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, investors have reduced bond allocations and shifted toward equities and shorter-term hedging strategies, helping support elevated equity valuations.
A powerful wealth effect has also played a role. U.S. household wealth has risen significantly above its pre-Covid trend, with much of the increase concentrated among higher-income households. Cash and cash-equivalent holdings are also running well above their pre-financial-crisis trend.
Meanwhile, central banks now have a much broader range of tools available to respond to market stress. HSBC noted that the Federal Reserve has close to 20 potential tools, facilities and backstops, while the European Central Bank has more than a dozen.
Lower energy intensity and relatively low private-sector leverage have also helped markets absorb shocks. Oil price spikes linked to conflicts in Ukraine and the Middle East have had less impact on developed-market economies than similar shocks might have in the 1970s and 1980s.
