Global momentum trading, which has driven equity market performance this year, is at risk of a more significant pullback, with market style expected to further rotate towards cyclical and value stocks, according to a recent strategy report.

The bank advises investors to increase allocations to US discretionary consumer and banking sectors, as well as cyclical stocks in Europe and emerging markets.

HSBC Holdings PLC noted that its tracked global long/short momentum factor has declined by 15% over the past three weeks.

Historical patterns suggest that after a cumulative 20% rise in the momentum factor, subsequent corrections typically last around six months, indicating the current de-momentum process may not be over.

The report highlighted the uniqueness of this cycle, where the momentum factor surged an additional 25% after a 20% gain, marking one of the strongest rallies on record and making it more susceptible to a prolonged and deeper correction.

However, HSBC Holdings PLC believes that while the concentration of global equity indices remains near historic highs, market breadth is improving.

Year-to-date, the S&P 500 Equal Weight Index, the Emerging Markets Equal Weight Index, and the Europe Equal Weight Index have risen approximately 12%, 5%, and 10% respectively, showing the rally is gradually broadening beyond a handful of tech giants.

HSBC Holdings PLC expects this market rotation to be supported by five key pillars: corporate earnings, central bank policy, capital expenditure, consumer demand, and fund inflows.

Regarding corporate earnings, the bank suggests the market is underestimating the potential for profit growth to spread to more sectors.

While consensus expects 23% year-on-year earnings growth for the S&P 500 this year, primarily concentrated in tech and energy, the proportion of US corporate earnings estimates being revised upwards has climbed to 73%, the highest level since 2021 and in the top 20th percentile historically since 2000, indicating the market retains early-cycle economic characteristics.

On monetary policy, HSBC Holdings PLC argues that the market has largely priced in expectations for a more hawkish Federal Reserve, with the probability of further 25 or 50 basis point hikes each around 35%, leaving limited room for more hawkish expectations to intensify, which should benefit cyclical sectors.

Consumer demand is another crucial support for the rotation.

HSBC Holdings PLC points to a resilient US labor market, significantly improved consumer confidence among high-income groups, and the upcoming FIFA World Cup potentially providing a further boost to consumption activity.

In terms of liquidity, the bank believes the market has sufficient capacity to absorb record levels of new equity issuance and financing.

US-listed companies have announced roughly $850 billion in share buyback plans this year, while US ETFs have attracted approximately $550 billion in inflows.

HSBC Holdings PLC forecasts that US corporate net share buybacks could still reach around $700 billion in 2026, roughly in line with 2025 levels.

For specific allocations, HSBC Holdings PLC favors the US Consumer Discretionary Select Sector SPDR Fund (XLY.US), noting that excluding Amazon.com Inc (AMZN.US) and Tesla Inc (TSLA.US), the sector's forward 12-month P/E ratio is only 16.6x, at the lowest 10th percentile since 2015.

Additionally, the bank is positive on the US 银行 sector benefiting from strong earnings, and previously underperforming European cyclical industries, including airlines, hotels, luxury goods, and defense.

For emerging markets, HSBC Holdings PLC highlights investment opportunities in South Africa, Chile, and Central and Eastern Europe that stand to gain from economic recovery cycles.

It also views equity valuations in Brazil and Turkey as particularly attractive, with recent performance significantly lagging fundamentals, suggesting room for value recovery.