HSBC: Three Painful Trades That Could Shake the US Market

HSBC's global research team warns that investors' prevailing expectations for the US market may prove incorrect, exposing them to the risk of three "painful trades."

In a report released on Monday, HSBC indicated that if market movements in the second half of the year deviate from Wall Street's expectations, several "painful trades" could arise, leading to widespread losses for investors due to adverse market fluctuations. The report stated:

"As we enter the second half of the year, many views have become a significant consensus, and market sentiment and positioning indicators show increasingly extreme tendencies. But what if the period in the third quarter is precisely the period when this broad consensus is overturned?"

Analysts added that they believe the US stock market may continue to "rise broadly," meaning a continued rise in risky assets, a view that contradicts some pessimistic expectations on Wall Street.

Here are the three "painful" trades identified by HSBC that could affect investors:

1. Continued Outperformance of US Stocks Over Other Global Markets

There is a growing belief that US stocks will underperform foreign markets this year. Investors are mainly concerned that tariffs may harm corporate profits and increase uncertainty in the United States, which in turn would impact already overvalued stock market valuations.

A Bank of America survey in June showed that 54% of global fund managers believe that the best-performing assets over the next five years will be foreign stocks, while only 23% are optimistic about US stocks. But HSBC believes that US stocks still have the potential to continue dominating global markets.

The bank cited several reasons for this. First, corporate profits may not be as severely affected by tariffs as investors expect. Strategists estimate that about 20% of the goods US companies need for production rely on imports.

At the same time, HSBC points out that large companies are benefiting from a weaker dollar, which helps enhance the appeal of US products in foreign markets.

In addition, US companies recorded a new high in stock buybacks after the first-quarter earnings season.

"True, US stock valuations are expensive, but that's because they are the most profitable," strategists say. "We can easily imagine a scenario: for example, a large Republican bill, potential efforts to ease regulations, and the improvements in earnings brought about by AI, will further widen the gap in return on equity between US stocks and stocks in other global markets."

2. The US Economy Has Not Slid Into Recession

Most investors still expect the US and global economies to slow significantly in the second half of the year. But HSBC points out that several recent economic forecast indicators show slight signs of recovery.

Bloomberg's GDP forecast diffusion index rebounded in June, and at the same time, some high-frequency consumer spending data showed a slight rebound, which may indicate that consumer confidence in the future has recovered.

"Despite widespread expectations of slowing growth, high-frequency data shows that economic activity in the US has recovered in June after a brief period of weakness in May," strategists say. They added that if political and economic uncertainty declines, and the US unemployment rate remains low, there are upside risks to economic growth.

3. A Strong Return of the Dollar

Most analysts also do not believe that the dollar will rebound soon, mainly due to the uncertainty caused by geopolitical and trade situations. The dollar index, which measures the value of the dollar against a basket of major currencies, has fallen by 10% since the beginning of the year.

Although HSBC's baseline forecast still indicates that the dollar will maintain a "weak" position in the second half of the year, strategists point out that there are two possible paths for the dollar to rebound unexpectedly, a move that would be "unexpected but painful" for the market.

One scenario is a global shock that prompts exchange rate traders to return to the dollar as a safe-haven asset. For example, the dollar briefly strengthened last month when conflict broke out between Israel, Iran, and the United States.

The other scenario is a decrease in uncertainty about US policies, and a decline in structural negative factors. The market may once again be convinced of "American exceptionalism," allowing the dollar's movement to more closely reflect the value indicated by interest rate levels.

In this scenario, HSBC estimates that the dollar index could rise to 102, meaning an increase of 5% from its current level.