HSBC: Global equities remain constructive, with the rally likely to broaden on the back of the “Five Cs”

Overview

This is a global equity strategy report. HSBC believes the global equity market remains in a favorable environment, but market performance is broadening from a small number of momentum stocks and technology leaders to a wider range of regions, sectors, and styles. The report summarizes this broadening through the “Five Cs”: corporate earnings, central banks, capex, consumer spending, and capital flows. Its core judgment is that although tensions in the Middle East and rising energy prices pose risks, earnings recovery, easing policy expectations, resilient AI spending, consumer fundamentals, and equity fund flows can still support risk assets.

Core views

The report’s core views include: First, the global momentum factor had previously posted extremely strong gains and has recently fallen 15%; historical experience suggests that reversals following strong momentum rallies can typically last around six months. Second, equal-weighted indices in the US, Europe, and emerging markets have also risen year to date, indicating that markets outside technology are not entirely weak. Third, US corporate earnings growth is strong, and sectors outside technology and energy have underestimated broadening potential; emerging-market and European EPS are also accelerating. Fourth, market pricing for Fed rate hikes has already become notably more hawkish, creating a high hurdle for further hawkish repricing; a moderate decline in rate-hike expectations would benefit cyclical and small-cap stocks. Fifth, the risk of AI capex cuts is exaggerated, but the room for further substantial capex upgrades by large cloud providers is limited, so the pace of semiconductor outperformance may slow. Sixth, US consumption continues to be supported by employment, confidence, the World Cup, and wealth effects, while consumer discretionary valuations and earnings expectations are low. Seventh, even if US IPO and secondary issuance reach record levels, buybacks, ETF inflows, and global fund inflows can still absorb equity supply.

Analysis framework

The report applies a top-down global equity strategy framework, breaking market broadening into five lines of analysis: earnings, policy, investment spending, consumer demand, and capital flows. It combines factor performance, index concentration, EPS expectations, interest-rate futures, AI capex, high-frequency consumer data, valuation percentiles, equity issuance, and fund-flow data to form its judgments. The allocation recommendations cover both regions and sectors, and further identify segments in the US, Europe, and emerging markets that are more likely to benefit from the broadening trade.

Methodology notes

• market_regimeFive Cs broadening framework

  Corporate earnings、Central banks、Capex、Consumer、Capital flows

  The report uses five macro and micro variables to explain why the global equity rally may broaden from a concentrated market to more regions, sectors, and styles.

• factor_analysisMomentum factor reversal analysis

  Momentum factor gains and subsequent reversal

  The report observes that the global long-short momentum factor fell 15% over the past three weeks and cites historical experience showing that reversals following sharp momentum-factor gains can typically last around six months.

• allocationRegional and sector allocation matrix

  Overweight、Neutral、Underweight

  The report provides global regional and sector allocation recommendations based on benchmark weights and HSBC’s views, expressing relative preferences across different markets and segments.

• Valuation methodsComparison of valuation percentiles and earnings expectations

  12-month forward PE, EPS growth, earnings revision ratio

  The report uses valuation percentiles and earnings expectations to assess whether consumer discretionary, cyclical stocks, and certain assets in Europe and emerging markets offer undervalued recovery potential.

Asset mapping & comparison

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

• Global equities

  Core bullish asset

  Strengths

  Corporate earnings, central-bank expectations, capex, consumer spending, and capital flows jointly support market broadening.

  Weaknesses

  Index concentration remains high, and some momentum stocks had previously risen too far.

  Comparison

  Relative to a single-track technology momentum rally, the report favors broader participation across the equity market.

  Risks

  Tensions in the Middle East, rising energy prices, and renewed hawkish repricing of interest-rate expectations.

• US equities

  Regional overweight

  Strengths

  Strong earnings growth, a high earnings revision ratio, and broadening potential in consumer and banking sectors.

  Weaknesses

  Technology and energy still contribute significantly to overall earnings, while index concentration is close to elevated levels.

  Comparison

  Among global regional allocations, the US has the highest benchmark weight and is listed as overweight by HSBC.

  Risks

  Higher energy costs, slowing consumption, and rising interest rates putting renewed pressure on valuations.

• Emerging-market equities

  Regional overweight

  Strengths

  Accelerating EPS growth, continued earnings improvement excluding Taiwan and Korea, and foreign inflows into non-technology emerging markets.

  Weaknesses

  Overall foreign outflows year to date have reached a record level, with the three technology giants acting as a significant drag.

  Comparison

  The report places emerging markets alongside the US as regional overweights, while Europe and most developed markets are neutral.

  Risks

  Food-price pressures, the dollar and interest-rate environment, and volatility stemming from concentration in technology.

• European equities

  Regionally neutral but with cyclical recovery opportunities

  Strengths

  Earnings growth may catch up with the US, while pressured cyclical sectors such as airlines, hotels, luxury goods, and defense offer recovery potential.

  Weaknesses

  Macroeconomic growth remains under downward pressure, and the region as a whole is rated neutral.

  Comparison

  Compared with the overall overweight positions in the US and emerging markets, Europe is better suited to selective cyclical and value-recovery exposure.

  Risks

  The euro, energy prices, tourism demand, and changes in GDP expectations.

• Japanese equities

  Regional underweight

  Strengths

  The report does not emphasize Japan’s relative advantages in the summary.

  Weaknesses

  Japan is listed as underweight in the global regional allocation table.

  Comparison

  A lower allocation preference than the US, emerging markets, and other neutral regions.

  Risks

  If global risk appetite continues to broaden, the underweight position in Japan could result in relative underperformance.

• Technology and semiconductors

  Sector overweight but with a potentially slower pace of relative outperformance

  Strengths

  AI capex remains resilient, while semiconductors and memory previously benefited from strong earnings upgrades.

  Weaknesses

  There is limited room for further substantial capex upgrades by large cloud providers, so the pace of semiconductor excess returns may slow.

  Comparison

  Technology remains a sector overweight, but the report is focused on the rally broadening from technology to other segments.

  Risks

  AI commercialization falling short of expectations, capex downgrades, excessive valuations, or a momentum reversal.

• US consumer discretionary

  Preferred area benefiting from the broadening trade

  Strengths

  Strong employment, recovering consumer confidence, the World Cup, and wealth effects support demand, while valuations are at low percentiles.

  Weaknesses

  Real-time consumption data has recently slowed, and market expectations for earnings growth have declined.

  Comparison

  Consumer discretionary is neutral in the sector allocation table, but the main text explicitly favors US consumer discretionary as a beneficiary of broadening.

  Risks

  Further weakness in consumption excluding gasoline, a weakening labor market, and a reversal of wealth effects.

• Financials and banks

  Sector overweight and regional selective opportunity

  Strengths

  US banking-sector loan growth, net interest margins, investment-banking fees, trading revenues, and cost efficiency are performing well; European banks are supported by higher rates and steeper yield curves.

  Weaknesses

  Sensitive to the yield curve, credit conditions, and capital-markets activity.

  Comparison

  Financials are listed as overweight in global sector allocation and are an important beneficiary of the broadening rally.

  Risks

  Worsening credit risks, rapid rate declines compressing net interest margins, and regulatory pressure.

Key data

• Recent performance of the global momentum factorDown 15% over the past 3 weeksThe report believes the momentum reversal may not yet be over.
• Historical momentum reversal experienceAfter a 20% rise in the momentum factor, the subsequent reversal typically lasts around 6 monthsThe current situation is more extreme, as momentum first rose 20% and then was further squeezed 25% higher.
• Year-to-date performance of equal-weighted indicesUS 12%, emerging markets 5%, Europe 10%This shows that markets outside technology leaders have also performed to some extent.
• S&P 500 earnings growth expectationsClose to 23% year over yearTechnology and energy are expected to account for 85% of this growth.
• US earnings revision ratio73%The highest since 2021 and in the top fifth percentile since 2000.
• Emerging-market Q2 EPS growth expectations35%Mainly driven by semiconductors; still close to 10.5% year over year excluding Taiwan and Korea.
• European Q2 earnings growth expectations15% year over yearPotentially the strongest growth rate since 2022.
• Market pricing for Fed rate hikesApproximately 37bp of hikes priced in by mid-2027The report believes there may be limited room for further hawkish repricing.
• Anthropic revenue run rateUSD47bnUsed to support the view that AI commercialization is emerging.
• Median AI spendingUSD10.66 per employee per month, up 2.5 times year over yearRamp AI data shows that AI spending is still growing from a low base.
• US hyperscaler capex upgrades for 2026/2027Upgraded by approximately USD200bn and USD300bn, respectivelyApproximately 70% is directed toward GPUs and servers.
• US consumer discretionary valuation12-month forward PE of 16.6x excluding Amazon and TeslaAt the bottom decile since 2015.
• US IPO issuance estimateMore than USD270bnIncluding large technology listings such as OpenAI, Anthropic, and SpaceX.
• US secondary issuance estimateUSD470bnTogether with IPOs, this could make 2026 the heaviest year for US equity issuance.
• Announced buyback volumeUSD850bnNearly USD100bn higher than during the same period in 2025.
• US ETF year-to-date inflowsApproximately USD550bnThe monthly pace is close to USD85bn, above approximately USD62bn in 2025.
• Foreign flows into emerging marketsUSD90bn of outflows year to date; nearly USD20bn of inflows excluding TSMC, Samsung Electronics, and SK HynixThe report believes the outflows are mainly concentrated in the three technology giants.
• Regional allocationUS 62% benchmark weight, overweight; emerging markets 10%, overweight; Japan 6%, underweightEurope ex UK, developed Asia ex Japan, the UK, and Canada are all neutral.
• Sector allocationTechnology 34%, financials 16%, and basic materials 3% are all overweightConsumer staples, communications, and utilities are all underweight.

Impact & implications

If the report’s judgment proves correct, the main opportunities in global equity investing will no longer be concentrated solely in AI, technology, and a few momentum leaders, but may broaden to US consumer discretionary and banks, European airlines, hotels, luxury goods, and defense, cyclical recovery in emerging markets, Korean consumer stocks, China’s technology hardware stack, and deeply valued markets such as Brazil and Turkiye. For portfolios, this means that while maintaining equity exposure, investors should focus on the risks and opportunities associated with a rotation from momentum toward cyclical, small-cap, value, and non-technology sectors.

Risks

• An escalation of tensions in the Middle East that drives energy prices higher.
• Global momentum stocks and AI-related assets had previously risen too far; an accelerating reversal could weigh on index performance.
• The Fed or other central banks repricing policy expectations more hawkishly, raising discount rates and pressuring cyclical and small-cap styles.
• Actual cuts to AI capex would weaken earnings support for technology and semiconductors.
• Continued weakness in real-time US consumption data could challenge the consumer discretionary recovery thesis.
• Record IPO and secondary issuance exceeding the absorption capacity of buybacks and capital flows, potentially creating equity supply pressure.
• Emerging-market capital flows remain influenced by a small number of large technology stocks, and foreign withdrawals may continue.

What to watch

• Whether the global long-short momentum factor continues to decline and how long the momentum reversal lasts.
• Whether EPS revision ratios in the US, Europe, and emerging markets continue to improve.
• A renewed repricing by Fed rate futures of rate hikes or cuts before 2027.
• AI-related revenue commercialization, token costs, corporate AI spending, and hyperscaler capex expectations.
• US employment, consumer confidence, restaurant and tourism activity, and high-frequency consumption data.
• The supply-demand balance among US IPOs, secondary issuance, buybacks, and ETF inflows.
• Earnings revisions and capital flows in European cyclical sectors, luxury goods, defense, and banks.
• Whether foreign inflows into emerging markets excluding the three technology giants continue.