HSBC explains why risk assets continue to ignore every negative catalyst

In a Tuesday note, HSBC explained why financial markets keep dismissing negative headlines, attributing the pattern to a structural evolution over recent years that has left risk assets remarkably resistant to shocks.

Strategist Max Kettner listed a lengthy run of potential setbacks since 2022, including higher inflation and interest rates, a U.S. regional banking crisis, tariffs, the cryptocurrency crash, and the unwinding of carry trades.

“Yet it seems as if risk assets continue to ignore every negative catalyst,” Kettner wrote, describing the strength as “nothing short of breathtaking.”

Kettner outlined several reasons for the resilience, foremost among them resilient earnings and economic growth outside technology and artificial intelligence—an area where he said consensus forecasts have consistently been too pessimistic.

He also cited a positive correlation between equity and bond returns that has reduced bonds’ role as a diversifier and kept equity allocations high, alongside a wealth effect supporting valuations.

Additional support, according to HSBC, includes a central-bank policy toolkit far larger than before the global financial crisis, lower oil intensity in developed economies than in the 1970s and 1980s, restrained leverage in non-government sectors, better credit index quality, faster price discovery, and passive fund rebalancing.

As for what could eventually end the run, Kettner said the greatest risk lies in the United States, given its outsized weight in both equities and credit.

Higher corporate taxes, a return to a negative equity-bond correlation driven by below-target inflation, or the removal of central bank puts could all weigh on markets, though he believes that last scenario is hard to imagine because equities, wealth effects, and financial conditions have become so intertwined.