HSBC Cites Structural Shifts for 'Breathtaking' Market Resilience Amid Shocks

Financial markets have demonstrated a remarkable ability to withstand a series of significant economic and geopolitical shocks, a trend HSBC attributes to several deep-seated structural shifts. In a note to clients Tuesday, the bank's strategists described the strength of risk assets as "nothing short of breathtaking" in the face of numerous headwinds since 2022.

A Pattern of Resilience

HSBC strategist Max Kettner highlighted a long list of negative catalysts that markets have largely absorbed without a sustained downturn. These include persistently high inflation, aggressive interest rate hikes, a U.S. regional banking crisis, tariffs, the collapse of major crypto assets, and the unwinding of popular carry trades.

"Yet it seems as if risk assets continue to ignore every negative catalyst," Kettner wrote. This persistent strength suggests that underlying market dynamics have fundamentally changed, making equities and other risk-sensitive investments less fragile than in previous cycles.

Key Drivers of Market Strength

HSBC identified several core reasons for this unusual resilience, led by the persistent underestimation of corporate earnings and economic growth, even in sectors outside of technology and artificial intelligence.

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Other significant contributing factors cited by the bank include:

• A positive equity-bond correlation, which has reduced the effectiveness of bonds as a portfolio diversifier and helped maintain high allocations to stocks.
• A powerful wealth effect that has continued to lift asset valuations.
• An expanded toolkit for central banks, developed since the global financial crisis, allowing for more decisive intervention.
• Lower oil intensity in developed economies compared to the 1970s and 1980s, lessening the economic impact of energy price shocks.
• Relatively low leverage across non-government sectors and improved credit quality in major indices.

Potential Risks on the Horizon

Looking ahead, Kettner believes the greatest risk to the current market regime originates in the United States, given its dominant weight in global equity and credit markets. A significant downturn could be triggered by higher corporate taxes or a return to a negative equity-bond correlation, which could occur if inflation falls below central bank targets.

Another potential threat is the removal of the perceived "central bank put"—the belief that monetary authorities will always step in to support markets. However, Kettner noted this is "hard to imagine," given how deeply intertwined equity performance, wealth effects, and overall financial conditions have become.