The most significant market upheaval in recent weeks has impacted all assets! However, HSBC believes "this will create good buying opportunities in the first half of the year."
HSBC believes that a "just right" economic environment may emerge in the first half of 2025. The market breadth of the S&P 500 index has significantly declined, and historical experience suggests that this could be a contrarian indicator, implying that the market adjustment is nearing its end
In December, the Federal Reserve's hawkish stance triggered market volatility, but HSBC stated, don't panic, this could be the biggest "bargain" opportunity in 2025.
On January 2, HSBC released a research report titled "What You Might Have Missed," where analysts including Max Kettner indicated that since the Federal Reserve cut interest rates last month, U.S. Treasury yields have surged, the dollar has strengthened, and the market has entered a so-called "danger zone" mode.
However, a "just right" economic environment may emerge in the first half of 2025. The market's expectations for Federal Reserve rate cuts are overly conservative, anticipating only one cut in the first half, which may need to be repriced.
HSBC believes that short-term market volatility will create attractive buying opportunities for U.S. Treasuries and risk assets. Over-sold "bond proxy" assets, U.S. bank stocks, tech stocks, and emerging markets present potential opportunities.
What has happened in the market over the past few weeks?
HSBC pointed out that the Federal Reserve exhibited an unexpectedly hawkish stance at its December 2024 meeting, pushing U.S. Treasury yields higher and strengthening the dollar. This change triggered the so-called "danger zone" phenomenon, causing almost all asset classes to be impacted to varying degrees.
Specifically, long-term U.S. Treasuries have seen total returns drop by more than 12% since the yield low in mid-September, emerging market currencies and local bonds have experienced significant corrections, and the stock market has faced the largest foreign capital outflow since 2020.
At the same time, U.S. economic growth expectations for 2025 have been raised, with growth in the fourth quarter of 2024 potentially exceeding expectations again. Inflation expectations have also risen significantly, with the market currently implying a one-year CPI of 2.52%. Meanwhile, short-term earnings expectations for the S&P 500 index remain low.
"The market breadth of the S&P 500 index has significantly declined, and historical experience suggests this could be a contrarian indicator, meaning the market adjustment is nearing its end."
Looking ahead to the coming weeks, HSBC believes that the market may continue to be volatile.
High expectations for bond supply and ongoing inflation pressures may lead to poor performance in long-term yields, further suppressing the prices of risk assets. At the same time, inflation expectations and market pricing are overly hawkish and may gradually return to neutral.
"Currently, market sentiment and positioning indicators have not issued a clear buy signal."
Future Opportunities
However, HSBC stated that short-term market volatility will create attractive buying opportunities for U.S. Treasuries and risk assets. In particular, a "Goldilocks" economic environment, where economic growth and inflation are at moderate levels, may emerge in the first half of 2025.
"The current market only accounts for one rate cut by the Federal Reserve in the first half of the year, while the actual rate cut may be larger and needs to be repriced."
In terms of stocks, HSBC believes that some "bond proxy" assets (such as residential builders) that have been excessively sold off may have rebound potential.
Additionally, although the overall market pullback has led to a decline in U.S. bank stocks, considering potential industry deregulation, high merger and acquisition activity, and higher yields, HSBC believes that this decline has been excessive. Tech stocks also show attractiveness amid further adjustments.
For emerging market stocks, if U.S. Treasury yields and the dollar stabilize, it may attract foreign capital back, and local debt in emerging markets may also become an unexpected "dark horse."
HSBC believes that in the coming months, the biggest risk is further rising yields, rather than political factors.
"The key short-term catalysts are not the inauguration on January 20, but the U.S. inflation data in December and the quarterly refinancing announcement (QRA) in early February."