Liquidity vital to cementing stocks outlook

"We believe much of the past few years' reform efforts are meant to address this ... and if ongoing reform efforts start to bear fruit in 2015, this could arrest the de-rating of China's valuation multiple," said Paul Louie, an analyst at Barclays.

The bank said that because profits are no longer being sacrificed at the expense of top-line growth, "healthier sustainable earnings" could lift the ratios back up to the past five years' average of 10-13.8.

It highlighted traditional industries such as consumer stocks, non-bank financials, property and SOEs as top beneficiaries of economic rebalancing and reform.

Most economists agree that the economy has avoided a hard landing, paving the way for a looser monetary environment, which is bullish.

"As fixed-asset investment slows, especially in the property market, the constraints for adopting monetary easing have been removed," said Liang.

The contribution of investment to GDP growth declined significantly in 2014 and fell below the contribution of consumption, CICC said.

Economists expect more interest rate cuts, as well as a reserve requirement ratio cut, during the first half of 2015.

Analysts said that looser monetary policy will drive short-term market rates down, lure capital to investment products with higher risks and yields, and thus push A-share valuations up.

"Capital inflow will continue to dominate the A-share market in 2015," Chen Li, chief China strategist with UBS AG, wrote in a recent note.

New funds are flowing into stocks from the domestic banking system and overseas investors. Mid- and large-cap stocks, including the shares of major SOEs and companies in the healthcare and consumer discretionary sectors, will attract such funds. The Stock Connect will help that process, Chen wrote.

The mainland's small investors, who generate 80 percent of A-share trades, should not be underestimated. They are seeking new investment channels as the property market remains weak and money market returns decline in a low-interest rate environment.

These investors are reallocating assets to the rising stock market, opening accounts at the fastest pace in three years. More than 1 million new brokerage accounts were set up in November, up 280 percent year-on-year, according to Reuters.