HSBC Says Stock Sell Signal Has Faded, Reaffirming Bullish Stance

A recent sell signal in HSBC's sentiment and positioning framework has vanished, leading the bank to tell clients on Tuesday that the recent turbulence across risk assets has likely run its course. The development reinforces the firm's bullish outlook, positioning it for further gains in the stock market.

Resilience Amid Volatility

In the client note, HSBC's chief multi-asset strategist, Max Kettner, highlighted the market's surprising resilience over a challenging two-month period. He pointed to significant sell-offs in specific areas, including a $30 rise in oil prices, a 40% drop in Asian memory chip stocks, and sharp declines in momentum stocks.

Despite these pressures, Kettner noted that global equities remain only about 1% below their record highs from early June. "And, yet, nothing has happened," he wrote, underscoring the market's ability to absorb sector-specific shocks without a broader collapse.

Fundamental Strengths

HSBC outlined several fundamental reasons for the market's stability and its optimistic forecast:

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• Earnings Beat Expectations: Investors have been overly bearish on corporate profits, with S&P 500 12-month forward earnings per share (EPS) being revised upward by 5.5% over the past year.
• Valuations Have Reset: The market's forward price-to-earnings multiple has contracted by two full points from its recent peak of 21.5, creating a more attractive entry point.
• Bond Yields: The bank argued that higher bond yields have helped equities withstand the impact of rising oil prices. Kettner also suggested that an unwind of "U.S. exceptionalism" could turn a future decline in yields into a tailwind for stocks.

Strategic Positioning

With the negative news flow largely in the past and the sell signal gone, HSBC stated it remains at a "max OW equities" (maximum overweight) position. The bank is also overweight high-yield and emerging-market credit.

Conversely, the firm holds an underweight position on U.S. Treasuries, Japanese government bonds, and oil, reflecting its confidence that the environment is favorable for risk assets to continue their advance.