Global markets have demonstrated remarkable resilience to a series of shocks in recent years, supported by strong corporate earnings, wealth gains, and extensive central-bank backstops, according to HSBC. The bank highlighted that the removal of perceived central-bank support could adversely impact markets, but noted that such a scenario is difficult to imagine, especially in the U.S., where equities, wealth effects, and financial conditions are closely intertwined [1].
HSBC identified several key risks that could threaten this streak of resilience: higher corporate taxes, a renewed rise in private-sector debt, and a shift in the relationship between stocks and bonds. Specifically, higher corporate taxes could squeeze profitability and weigh on markets, while inflation falling close to or below target could restore the negative stock-bond correlation, potentially encouraging investors to reduce equity allocations and putting pressure on valuations [1].
A renewed rise in private-sector leverage could also make the economy and markets more vulnerable to shocks, although HSBC noted that leverage is currently at multi-decade lows. The bank emphasized that these risks are particularly pronounced in the U.S., given its outsized weight in global equities and credit [1].
Deutsche Bank echoed concerns about market endurance, stating that risk assets have remained "consistently resilient" despite rising real rates and mounting inflation pressures, aided by surprisingly strong global growth. However, Deutsche Bank warned that "the current equilibrium is unsustainable," noting that risk assets like equities and credit appear complacent in the face of stagflationary shocks increasingly being priced into rates markets. 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 [1].
CONCLUSION
HSBC and Deutsche Bank both caution that global markets' resilience may not last indefinitely, with key risks including higher corporate taxes, increased private-sector debt, and changes in central-bank support. While strong earnings and economic growth have underpinned market strength, the banks warn that complacency in risk assets could be challenged if these risks materialize. Investors should remain vigilant as the current equilibrium is described as unsustainable.