Risk assets have continued to withstand a series of potential market pressures since 2022, with HSBC strategist Max Kettner attributing the pattern to factors ranging from earnings growth to changes in monetary policy tools and market structure.
Kettner said in a Tuesday note that markets have encountered higher inflation and interest rates, turmoil among U.S. regional banks, tariffs, a cryptocurrency market decline and the unwinding of carry trades during the period.
“Yet it seems as if risk assets continue to ignore every negative catalyst,” he wrote, calling their resilience “nothing short of breathtaking.”
HSBC Strategist Points to Earnings, Growth and Asset Allocation
One explanation identified by Kettner is the performance of corporate earnings and economic growth. He said consensus estimates have consistently underestimated their resilience, including outside the technology and artificial intelligence sectors.
Changes in the relationship between equities and fixed income have also contributed, according to the strategist. A positive equity-bond correlation has reduced the role of bonds as a portfolio diversifier, which Kettner said has helped keep equity allocations elevated.
A wealth effect has also contributed to higher valuations, he said.
Kettner identified several additional structural factors, including an expansion of the tools available to central banks since the global financial crisis. He also noted that developed economies are less dependent on oil relative to economic activity than they were during the 1970s and 1980s.
Other factors cited in the note include comparatively low leverage outside government sectors, changes in the quality of credit indices, quicker price discovery and portfolio rebalancing by passive funds.
U.S. Market Exposure Among Potential Sources of Risk
Kettner said the U.S. represents the main potential source of risk to the current environment because of its comparatively large share of global equity and credit markets.
Among the developments that could affect risk assets, he cited an increase in corporate taxation.
Below-target inflation could also result in equities and bonds returning to a negative correlation, changing one of the conditions that Kettner identified as supporting current asset allocations.
The strategist additionally cited the possibility that central banks could withdraw the support markets expect during periods of financial stress. Kettner said he finds such an outcome difficult to envisage given the degree to which equities, wealth effects and financial conditions have become interconnected.
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