Investing.com -- HSBC strategists expect US stocks to rally in the first half (H1) of 2025, despite the current volatility driven by rising bond yields and a stronger dollar. The December Federal Reserve meeting was more hawkish than anticipated, leading to higher yields on US Treasuries (UST) and pressure on equities, bond proxies, and emerging market assets.
"The rise in UST yields triggered our Danger Zone, where virtually all asset classes have started to suffer," strategists noted. However, they believe the current market conditions may set up attractive opportunities in the coming months.
HSBC anticipates that near-term market weakness could continue. "The next few weeks may well remain choppy with fears of higher bond supply and/or stubborn inflation leading to a further underperformance of the long end, thus prompting more risk asset weakness," they said.
From a fundamental perspective, rising consensus and market-based inflation expectations suggest the outlook is becoming overly hawkish.
Looking further ahead, the bank sees potential for a turnaround. "Overall, we still think H1 is likely to be a proper Goldilocks backdrop," HSBC said, suggesting that the first half of 2025 may provide a favorable environment for both equities and fixed income.
"There's barely one Fed rate cut in the price for H1, which will then have to be re-priced more dovishly," they added.
HSBC highlights specific areas that could benefit from this environment. Bond proxies, such as homebuilders, "have sold off too aggressively of late," analysts said. US banks have also underperformed, but more deregulation hopes for more M&A activity and higher yields could all support the sector.
Furthermore, tech stocks could benefit from any further dip, analysts note.
Meanwhile, a potential stabilization in UST yields and the US dollar should be a bullish factor for emerging market (EM) equities given the strong foreign investor outflows recently.