In a note published Tuesday, HSBC set out why financial markets have repeatedly shrugged off adverse developments over the past several years, contending that a deeper structural shift has made risk assets notably resilient to shocks.
HSBC strategist Max Kettner catalogued a long list of possible setbacks since 2022 - from higher inflation and rising interest rates, to a U.S. regional banking crisis, tariffs, the crypto market collapse and the unwinding of carry trades. Despite that sequence of headwinds, Kettner wrote that risk assets have appeared to pay little heed to negative catalysts, calling the durability of markets "nothing short of breathtaking."
The note outlines several core explanations for this persistence.
- Earnings and growth resilience - Kettner argues that corporate earnings and underlying growth have proved stronger than consensus expectations, and that this outperformance extends beyond technology and artificial intelligence sectors.
- Positive equity-bond correlation - A shift toward a positive correlation between equities and bonds has diminished the role of government bonds as a portfolio diversifier, supporting higher equity allocations and contributing to a wealth effect that lifts valuations.
- Expanded monetary policy toolkit - Central banks now possess a broader range of policy tools than prior to the global financial crisis, which Kettner views as a stabilizing factor for markets.
- Lower oil intensity and structural credit improvements - Lower oil intensity in developed economies compared with the 1970s and 1980s, lower non-government leverage, improved quality in credit indices, faster price discovery and the mechanics of passive fund rebalancing were all cited as additional supports.
Kettner also considered what might bring the current stretch to an end. He identified the United States as the principal point of vulnerability given its disproportionate weight in equity and credit markets. Specific threats flagged include higher corporate taxes, a reversal to a negative equity-bond correlation driven by below-target inflation, or the removal of the implicit central bank support that has become intertwined with equity performance, wealth effects and financial conditions. He added that removing central bank support would be difficult to imagine given those interconnections.
Overall, the note frames recent market strength as the product of multiple reinforcing structural factors rather than a single transient driver, while singling out U.S.-centric developments as the primary scenario that could reverse the current dynamic.
Note: The observations above reflect the analysis presented in the HSBC strategist's note and do not introduce additional facts beyond that source.