HSBC‘s latest strategy report indicates that the momentum trading that has dominated global equity markets year-to-date is facing a heightened risk of a more pronounced pullback, with market style expected to further rotate toward cyclical and value stocks. The bank’s tracked global long-short momentum factor has declined by a cumulative 15% over the past three weeks, but historical experience suggests that after a cumulative 20% rise in the momentum factor, such corrections typically last about six months, and the current de-momentum process may not yet be complete. HSBC notes that this cycle has been particularly unusual, with the momentum factor surging by an additional approximate 25% after its initial 20% advance, marking one of the strongest rallies on record and rendering it more susceptible to a sustained and larger reversal.
Although global equity index concentration remains near historical highs, market breadth is improving. Year-to-date, the S&P 500 Equal Weight Index, the MSCI Emerging Markets Equal Weight Index, and the European Equal Weight Index have risen by roughly 12%, 5%, and 10%, respectively, indicating that the rally has gradually broadened beyond a handful of tech giants to more sectors. HSBC believes this market rotation is likely to be underpinned by “five pillars,” including corporate earnings, central bank policies, capital expenditure, consumer demand, and fund flows.
On the corporate earnings front, the market is underestimating the potential for earnings growth to spread to more sectors. Although consensus estimates project 23% year-over-year earnings growth for the S&P 500 this year, with growth concentrated primarily in technology and energy, the proportion of U.S. corporate earnings upgrades has risen to 73%, the highest level since 2021 and placing it in the top 20th percentile of historical readings since 2000, suggesting that the market still exhibits early-cycle characteristics. In terms of monetary policy, the market has largely priced in a further hawkish tilt from the Federal Reserve, with implied probabilities for a 25-basis-point or 50-basis-point hike both around 35%, leaving limited room for further hawkish repricing, which is favorable for cyclical sector performance. Consumer demand also provides important support, as the U.S. labor market remains resilient, consumer confidence among high-income groups has notably improved, and the upcoming FIFA World Cup is expected to further stimulate consumption activity. On the liquidity front, the market has sufficient liquidity to absorb record new issuance and financing volumes. U.S.-listed companies have announced approximately $850 billion in share buyback programs year-to-date, while ETFs have attracted roughly $550 billion in cumulative inflows. HSBC projects that net share buybacks by U.S. corporations could still reach around $700 billion in 2026.
In terms of specific allocations, HSBC favors the U.S. Consumer Discretionary sector (XLY). Excluding Amazon (AMZN) and Tesla (TSLA), the sector’s forward 12-month price-to-earnings ratio stands at just 16.6x, placing it in the lowest 10th percentile of historical valuations since 2015. In addition, the bank favors the U.S. banking sector, which benefits from strong earnings performance, as well as previously lagging European cyclical industries, including airlines, hotels, luxury goods, and defense. On the emerging markets front, HSBC highlights investment opportunities in South Africa, Chile, and Central and Eastern European markets that benefit from cyclical recovery, while also viewing Brazilian and Turkish equity valuations as highly attractive, with recent performance having notably lagged underlying fundamentals, leaving room for value mean reversion.
