Jim Cramer that “we’re going to have a lot of talks with China. We have a good relationship with China.” Trump cast his previous position on China as overly harsh, while noting how talks with Chinese President Xi Jinping could help address U.S. concerns. Separately on Thursday, Trump’s incoming press secretary Karoline Leavitt told Fox News that the President-elect has invited Xi to the Jan. 20 inauguration. Beijing has yet to publicly respond. Limited upside Upside for the MSCI China Index is limited until foreign investors know the scale of Trump’s tariffs and sanctions, and see profit growth across China’s economy, the Macro Research Board said in a note Wednesday. For now, foreign investors are only interested in trading around potential China policy shifts, but ignoring improving fundamentals, such as how large internet platform companies are seeing “significant” improvement in future earnings, the report said. “The key signal for upgrading positions in Chinese stocks [from neutral] will be found in an improvement in bank earnings,” the MRB report said, noting that “the single most important indicator for upgrading China would therefore be a pickup in credit volumes.” Credit data for November released Friday missed the expectations of economists polled by Reuters, and Citigroup analysts pointed out that lower corporate demand was largely responsible. Official figures on November retail sales, industrial production and investment are due out on Monday. “As much as Beijing wants to stimulate more employment, home buying and consumer spending, [policymakers] also want to avoid encouraging high-debt sectors to take on more debt,” Paul Christopher, head of global investment strategy at Wells Fargo Investment Institute, said in an email. “This dilemma is likely to mean more limited support than in the past.” “2024 provides a good example of what we think is to come,” Christopher said, referring to how Chinese stocks have whipsawed this year as forecasts of policy support rose and fell. Looking ahead to next year, Christopher said he still favors U.S. large-cap stocks over other asset classes. Those include smaller U.S. stocks and names listed overseas, he said, noting Wells Fargo “would use any bump higher in emerging market equities to reallocate to U.S. large-caps.” The S & P 500 is almost 27% higher in 2024, on pace for its second consecutive gain of more than 20%. In contrast, this year’s rally in Chinese stocks could snap multiple years of declines. Hong Kong’s Hang Seng Index is on track to break a four-year losing streak, posting a gain of more than 17% for the year so far. The Shanghai composite is up 14% year-to-date, after two straight years of losses. The MSCI China Index, which tracks stocks traded in both Hong Kong and the mainland, has held onto more than half of its gains since a surge of more than 35% fromthe lows in September to the October highs. Costello at Cambridge Associates pointed out in a 2025 outlook that a “market collapse is unlikely.” “Downside risks to China seem contained as monetary easing and actions taken to control local government debt risks should help to prevent further stress,” Costello said. — CNBC’s Michael Bloom contributed to this report.