U.S. Stocks Are Getting Three Things Wrong, According to This Bank

U.S. trade policy has been especially fluid this week, with new developments leaving financial markets slightly unsettled Friday morning. Investors have been trying to interpret the latest moves from Washington and assess what they might mean for the broader economy and asset prices. Still, not everyone is worried about these changes—least of all strategists at HSBC.

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According to a note from HSBC’s Max Kettner, chief multi-asset strategist, the ongoing discussion around tariffs and trade has taken a back seat in the market’s current focus. “From our perspective, the tariff debate has largely faded following the pause in U.S.-China trade tensions,” the team stated. They added that recent market behavior shows a reduced sensitivity of risk assets—like stocks and corporate bonds—to tariff-related headlines.

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Despite the policy uncertainty, the U.S. economy appears to be on solid ground. Consumer spending has bounced back strongly, and HSBC believes consensus forecasts may actually be underestimating the economy’s resilience. “Low expectations set the stage for positive surprises,” they wrote. If economic data continues to beat subdued forecasts, it could serve as an additional tailwind for risk assets by prompting upward revisions.

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One concern often associated with tariffs is inflation. However, HSBC notes that, so far, tariffs haven’t reignited pricing pressures. In fact, inflationary trends appear to be moderating. Another benefit of the ongoing trade discussions, they argue, is that it keeps investor sentiment and positioning relatively balanced, preventing the market from becoming too euphoric or too bearish.

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As earnings season kicks off next week, HSBC is skeptical of the prevailing market view that corporate profits will shrink on a quarterly basis. “We disagree with the expectation of a quarter-on-quarter earnings decline,” they wrote.

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Earnings estimates have already been revised lower over the past few months—the largest downward shift in three years. Given how much activity was pulled forward into the earlier part of the year, they believe earnings per share (EPS) could actually see a temporary boost in the second quarter, not the decline most are predicting.

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A common concern among investors right now is that U.S. equities are expensive, especially after the S&P 500 recently hit a record high. However, HSBC argues that valuations aren’t stretched when viewed on an equal-weighted basis. In fact, the benchmark index is only modestly above its long-term average, suggesting there’s still room for further gains.

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Bringing all their observations together, HSBC’s strategists point to a number of popular but potentially flawed narratives that are driving investor sentiment around U.S. markets. These include the widespread belief that U.S. economic growth is headed for a steep slowdown, expectations of further weakness in the U.S. dollar, and the view that American stocks will lag behind global markets in the second half of the year. “These are widely held views, but we think they may turn out to be wrong,” the strategists wrote.

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With that in mind, HSBC has adjusted its multi-asset portfolio to reflect more confidence in U.S. equities. The firm increased its allocation to U.S. stocks by four percentage points, raising it to 31% of its total portfolio. In their overall portfolio breakdown, equities now make up 50%, followed by government bonds at 25%, corporate credit at 10%, and both commodities and cash each at 5%.

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On Friday morning, stock futures in the U.S. were pointing to a lower open, with S&P 500 and Nasdaq futures down 0.64% and 0.57%, respectively. This follows a Thursday rally that saw the S&P 500 close at a fresh all-time high.

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Meanwhile, bitcoin made headlines with another record-breaking move, while gold prices also climbed, reflecting investor interest in alternative stores of value.

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Despite the cautious tone in early futures trading, HSBC’s outlook remains constructive. They believe the current environment is ripe for upside surprises, especially as expectations remain low and productivity indicators stay strong. Their view is that U.S. markets may still offer attractive opportunities, even in the face of political and economic uncertainties.

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In short, while shifting trade policies and geopolitical concerns may be making headlines, HSBC is betting that the strength of the U.S. consumer, improving corporate earnings, and underappreciated valuations will help carry markets higher through the rest of the year.

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