The strategists at HSBC are taking a positive stance on U.S. equities, asserting that the current bull market is not exceptional when compared to historical trends. They have upgraded their rating on U.S. stocks to “tactically overweight” from neutral, indicating a positive outlook over a three- to six-month horizon. To support their view, they presented a chart comparing the performance of the S&P 500 during this bull market to previous ones since 1956, suggesting that the recovery so far has been relatively subdued.
HSBC’s strategists argue against concerns of a bubble in U.S. stocks, highlighting that equity valuations have moved in line with declining interest-rate volatility since the beginning of the year. While acknowledging that valuations may have slightly outpaced rate volatility, they caution against overweighting equities excessively, as hawkish data surprises could lead to intermittent dips in valuations. However, they dismiss claims of a forming equity market bubble, emphasizing the diminishing uncertainty surrounding interest rates.
Regarding Federal Reserve rate cuts, HSBC’s strategists suggest that the number of cuts matters less than the fact that cuts are being made. They believe that the ultimate level of interest rates, which could impact valuations, is a concern for the future. They also note that both U.S. households and corporates have lower rate sensitivity than in previous decades, with non-financial debt at lower levels and fewer households holding floating-rate debt.
HSBC’s analysis suggests a tendency towards excessive bearishness on earnings, particularly favoring large caps and technology stocks for driving earnings and margin strength. They express caution towards U.S. small caps due to poor earnings momentum and the risk posed by a high share of floating-rate debt in the event of rising U.S. yields.
Lastly, HSBC points out that U.S. equities have not significantly outperformed since January 2022 relative to nominal gross domestic product growth, suggesting that as long as negative economic activity surprises remain limited, the outperformance of risk assets over developed market sovereign debt is likely to continue.
Overall, the S&P 500, Dow Jones Industrial Average, and Nasdaq Composite closing at record highs indicate the prevailing optimism in the U.S. equity market.