Despite a 40% surge in oil prices this year, a sharp downturn in the global semiconductor sector, and ongoing tensions in the Middle East, global stock markets are less than 1% away from their all-time highs. HSBC Holdings PLC believes this surprising resilience shows the market has already priced in most of the negative news, while positive catalysts like improving earnings and falling interest rates are still on the horizon, making now the right time to lift stock allocations to a "maximum overweight" position.

A team of strategists at HSBC Holdings PLC, led by Max Kettner, released a research report this week stating that the market has remained strong in the face of a series of shocks: Brent crude oil is up 40% year-to-date, South Korea's KOSPI index has fallen more than 30% this month, the Philadelphia Semiconductor Index (SOX) is down 16% over the same period, and shares of Elon Musk's SpaceX have also dropped more than 20% since their listing. Yet, global stock markets are still just a stone's throw away from their record highs.

"It seems that nothing can truly shake this market," the Kettner team wrote in the report.

Furthermore, credit markets have not signaled any significant risk. Spreads on European high-yield bonds continue to narrow, while spreads on emerging market and dollar high-yield bonds are largely flat, further confirming that overall market risk appetite remains solid.

Five Reasons Supporting a "Maximum Overweight" Stance

HSBC Holdings PLC maintains its "maximum overweight" rating on stocks, based on five key judgments. First, expectations for global economic growth have been significantly revised downward from the start of the year, meaning it is now easier for positive data surprises to emerge rather than new disappointments.

Second, investors were overly pessimistic about second-quarter corporate earnings, but the current earnings season has once again seen a broad wave of beats, mirroring the pattern from the previous quarter. The resilience of corporate profits continues to exceed market expectations.

Third, from a valuation perspective, U.S. stocks, particularly some large-cap technology shares, are currently valued even lower than at the start of the U.S.-Iran conflict, providing a higher margin of safety for future gains.

Fourth, the sharp rise in U.S. Treasury yields actually creates room for a decline in the future. The current 2-year U.S. Treasury yield stands at 4.316%, nearly one percentage point higher than when the Middle East conflict erupted. HSBC Holdings PLC expects that falling bond yields will become a significant support factor for stocks in the coming months, though the timing is not yet mature, so it maintains a "tactical underweight" on U.S. Treasuries for now.

Fifth, recent concentrated selling in memory chip stocks and bonds of hyperscale cloud computing companies has not seen capital exit the market. Instead, it has flowed into other sectors, driving a continued rotation within the market. HSBC Holdings PLC anticipates this capital reallocation process will persist over the next few weeks.

Kettner Remains Steadfast After a Prolonged Bullish Run

Since 2023, Kettner has been one of Wall Street's most steadfast bulls. At that time, amid high inflation and aggressive interest rate hikes, most strategists were cautious about stocks, but Kettner insisted on a bullish view. Subsequently, the S&P 500 index rose 20% for the year, validating his judgment. However, Kettner has not become complacent after his success in recent years. In an interview with Bloomberg earlier this month, he said: "Even if our judgments have been largely correct in the past few years, we must constantly verify whether these judgments still hold true."

Today, global stock markets are about 1% away from the record highs set in early June. In HSBC Holdings PLC's view, the market has proven it can withstand a series of negative factors like oil price surges, escalating geopolitical conflicts, and tech stock corrections. What has not yet been fully priced in, however, is the potential for a new round of upward momentum driven by persistently better-than-expected corporate earnings and falling bond yields.