Global markets have withstood a series of shocks in recent years, but HSBC believes several underlying variables could eventually break this resilience. These key risks include higher corporate taxes, a resurgence in private sector debt, and a structural shift in the traditional relationship between stocks and bonds. In addition, if confidence in central banks' 'safety net' expectations wavers, current risk appetite could also be tested. HSBC issued this warning in a research note on Monday.

HSBC noted that while the fading of the 'central bank put' could have negative implications, this scenario is hard to imagine in the short term, particularly in the US market, where equities, wealth effects, and financial conditions are highly interconnected. Given the US's outsized weight in global equity and credit markets, HSBC believes the greatest risk originates precisely from the US. If corporate tax increases squeeze profit margins, pressure would mount on equities; conversely, if inflation falls back to or below target levels, the negative correlation between stocks and bonds could be restored, meaning bond prices rise when stocks fall. A return of this negative correlation could prompt investors to reduce equity allocations, thereby exerting downward pressure on valuations. A renewed rise in private sector leverage would also make the economy and markets more vulnerable to external shocks, though HSBC also pointed out that current private leverage ratios remain at multi-decade lows.

HSBC emphasized that these risks merit attention because markets have shown remarkable immunity to negative news in recent years—whether it be surging inflation, tariff hikes, geopolitical conflicts, carry trade unwinds, or private credit concerns, none have persistently shaken risk assets. 'Risk assets seem to turn a blind eye to every negative catalyst,' HSBC strategists wrote in the report. The strategists described the market as a 'non-stick pan,' noting that despite a steady stream of potential headwinds over the past five years, risk assets have displayed astonishing resilience.

Deutsche Bank has also questioned how long this resilience can last. In a report on Monday, the bank noted that despite rising real interest rates and mounting inflationary pressures, risk assets 'continue to hold firm' supported by surprisingly strong global economic growth. Deutsche Bank stated, 'The current market equilibrium is unsustainable... Risk assets such as equities and credit continue to show concerning complacency toward stagflationary shocks that are increasingly being priced by the rates market.' The report also noted that despite accumulating inflationary pressures, rates markets are still pricing only limited central bank tightening, while equity and credit markets assume that rising yields will not materially damage economic growth.

Drivers Behind Market Resilience

HSBC believes one key factor is the strength of corporate earnings and economic fundamentals, particularly in the US, where consensus expectations have repeatedly underestimated actual profit levels. Moreover, this resilience has spread beyond technology and artificial intelligence sectors. Meanwhile, US corporate tax rates remain near multi-decade lows.

Another factor is the evolution of the stock-bond relationship. As government bonds no longer serve as effective hedges against equity risk as they once did, investors have reduced bond allocations in favor of increased stock holdings and short-cycle hedging strategies, which has to some extent supported elevated equity valuations. Strong wealth effects have also played a role. US household wealth is significantly above its pre-pandemic trend line, with growth concentrated primarily in higher-income households. Holdings of cash and cash-like assets are also well above pre-financial-crisis trend levels.

At the same time, central banks now have a richer toolkit to respond to market stress. HSBC noted that the Federal Reserve has nearly 20 potential tools, facilities, and policy backstops, while the European Central Bank has more than a dozen. Additionally, lower energy intensity and relatively low private sector leverage ratios have strengthened the market's capacity to absorb shocks. Oil price spikes linked to conflicts in Ukraine and the Middle East have had a far smaller impact on advanced economies than similar events in the 1970s and 1980s.