HSBC believes the recent period of volatility across global financial markets has largely passed, with the bank saying a key sell signal in its market sentiment framework has disappeared, reinforcing its positive outlook for equities.
In a research note, Chief Multi-Asset Strategist Max Kettner argued that despite several significant market shocks over recent months, global equities have remained remarkably resilient.
Markets Weathered a Challenging Two Months
Kettner highlighted a series of events that created turbulence across asset classes, including a $30-per-barrel surge in oil prices following renewed conflict in the Middle East, a 40% decline in Asian memory-related stocks, sharp losses in momentum shares and a 50% drop in SpaceX’s share price from its intraday peak.
“And, yet, nothing has happened,” he wrote, noting global equities remain only around 1% below the record highs reached in early June.
Earnings and Valuations Support the Outlook
HSBC believes several factors have helped sustain the equity market despite recent uncertainty.
The bank noted that economic growth expectations have moderated significantly compared with earlier this year, while corporate earnings have continued to surprise to the upside.
According to HSBC, analysts have once again underestimated earnings, with 12-month forward earnings per share forecasts for the S&P 500 rising another 5.5% over the past year alongside a broadly positive second-quarter earnings season.
The bank also pointed to more attractive valuations, noting that the forward price-to-earnings ratio has fallen by roughly two multiple points from the 21.5 level recorded at the beginning of the Middle East conflict.
HSBC Maintains Overweight Equity Position
HSBC said higher government bond yields have helped explain why equity markets have largely ignored rising oil prices, adding that a continued unwinding of “U.S. exceptionalism” could eventually make lower bond yields supportive for stocks.
The bank also argued that the recent selloff in hyperscaler debt “masks lower issuance and strength elsewhere.”
With market sentiment improving, HSBC said it remains “max OW equities,” while continuing to overweight high-yield bonds and emerging-market credit.
At the same time, the firm remains underweight U.S. Treasuries, Japanese government bonds and oil.
According to HSBC, the disappearance of its sentiment-based sell signal strengthens the case for further gains in global equities.