HSBC warns that global stock market momentum trading faces a greater pullback, optimistic about consumer, banking, and cyclical stock rotation opportunities.

HSBC's latest strategy report pointed out that momentum trading, which has been dominating the performance of global stock markets this year, is facing a greater risk of a significant pullback. The future market style is expected to further rotate towards cyclical and value stocks. The bank recommends investors to increase their allocation to US consumer discretionary, banking sectors, as well as cyclical stocks in Europe and emerging markets. HSBC stated that the global long-short momentum factor it tracks has dropped by 15% in the past three weeks. However, historical experience shows that after the momentum factor rises by 20%, the related pullback typically lasts for about six months, indicating that the current de-momentum process may not be over yet. The report pointed out that this round of the market is particularly unique, as the momentum factor surged by about 25% after rising by 20%, making it one of the strongest historical uptrends, and thereby making it more likely to experience a sustained and larger pullback. However, HSBC believes that despite the concentration of global stock market indices still near historical highs, market breadth is improving. So far this year, equally-weighted indices such as the S&P 500, emerging markets, and Europe have risen by approximately 12%, 5%, and 10% respectively, indicating that the uptrend is gradually spreading from a few tech giants to more industries. HSBC believes that this market rotation is likely to be supported by the "five pillars," including corporate earnings, central bank policies, capital expenditures, consumer demand, and fund flows. In terms of corporate earnings, HSBC pointed out that the market underestimates the possibility of earnings growth spreading to more industries. Despite the general expectation for a 23% year-on-year earnings growth for the S&P 500 index this year, with growth mainly concentrated in the technology and energy sectors, the proportion of upward revisions in US corporate earnings expectations has risen to 73%, the highest level since 2021 and in the top 20% percentile since 2000, indicating that the market still exhibits early economic cycle characteristics. In terms of monetary policy, HSBC believes that the market has largely absorbed the further hawkish expectations of the Federal Reserve, with the probability of pricing in a 25 or 50 basis point rate hike in the future at around 35%. The limited room for further hawkish expectations will be favorable for the performance of cyclical sectors. Consumer demand is also an important support for market rotation. HSBC pointed out that the US labor market remains robust, with significantly improved consumer confidence among high-income groups, coupled with the upcoming FIFA World Cup which is expected to further stimulate consumer activity. On the funding side, HSBC believes that the market has sufficient liquidity to absorb record-breaking new stock listings and financing sizes. So far this year, US listed companies have announced approximately $850 billion in stock buyback programs, while US ETFs have attracted approximately $550 billion in cumulative inflows. HSBC expects that the net stock buyback size for US corporations in 2026 is likely to reach around $700 billion, remaining at a similar level to 2025. In terms of specific allocations, HSBC is bullish on the US consumer discretionary sector (XLY.US), pointing out that excluding Amazon.com, Inc. (AMZN.US) and Tesla, Inc. (TSLA.US), the sector's forward 12-month P/E ratio is only 16.6 times, at the lowest 10% percentile since 2015. Additionally, HSBC also recommends Bank of America Corp sector, benefiting from strong performance, as well as previously lagging European cyclical industries such as aviation, hotels, luxury goods, and defense sectors. Regarding emerging markets, HSBC specifically recommends investment opportunities in South Africa, Chile, and Central and Eastern European markets that benefit from economic recovery. It also believes that the stock markets of Brazil and Turkey have relatively high attractiveness in terms of valuation, with recent performances significantly weaker than fundamentals, presenting potential for value recovery.