HSBC strategist Max Kettner outlined a series of factors that he said have helped risk assets remain resilient despite economic, financial and geopolitical pressures since 2022.
In a note published Tuesday, Kettner pointed to a range of potential market setbacks over the period, including higher inflation and interest rates, the U.S. regional banking crisis, tariffs, the cryptocurrency market decline and the unwinding of carry trades.
“Yet it seems as if risk assets continue to ignore every negative catalyst,” Kettner wrote, describing their performance as “nothing short of breathtaking.”
Earnings and Growth Among Factors Supporting Markets
Kettner identified earnings and economic growth resilience as central factors behind the performance of risk assets. He said consensus expectations have repeatedly underestimated this resilience, including in sectors outside technology and artificial intelligence.
The strategist also cited the positive correlation between equities and bonds. According to Kettner, this relationship has reduced the diversification benefits traditionally associated with bonds and contributed to maintaining higher allocations to equities.
He also pointed to a wealth effect supporting valuations.
Other factors cited by Kettner include the range of policy tools now available to central banks compared with the period before the global financial crisis and the lower oil intensity of developed economies relative to the 1970s and 1980s.
He also identified low leverage in non-government sectors, improved credit index quality, faster price discovery and rebalancing by passive investment funds as factors contributing to market resilience.
Kettner Identifies Potential Risks to Current Market Conditions
Looking at factors that could alter the current environment, Kettner said the largest risk is concentrated in the U.S. because of the country’s weight in global equity and credit markets.
He identified higher corporate taxes as one potential pressure on risk assets.
Kettner also said a return to a negative correlation between equities and bonds, potentially resulting from below-target inflation, could affect current market dynamics.
Another potential factor would be the removal of central bank support during periods of market stress. However, Kettner said he considers that scenario difficult to envisage because of the connections between equity markets, wealth effects and broader financial conditions.
Get stock prices from InvestorsHub
