HSBC is bullish on a broadening rally in global equities, with five "C" factors supporting rotation from momentum stocks to a wider market

Overview

This is a global equity strategy report. HSBC believes that although Middle East tensions and rising energy prices pose downside risks, the fundamentals for global equities are still improving, and the market rally should not be driven solely by AI, technology, and a handful of momentum stocks. Instead, broader rotation is more likely across regions, sectors, and market capitalizations. The report explains the broadening rally through five "C" factors: Corporate earnings, Central banks, Capex, Consumer, and Capital flows.

Core views

The core view is to remain bullish on global equities, but positioning and allocation should tilt more toward market broadening and rotation. On earnings, US earnings growth is strong and is expected to expand from technology and energy into a broader set of sectors, while EPS in Europe and emerging markets is also accelerating. On central banks, market pricing for Fed hikes is already hawkish, leaving limited room for further repricing; if rate expectations ease, cyclical and small-cap stocks would be supported. On capital expenditure, the risk of major cuts to AI capex is seen as low, but the room for hyperscale cloud providers to continue sharply raising capex is also limited, so semiconductors' relative advantage may slow. On consumers, US employment, confidence, wealth effects, and World Cup-related spending support remain in place. On capital flows, despite large US IPO and refinancing supply, buybacks, ETF inflows, and global fund inflows should still be able to absorb supply and support broadening.

Analysis framework

The report uses a top-down global equity strategy framework, combining market concentration, momentum factors, earnings revisions, central bank pricing, AI capital expenditure, high-frequency consumer data, equity supply and demand, and fund flows to assess the likelihood that leadership broadens from a small group of tech and momentum stocks to cyclicals, financials, consumers, Europe, and parts of emerging markets.

Methodology notes

• Market style and factorsMomentum factor reversal analysis

  By examining the recent performance and historical price path of the global long-short momentum factor, the report assesses whether market leadership may shift from momentum stocks to a broader equity universe.

  The report notes that the global long-short momentum factor fell 15% over the past three weeks, and that historically, reversals after a 20% rise in the momentum factor typically last about six months. This time, after first rising 20%, it then squeezed another 25% higher, making a deeper and longer drawdown more likely.

• Macro and policyCentral bank rate expectations framework

  By comparing the market-implied Fed rate path, inflation indicators, and historical equity performance, the report evaluates how changes in rate expectations may affect equity rotation.

  The report believes the market has already priced future rate hikes fairly fully; if hike expectations ease moderately while a 'no landing' scenario remains intact, cyclical and small-cap stocks should benefit.

• Earnings and fundamentalsEarnings growth and earnings revision diffusion

  The report uses EPS growth, the proportion of companies raising guidance, and earnings revision ratios to assess whether earnings improvement is spreading beyond a few sectors.

  The report emphasizes that the ratio of US companies raising guidance versus lowering guidance is at a high percentile, the US earnings revision ratio has risen to 73%, and earnings are also improving in Europe and in emerging markets excluding Taiwan and Korea.

• Capital supply and demandEquity supply and capital flow matching

  By comparing IPO and follow-on supply against buybacks, ETF inflows, and global equity fund inflows, the report evaluates whether the market can absorb incremental equity supply.

  The report estimates that US IPO and secondary issuance volumes are at record highs, but buybacks, retail ETF flows, and global equity fund inflows remain strong enough to support market demand.

Asset mapping & comparison

Structured mapping from thesis to named assets (strengths, weaknesses, peers, risks).

• US equities

  Regional overweight

  Strengths

  Strong earnings growth, improving earnings revisions, resilient consumers, and bank fundamentals supported by loan growth and capital markets activity.

  Weaknesses

  Index concentration is near record highs, and tech and momentum stocks are crowded.

  Comparison

  More positive than Japan in allocation, and still the largest weighted region in global benchmarks.

  Risks

  Rising energy prices, momentum-stock pullback, and continued hawkish repricing of rates.

• Emerging market equities

  Regionally neutral but with structural opportunities

  Strengths

  EPS is improving, earnings growth is still accelerating even excluding Taiwan and Korea, and foreign inflows are appearing outside the three tech giants.

  Weaknesses

  Overall foreign outflows have reached record levels, and some markets are pressured by food prices and macro headwinds.

  Comparison

  The report does not overweight emerging markets overall, but highlights opportunities in South Africa, Chile, selected CEE markets, Korean consumption, Chinese tech hardware, Brazil, and Turkiye.

  Risks

  US dollar and rate pressure, food prices, concentrated tech outflows, and geopolitics.

• European equities

  Regionally neutral but positive on selective cyclical recovery

  Strengths

  Earnings revisions are broadening, while lower energy prices, tourism recovery, stable luxury demand, and a defense recovery can support cyclical sectors.

  Weaknesses

  Macro growth had previously been revised down, and some cyclical sectors had come under significant pressure.

  Comparison

  Not a regional overweight versus the US, but rotation opportunities are clearer in airlines, hotels, luxury, defense, and banks.

  Risks

  The euro, energy prices, tourism demand, and macro recovery falling short of expectations.

• Japanese equities

  Regional underweight

  Strengths

  The report does not provide clear strengths in the summary material.

  Weaknesses

  The regional allocation table shows HSBC is underweight Japan.

  Comparison

  Compared with the US overweight and mostly neutral views on other regions, the view on Japan is more cautious.

  Risks

  Not discussed in detail in the main summary.

• Technology sector

  Sector overweight

  Strengths

  AI capex remains solid, signs of AI commercialization are emerging, and technology remains the core source of earnings contribution.

  Weaknesses

  Market concentration and momentum crowding are high, and semiconductors' relative outperformance may slow.

  Comparison

  Still a sector overweight, but the report puts more emphasis on broadening rather than continuing a single-minded bet on technology.

  Risks

  Limited room for further large capex upgrades by hyperscale cloud providers, and momentum reversal hitting tech leaders.

• Financial sector

  Sector overweight

  Strengths

  Banks are supported by loan growth, net interest income dynamics, investment banking fees, sales and trading revenue, efficiency improvement, and a benign credit environment.

  Weaknesses

  Sensitive to the yield curve and macro conditions.

  Comparison

  An overweight sector alongside technology and basic materials.

  Risks

  Unfavorable yield-curve shifts, rising credit risk, and cooling capital markets activity.

• Basic materials

  Sector overweight

  Strengths

  Listed as overweight in the global sector allocation table.

  Weaknesses

  The main text summary does not provide detailed sector-level justification.

  Comparison

  In the overweight group together with technology and financials.

  Risks

  Global growth, commodity prices, and fluctuations in Chinese demand.

• Consumer discretionary

  Preferred US broadening theme, neutral in the sector table

  Strengths

  Cheap valuation, low earnings expectations, consumption supported by employment and wealth effects, and a possible temporary boost from the World Cup.

  Weaknesses

  Real-time consumption data have softened recently, mainly due to lower gasoline spending.

  Comparison

  Excluding Amazon and Tesla, the 12-month forward PE is in the bottom decile since 2015, indicating relative valuation appeal.

  Risks

  Consumer recovery falling short of expectations, weaker employment, and energy prices squeezing disposable income.

• Semiconductors

  Beneficiaries of AI capex, but relative advantage may slow

  Strengths

  Upward revisions to capex by US hyperscale cloud providers directly drive semiconductor and memory earnings upgrades.

  Weaknesses

  There is limited room for capex to be revised upward by a similar magnitude over the next 12-18 months.

  Comparison

  Compared with other beneficiaries of market broadening, semiconductors had already rallied more strongly, and their pace of outperformance may slow going forward.

  Risks

  Cooling capex expectations, AI monetization below expectations, and valuation and momentum pullbacks.

Key data

• Global long-short momentum factorDown 15% over the past 3 weeksThe report believes the momentum reversal may not be over yet.
• Historical duration of momentum reversalsAbout 6 monthsHistorically, drawdowns after a 20% rise in the momentum factor typically last about six months.
• Year-to-date performance of equal-weighted indicesUS 12%, emerging markets 5%, Europe 10%This shows that parts of the market beyond large-cap heavyweights have already delivered some performance.
• S&P 500 earnings growth expectationClose to 23% YoYAbout 85% of the consensus expectation comes from technology and energy.
• US earnings revision ratio73%The highest since 2021, and in the top quintile since 2000.
• Emerging markets Q2 EPS growth expectation35%Mainly driven by semiconductors; excluding Taiwan and Korea, it is still close to 10.5% YoY.
• Europe Q2 earnings growth expectation15% YoYIf achieved, this would be the strongest growth rate since 2022.
• Market pricing for Fed hikesAbout 37bp of hikes by mid-2027The report believes further hawkish repricing may be limited.
• Core PCE and Dallas Fed trimmed-mean PCE3.4% YoY and 2.4% YoYDifferent inflation indicators are sending different policy signals.
• Monthly average AI spending per employeeMedian USD10.66, top decile USD516Used to show that AI commercialization and spending are still rising from a low base.
• Upward revisions to US hyperscale cloud provider capexUSD200bn upward revision in 2026, USD300bn upward revision in 2027About 70% is allocated to GPUs and servers.
• US consumer discretionary sector valuation12-month forward PE of 16.6x excluding Amazon and TeslaAt the bottom decile since 2015.
• US IPOs and secondary offeringsIPOs may exceed USD270bn, with secondary offerings around USD470bnThe report says 2026 may be the heaviest issuance year for the US equity market.
• Announced buybacksUSD850bnNearly USD100bn higher than the same period in 2025.
• US ETF inflowsAbout USD550bn year to dateEquivalent to about USD85bn per month, above roughly USD62bn in 2025.
• Foreign flows to emerging marketsOverall outflow of USD90bn; excluding TSMC, Samsung Electronics, and SK Hynix, inflows were close to USD20bnThis indicates that capital is still flowing into emerging markets beyond the three technology giants.

Impact & implications

The investment implication is that portfolios should not only bet on already crowded AI, semiconductor, and momentum stocks, but should also increase focus on assets benefiting from market broadening. In the US, the preferred areas are consumer discretionary and banks; in Europe, airlines, hotels, luxury, defense, and banks; and in emerging markets, cyclical recovery, AI spillover, and deep value opportunities in South Africa, Chile, selected CEE markets, Korean consumption, Chinese tech hardware, Brazil, and Turkiye.

Risks

• Escalation of Middle East tensions and further rises in energy prices.
• A deeper and more persistent reversal in crowded momentum and AI-related trades.
• Fed rate expectations continuing to reprice more hawkishly rather than easing moderately.
• A slowdown in high-frequency US consumer spending evolving from short-term volatility into broader demand weakness.
• US IPO and refinancing supply exceeding what buybacks, ETFs, and fund inflows can absorb.
• Cuts to AI capital expenditure or AI commercialization progressing below expectations.
• European macro recovery, tourism, luxury demand, or defense-sector recovery falling short of expectations.
• Foreign outflows from emerging markets expanding and no longer being limited to TSMC, Samsung Electronics, and SK Hynix.

What to watch

• Whether the global long-short momentum factor continues to pull back, and whether market leadership broadens from momentum stocks to mid-caps and cyclicals.
• Whether the proportion of US companies raising guidance and the earnings revision ratio can remain elevated during earnings season.
• Whether S&P 500 earnings growth truly broadens from technology and energy into sectors such as consumer discretionary and industrials.
• Whether pricing in Fed rate futures for hikes through 2027 declines.
• Whether Core PCE, Dallas Fed trimmed-mean PCE, and CPI continue to send divergent signals.
• Whether hyperscale cloud provider capex expectations continue to be revised up, flatten out, or turn down.
• Whether commercialization indicators such as AI spending and revenue trends at Anthropic and OpenAI continue to improve.
• US consumer employment, confidence, OpenTable dining, wealth effects, and earnings expectations for consumer discretionary.
• The supply-demand balance among US IPOs, secondary offerings, buybacks, ETF inflows, and global equity fund inflows.
• Price momentum and earnings revisions in European cyclicals, luxury, defense, and banks.
• Whether emerging market fund flows excluding TSMC, Samsung Electronics, and SK Hynix remain positive.