(Bloomberg) -- A liquidity-driven rally in Chinese stocks is sparking debate among Wall Street analysts over its sustainability, as macroeconomic indicators remain weak.

Goldman Sachs Group Inc. strategists raised their 12-month target for the CSI 300 Index to 4,900 from 4,500 on Thursday, citing supportive valuation metrics, trend-level profit growth in the high single digits, and favorable market positioning. In contrast, those at Morgan Stanley are more cautious, flagging emerging signs of market overheating.

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“The uptrend has legs notwithstanding near-term profit-taking pressures,” Goldman strategists including Kinger Lau wrote in a note. “Liquidity factors and valuation expansion, as opposed to cyclical macro fundamentals, have been the main propeller of equity gains globally, China included.”

Despite a sluggish economic backdrop, Chinese stocks are surging. The CSI 300 has gained around 10% this month, ranking among the best-performing major indexes. The average daily turnover volume so far in August is 2.2 trillion yuan ($309 billion), on track to be a record.

The firms’ split views reflect the varying risk profiles that investors must navigate, as the rally appears fueled more by liquidity than lasting economic strength.

The CSI 300 closed Thursday at 4,463.78, about 10% below Goldman’s new target.

Morgan Stanley analysts noted that while signs of overheating are not yet prevalent, improving corporate fundamentals and stronger policy support need to follow up soon.

“Additional liquidity is still available for equity allocation; however, only under the condition that corporate earnings and top-down government policies can follow through as soon as possible,” Morgan Stanley analysts including Laura Wang wrote in a note. “As demonstrated by previous short-lived attempted A-share rallies, the big hurdle to rally sustainability still lies in fundamentals and long-term macro growth outlook.”

Earlier this month, HSBC Holdings Plc analysts raised their targets for China’s onshore equity gauges on abundant domestic liquidity, forecasting 4,000 for the Shanghai Composite index by year-end from its Thursday close at 3,843.6. HSBC also estimated 4,600 for the CSI 300 index by year-end.

JPMorgan Chase & Co. strategists see signs of crowded investor positioning in Asia, though they say global policy easing and the current liquidity surge in China are providing a strong counter-force. They estimate 24% upside to the CSI 300 and 35% upside for the MSCI China index by the end of 2026.

“The equity bull market will remain intact and any correction/consolidation will present a buying opportunity,” JPMorgan strategists including Rajiv Batra, Mixo Das and Wendy Liu wrote in a Thursday note on Asian markets. “However, it is important to manage risks where positioning is particularly crowded.”

--With assistance from April Ma.

(Adds HSBC, JPMorgan views in last three paragraphs.)

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