Global markets shrug off shocks. HSBC sees what could break the streak

Global markets have shrugged off a barrage of shocks in recent years, but HSBC sees several developments that could eventually end that streak.

The key risks include higher corporate taxes, a renewed rise in private-sector debt and a shift in the relationship between stocks and bonds. A withdrawal of perceived central-bank support for markets could also test that resilience, the bank said in a note Monday.

While the “removal of central bank puts” could have an adverse impact, HSBC said, such a scenario is difficult to imagine, particularly in the U.S. where equities, wealth effects and financial conditions have become quite intertwined.

Given the outsized weight of the U.S. in global equities and credit, the greatest risks lie there, HSBC said. Higher corporate taxes that squeeze profitability could weigh on markets, while inflation falling close to or below target could restore the negative stock-bond correlation — rise in bond prices when stocks fall.

That, in turn, could encourage investors to reduce equity allocations and put pressure on valuations.

A renewed rise in private-sector leverage could also make the economy and markets more vulnerable to shocks, although HSBC noted that it is at multi-decade lows.

The risks stand out because markets have proven remarkably resilient to bad news in recent years, from surging inflation and tariffs to geopolitical conflicts, the unwinding of carry trades and private-credit concerns.

“It seems as if risk assets continue to ignore every negative catalyst,” HSBC strategists wrote.

The strategists described markets as “Teflon,” arguing that risk assets have remained remarkably resilient despite a long list of potential negative triggers over the past five years.

Deutsche Bank has also questioned how long that endurance can last. The bank said in a report Monday that risk assets have remained “consistently resilient” despite rising real rates and mounting inflation pressures, helped by surprisingly strong global growth.

“The current equilibrium is unsustainable … Risk assets like equities and credit are still strikingly complacent against the stagflationary shock that’s increasingly being priced into rates markets,” Deutsche Bank said.

Rates markets are still pricing only limited central-bank tightening despite mounting inflation pressures, while equities and credit are assuming higher yields will not materially damage growth, it said.

Behind market’s resilience

One key factor is the strength of corporate earnings and economic growth, particularly in the U.S., where consensus estimates have repeatedly underestimated earnings. That resilience has extended beyond technology and artificial intelligence, HSBC said, while U.S. corporate tax rates remain near multi-decade lows.

Another factor is the changing relationship between stocks and bonds. With government bonds no longer providing the same diversification against equity risk as they once did,…