Stock market rally safe until at least H2 2024 - HSBC

Since beginning its rally in November 2023, the US stock market has shown little sign of stopping, with the S&P 500 notching a new record closing high on Thursday. During the first quarter of this year, the benchmark index jumped roughly 10.2%, marking its best Q1 gain since 2019.

Other widely followed indexes, including the 30-stock Dow Jones Industrial Average and the NASDAQ Composite, ended the three-month period with gains of 5.6% and 9.1%, respectively.

Stock market rally in 2024

The aforementioned numbers clearly depict the robustness of the current US stock market’s rally, which occurs while interest rates sit at their highest level in more than two decades.

The tight environment and sticky inflation have been broadly offset by investor excitement over artificial intelligence (AI) technology, which has been the primary driver behind this stock market bull run.

Big Tech companies, particularly Nvidia (NASDAQ:NVDA), have witnessed unprecedented growth during the ongoing AI boom, with the chipmaker surging over 80% in the first quarter and roughly 230% in the past year.

Other AI-related companies Super Micro Computer (NASDAQ:SMCI), Meta Platforms (NASDAQ:META), and Dell (NYSE:DELL) have also seen strong double-digit gains year-to-date.

Apart from AI demand, anticipation of interest rate cuts by the Federal Reserve has also increased investor appetite for risk assets. The US central bank previously hinted at three cuts for 2024, while some Wall Street analysts believe there could be more.

Against this backdrop, other risk assets, including cryptocurrencies, have also witnessed strong performance. Bitcoin jumped nearly 50% this year, recently hitting a new all-time high.

Stay long stocks in near term - HSBC

In the aftermath of risk assets’ outperformance in recent weeks, strategists at HSBC said Tuesday they “remain tactically constructive” on this group, particularly US and Japan stock markets.

However, the bank’s biggest overweight stance remains in oil, among other risk assets.

“Positioning still close to multi-year lows, more attractive carry due to the steep backwardation in the futures curve, green shoots in global manufacturing activity, and more favourable supply / demand dynamics should result in some near-term outperformance, in our view,” HSBC strategists said in a note.

From a broader perspective, while the improving global growth presents a positive outlook, it also introduces an upward risk to inflation. Yet, HSBC strategists consider it premature to be concerned about this aspect.

For them, a more vital consideration for equities and risk assets at large is the potential for rate cuts by the Federal Reserve and other central banks.

“Indeed, as long as they do cut, we still think there should be a sizable relief rally in store, as real money investors are still largely positioned neutral across virtually all asset classes,” noted strategists.

The second stage, however, could be more challenging, HSBC cautioned, questioning whether the Fed will manage to reduce rates to 2.5%. They ponder if a pause might be necessary during the process or if, akin to the scenario in the mid-1990s, the policymakers could be compelled to halt the rate cuts after initiating only a few.

“These risks have the potential to weigh on risk assets – but we think that is, at the earliest, a story for H2,” the bank’s team added.