Market Resilience May Be Reaching Its Limits, HSBC Warns

For five years, global markets have absorbed blow after blow without flinching. Inflation surged. Tariffs multiplied. Geopolitical conflicts erupted across two continents. Carry trades unwound. Private credit wobbled. Yet equities and bonds kept climbing, as if coated in something slick that shocks could not grip. HSBC strategists, watching this streak, called it what it looked like: Teflon. But in a note released Monday, the bank laid out a case for why that coating may be wearing thin.

The resilience has been real, and it has had real causes. U.S. corporate earnings have repeatedly surprised analysts on the upside, and economic growth—particularly in America—has remained robust enough to support elevated valuations even as central banks raised rates. Household wealth in the U.S. has climbed well above its pre-pandemic trend, concentrated heavily among higher earners, and cash holdings remain elevated compared to levels before the 2008 financial crisis. Investors, facing a world where government bonds no longer reliably hedge against stock losses, have shifted money into equities and shorter-term hedging tools, propping up stock prices. The Federal Reserve alone has access to close to twenty different tools and backstops to deploy during market stress, and the European Central Bank has more than a dozen. Lower energy intensity in developed economies means that oil shocks—even those tied to wars in Ukraine and the Middle East—pack less punch than they would have in the 1970s or 1980s.

Yet HSBC identifies several specific vulnerabilities that could test this resilience to its breaking point. The greatest risks cluster around the United States, which carries outsized weight in global equity and credit markets. If corporate tax rates rise significantly from their current multi-decade lows, profit margins could compress, weighing on stock valuations. If inflation falls close to or below central bank targets, the relationship between stocks and bonds could flip—a negative correlation that would send bond prices up when stocks fall, encouraging investors to reduce their equity holdings and potentially triggering a repricing of valuations downward. A renewed buildup of private-sector debt, while currently at multi-decade lows, could make both the economy and markets more fragile. And perhaps most consequential: if central banks withdraw the perceived support they have provided to markets, the entire foundation shifts. That scenario seems unlikely in the near term, HSBC acknowledged, particularly in the U.S. where equities, wealth effects, and financial conditions have become deeply intertwined. But the bank did not rule it out.

Deutsche Bank, in a separate report released the same day, echoed the concern. The bank argued that the current equilibrium is unsustainable. Risk assets—equities and credit—remain strikingly complacent, Deutsche Bank said, even as rates markets price in only limited central bank tightening despite mounting inflation pressures. Equities and credit are essentially betting that higher yields will not materially damage economic growth. That bet may hold. But if it does not, the reversal could be sharp.

What makes this moment notable is not that risks exist—they always do—but that markets have become so accustomed to absorbing them that the possibility of a shock that sticks has receded from most investors' calculations. HSBC strategists put it plainly: it seems as if risk assets continue to ignore every negative catalyst. The streak has lasted long enough that it has begun to feel like the natural state of markets. But streaks, by definition, end. The question now is what will break this one.