A stoic market has shaken off surging oil prices and a tech selloff, says HSBC

Strategists at HSBC are "maximum overweight" equities.

The equity market's resilience in the face of much volatility means investors should be "maximum overweight," according to HSBC.

In a note published this week, a team of strategists at the bank led by Max Kettner observed that global equities are only about 1% off their record highs hit in June, while there's little sign of distress in credit markets.

And this stoic performance comes despite a number of potentially destabilizing factors, including volatility in the oil market and in the technology sector.

Brent crude (BRN00) (BRNU26) is up 40% since the start of the year, and prices have fluctuated depending on expectations of a peace deal being reached between the U.S. and Iran. Since the start of the month, South Korea's Kospi index KR:180721, which is heavily exposed to memory chip makers, has fallen more than 30% as the PHLX Semiconductor Index SOX, consisting of U.S.-traded semiconductor companies, has fallen 16%. And after launching on the Nasdaq last month, Elon Musk's SpaceX $(SPCX)$ has tumbled over 20%.

"Yet, nothing seems to shake this market," the strategists wrote. Global equities are only around 1% off their recent all-time highs in early June, while European high-yield spreads are tighter and emerging market and dollar high-yield spreads are broadly the same, according to HSBC.

The strategists are "maximum overweight" equities for five reasons.

They hold that economic growth expectations are lower compared to earlier in the year, which means there's opportunity for a positive surprise as those downgrades are reversed, they said.

The strategists also noted that investors have been overly bearish on second-quarter earnings, where there have already been a lot of surprises, similar to during the previous financial reporting season.

Valuations, especially for U.S. stocks and some big tech names, are lower now than even at the start of the conflict in Iran, the strategists wrote.

At the same time, bond yields are considerably higher, with the yield on the 2-year Treasury note BX:TMUBMUSD02Y nearly a full percentage point above where it was when the U.S. and Israel first started attacking Iran. In the coming months, falling Treasury yields could provide a tailwind for stocks, though "just not quite yet," said HSBC, which remains "tactically" underweight U.S. Treasurys.

Additionally, the sell-off in memory stocks and hyperscalers' debt has obscured strength in other sectors, which have seen the benefits of a rotation out of those stocks, they said. That's a trend they see continuing in the weeks to come.

Kettner has remained bullish on stocks since 2023, as other rival Wall Street analysts have taken more cautious stances. As inflation and interest rates were rising, he maintained that equities would climb. The S&P 500 SPX finished the year 20% higher than it was in January.

Despite his position for maximum upside, Kettner told Bloomberg in an interview earlier this month: "Just because you've got it largely right for the last few years, you'll always have to stay alert to make sure that it stays like that."

-Nora Redmond