HSBC: Is the current US stock market a bubble?

HSBC believes that the current risk assets do not constitute a bubble, but are more similar to the market environment in 2017, with the potential for risk assets to continue to rise steadily.

Overnight, US stocks surged, with the SPDR S&P 500 posting its largest weekly gain in three months, and the Nasdaq closing at a historic high. Combining the strong performance since last year, some believe that the upward trend supported by tech stocks may have peaked, with a possibility of a "bubble" burst.

An analysis report released by HSBC analyst Max Kettner's team on March 22nd suggests that despite the market appearing to be in the late stages of an extreme cycle, on the contrary, we may actually still be in the early stages of the economic cycle.

In terms of results, the report states that compared to the peak in January 2022, the cumulative increase in US stocks is only 9%, while the nominal GDP in the US has grown by over 13% since that time, indicating that the economy is still on a path of stable growth, which does not align with the characteristics of an imminent "bubble" burst.

As long as there is a rate cut, the stock market can continue its upward trend

In recent months, both the US and global economies have seen a series of strong rebounds in indicators and macro variables. HSBC believes that even some indicators and macro variables show characteristics of an early stage of an uptrend cycle rather than a late stage.

The report indicates that for broader risk assets such as stocks, whether the Federal Reserve cuts interest rates two or three times is not a binary question: as long as there is a rate cut, the stock market will not reverse.

HSBC points out that in fact, stock valuations are consistent with the decrease in interest rate volatility.

Stock valuations are slightly ahead of interest rate volatility. Therefore, we are not significantly overweighting stocks at this point, as unexpected hawkish data could still lead to intermittent declines in stock valuations.

However, claims that the stock market is forming a bubble overlook a major change that has already occurred, which is the dissipation of interest rate uncertainty.

From the perspective of economic growth, it is not surprising that risk assets continue to rise.

HSBC found that the negative impact of the interest rate hike cycle from 2022 to 2023 on the US economy is not significant, largely due to the low sensitivity of businesses and households to interest rates.

For example, some companies have terminated debt while holding cash close to historical highs.

Therefore, the net interest expense of non-financial US companies is currently at the lowest level since the outbreak of the global financial crisis.

Similarly, floating-rate debt for US households has decreased significantly, while the rise in stocks and housing prices last year has brought about significant positive wealth effects

In fact, looking at the average bull market of the S&P 500 index over the past few decades, the starting point of this round of market is lower.

Previously, major Wall Street banks including Goldman Sachs and Bank of America warned that the current rise in US stocks is supported by a few heavyweight stocks (mainly tech stocks), indicating that the market is "narrowing as it rises."

HSBC believes that the current rise does indeed exhibit a "high degree of concentration," and that the strength of tech stocks does not signal a bubble. In fact, the phenomenon of "concentrated gains" is not limited to the US stock market, as some major global stock indices are even more concentrated (such as Danish biopharmaceutical stocks).

The profit margins and earnings momentum of large enterprises are very strong, and are even on the rise. We believe that there are almost no similarities between the current situation and the late 1990s tech internet boom.

We will continue to avoid US small-cap stocks because of their poor profit momentum, and the high proportion of floating rate debt could pose risks if US yields rise again.

The report points out that the current rise in US stocks has expanded significantly.

It is no longer just the information technology and communication services sectors that are driving the sharp rise in the stock market.

The report concludes that there is ample evidence to suggest that risk assets are not in a bubble. However, despite the lack of bubble risk in the stock market, the performance of risk assets has not been satisfactory.

Since the beginning of this year, the performance of low-quality stocks has been significantly lower than that of high-quality stocks.

Numerous Signs Indicate Economic Recovery

HSBC points out that in recent months, most global leading indicators for the economic cycle have been rising, indicating that the economy is moving further away from recession risks.

Taking all these variable indicators into account, HSBC believes that the overall macro situation looks more like early cycle rather than late cycle.

The Consensus GDP Diffusion Index (measuring the breadth of Bloomberg's consensus forecasts for major global economies) has recently shown a strong increase, which will provide support for risk assets.

HSBC believes that as the loose cycle progresses, the financial environment is expected to further relax.

Regional central banks' surveys on manufacturing have also significantly improved. As global central banks shift from raising interest rates to cutting them, we should increasingly consider the lagging end of loose monetary policy rather than headwinds of tightening policy.

For the United States, both company CEOs and consumers have shown strong confidence.

During the first quarter earnings season, the overall sentiment of earnings conference calls has also significantly improved.

As the economy rebounds strongly, inflation in major economies is showing signs of re-acceleration. However, HSBC's forecast for overall and core inflation rates in the United States is expected to remain at current levels throughout the year, without further heating up, as the impact of inflation on the stock market is not expected to be significant.

We believe that as long as the Federal Reserve does not shift towards raising interest rates, any unexpected upward movement in inflation will have a greater impact on the fixed income market than on stocks.

If the Federal Reserve's quantitative easing program reduces bank reserves or if the Fed begins to question the extent of potential rate cuts, valuation issues for risk assets will start to emerge. However, this is still far off, at the earliest in the second half of the year.