HSBC strategists said Monday they maintain a constructive view on global equity markets and foresee potential for further gains, though their conviction has slightly waned since the beginning of the year.
Global equity markets have been on a roll in 2024, surging 13% year-to-date. HSBC said its year-end FTSE All-World target of 570, in an increasingly likely Goldilocks scenario, suggests more modest returns with a 5% upside in the second half of the year.
“Still, in our conversations with clients we get the impression there's a fixation on the downside risks, and we believe the market is potentially overlooking five key upside catalysts,” strategists noted.
1) 'Earnings deliver:' Despite skepticism about the projected growth in US earnings, from 7% year-over-year in Q1 2024 to 17% by Q4, there are strong indications these estimates are attainable, according to HSBC.
"We see upside to the Magnificent 7's earnings which the consensus expects to slow sharply, we also believe the remaining S&P 493 can see a fast reacceleration given their EPS remains 11% below trend,” strategists wrote.
Globally, HSBC's macro activity tracker suggests earnings momentum should remain resilient, and their guidance sentiment indicators (GSI), which track corporate sentiment on earnings calls, are trending higher across major regions.
2) 'Goldilocks macro backdrop supports valuations:' The US June CPI report reinforced the narrative of moving towards a Goldilocks scenario, indicating cooling inflation.
"We believe this will provide an opportunity for the Fed to cut in September,” strategists commented.
Traditionally, when the Fed has begun easing and the US has avoided a recession, the S&P 500 has rallied 10% in the subsequent six months. HSBC also believes that greater clarity on the Fed's direction should reduce uncertainty and bond volatility, bolstering valuations. Their ROE/COE framework suggests valuations are not stretched.
3) 'AI momentum continues:' The AI theme faces increasing scrutiny. HSBC highlighted that the stocks related to the AI infrastructure build-out have returned 70% year-to-date, AI enablers are up 25%, and early AI adopters have delivered just 7%.
However, the bank’s team believes earnings revisions are the key indicator for the durability of the AI trade. On this metric, the backdrop looks healthy, with the 12-month forward EPS for key AI beneficiaries up 17% this year.
4) 'A catch-up, not catch-down trade:' Global equities may see additional support from better market breadth. While mega-cap tech is expected to continue leading, HSBC expects their dominance "to decrease in favor of more balanced market performance."
5) 'Positioning moves to euphoria:' Lastly, strategists said that across their suite of positioning indicators, there are few signs of clear sell signals. Institutional investors have increased risk exposure, and cash holdings are near three-year lows, but fund flows have not been exorbitant.