HSBC and Deutsche Bank issued a joint warning: the “non-stick” resilience of the market is difficult to sustain, and undercurrent corporate tax and debt risks are surging

The Zhitong Finance App learned that the global market has successively withstood the test of multiple shocks in recent years, but HSBC believes that several potential variables may eventually break this resilient situation.

These key risks include an increase in corporate tax burdens, a resurgence in private sector debt, and structural changes in the traditional relationship between stocks and bonds. Furthermore, if the market's confidence in the central bank's “backing up” expectations is shaken, it may also test current risk appetite. HSBC issued the above warning in a research report released on Monday.

HSBC said that although the decline of “central bank put options” may have a negative impact, it is difficult to imagine this scenario in the short term, especially in the US market — where the stock market, wealth effects, and financial conditions are highly interconnected.

Given America's prominent share of the global stock market and credit market, HSBC believes that the biggest risk comes from the US. If the corporate tax increase squeezes profit margins, it will put pressure on the stock market; if inflation falls back to or below the target level, it may restore the negative correlation between stocks and bonds — that is, bond prices rise when the stock market falls.

This return to negative correlation may prompt investors to reduce stock allocation ratios, thereby putting downward pressure on valuations.

If private sector leverage rises again, it will also make the economy and market more vulnerable to external shocks. However, HSBC also pointed out that the current private leverage ratio is still low for decades.

HSBC emphasized that the reason these risks are worth paying attention to is because the market has shown strong “immunity” to negative news in recent years — whether it is soaring inflation, tariff increases, geographical conflicts, arbitrage settlement, and private credit concerns, it has not been able to continuously shake risky assets.

“Risk assets seem to turn a blind eye to every negative catalyst,” the HSBC strategist wrote in the report.

The strategist described the market as a “non-stick pan,” arguing that despite endless potential negative factors over the past five years, risky assets have shown remarkable resilience.

Deutsche Bank also questioned how long this resilience will last. The bank pointed out in a report on Monday that despite rising real interest rates and increased inflationary pressure, risk assets “continue to be strong” under the unexpectedly strong support of global economic growth.

Deutsche Bank said, “The current state of market equilibrium is unsustainable... Risk assets such as stocks and credit still show worrying complacency about being increasingly impacted by stagflation in interest rate market pricing.”

The report also pointed out that although inflationary pressure continues to accumulate, the interest rate market still only prices limited austerity by the central bank; while the stock market and credit market assume that rising yields will not substantially damage economic growth.

Drivers behind market resilience

HSBC believes that one of the key factors is the strong performance of corporate profits and economic fundamentals. Especially in the US, the market's consistent expectations have repeatedly underestimated actual profit levels. Moreover, this resilience has spread outward from the fields of technology and artificial intelligence. Meanwhile, the US corporate tax rate is still near a decades-low level.

Another factor is the evolution of equity and debt relationships. Since government bonds are no longer as effective in hedging stock risks as in the past, investors have reduced bond allocations, increased their stock holdings and adopted short-term hedging strategies, which to a certain extent supported high stock valuations.

The strong wealth effect also played a role. The wealth of American households is already significantly higher than the pre-pandemic trend line, and growth is mainly concentrated in high-income households. The holding scale of cash and cash-like assets is also far higher than the trend level before the financial crisis.

At the same time, central banks have more policy tools to deal with market pressure. HSBC pointed out that the Federal Reserve has nearly 20 kinds of potential tools, convenient tools, and policy backing, while the ECB has more than 10 types.

Furthermore, the reduction in energy intensity and the relatively low level of private sector leverage have also enhanced the market's ability to absorb shocks. The impact of the sharp rise in oil prices associated with the conflict in Ukraine and the Middle East on developed economies is far lower than the impact of similar events in the seventies and eighties of the last century.