HSBC analysts believe the current market rally is poised to continue, supported by a "Goldilocks" economic scenario where conditions are just right for growth without overheating.
Despite lingering inflation concerns, recent gains in global equity markets, credit markets, and commodities signal a robust outlook.
The rally has been driven by slightly lower-than-expected US inflation and weaker retail sales data, which have fueled hopes of a balanced economic environment.
The bank explains that although inflation remains a concern, its mixed performance hasn't led the Federal Reserve to cut rates aggressively. This stability in rates and inflation expectations, which shifted from overly dovish in January to more cautious in April, supports the ongoing strength in risk assets.
HSBC highlights several reasons for their optimistic view: short-term sentiment and positioning are not yet signaling a market top, real money investor sentiment is only slightly overweight equities and underweight credit, and the fear of aggressive Fed rate hikes has diminished.
Additionally, quantitative tightening (QT) does not pose a significant threat to liquidity, and China's economic outlook remains a positive risk factor. Furthermore, HSBC's machine learning models predict an "Everything Rallies" equity market environment.
With these factors in play, HSBC remains risk-on, maintaining maximum overweight positions in high-yield credit, emerging market debt, and equities in the US, emerging markets, and Japan.
They also hold underweight positions in developed market sovereigns and investment-grade credit.