U.S. equities rebounded across the board, rising 1%; Apple’s stock traced a V-shaped recovery after its new product launch; short-term Treasury yields, the U.S. dollar, and commodities all rose.

All three major U.S. equity indices rose: the S&P 500 gained 62.63 points, or 1.16%, closing at 5,471.05. The Dow Jones Industrial Average—closely tied to the economic cycle—rose 484.18 points, or 1.20%, to close at 40,829.59. The tech-heavy Nasdaq Composite gained 193.77 points, or 1.16%, closing at 16,884.60. The Nasdaq-100 rose 1.3%. The Nasdaq Technology Market Cap Weighted Index (NDXTMC), which tracks the performance of Nasdaq-100 technology constituents, rose 1.11%. The Russell 2000—more sensitive to economic cycles—rose 0.30%. The CBOE Volatility Index (VIX) fell 13.09% to 19.45. All U.S. sector ETFs posted gains. The global airline ETF rose 2.64%, the semiconductor ETF rose 2.26%, and ETFs tracking technology, global technology stocks, financials, discretionary consumer goods, biotechnology, and utilities each rose by more than 1%; the banking ETF rose only 0.65%, the weakest performer. All 11 sectors of the S&P 500 posted gains. The S&P discretionary consumer staples sector rose 1.63%; industrials, information technology/tech, financials, and real estate each rose at least 1.15%; energy rose 0.77%; and telecommunications rose just 0.04%, the smallest gain.

HSBC: Is the current U.S. equity market a bubble?

From an economic growth perspective, the sustained rally in risk assets is indeed unsurprising. HSBC finds that the impact of the 2022–2023 hiking cycle on the U.S. economy was relatively muted—largely because both corporations and households exhibited low sensitivity to interest rate changes. For instance, some companies have paid down debt and now hold cash balances near historical highs. As a result, net interest expenses for U.S. non-financial corporations are currently at their lowest level since before the Global Financial Crisis. Similarly, floating-rate household debt has declined significantly, while last year’s surges in stock and home prices generated substantial positive wealth effects. In fact, compared with the average bull market in the S&P 500 over the past several decades, this rally began from a lower base. Earlier, Wall Street giants—including Goldman Sachs and Bank of America—warned that the current U.S. equity rally is being driven largely by a narrow group of high-weight stocks, primarily in the technology sector, signaling a market that is “rising but narrowing.” HSBC acknowledges that the current rally does exhibit “high concentration,” yet the strength of tech stocks does not signal a bubble. In fact, such concentration is not unique to U.S. equities—some major global indices display even higher concentration (e.g., Danish biopharmaceutical stocks). Currently, large-cap corporate profit margins and earnings momentum remain robust—and are even accelerating. We believe there is virtually no resemblance between today’s environment and the late-1990s tech/internet boom. We will continue to avoid U.S. small-cap stocks, given their weak earnings momentum and the risks posed by their high proportion of floating-rate debt should U.S. yields rise again. The report notes that the current U.S. equity rally has broadened considerably. Driving the sharp market gains is no longer solely the information technology and communication services sectors. The report concludes that abundant evidence suggests risk assets are not in a bubble. That said, although equities face no imminent bubble risk, the performance of risk assets overall remains uneven. Since the start of this year, low-quality stocks have clearly underperformed high-quality ones. Numerous indicators point to an economic recovery. HSBC notes that over recent months, most global cyclical leading indicators have rebounded, suggesting the economy is moving further away from recession risk. Aggregating all these indicator variables, HSBC judges the overall macroeconomic backdrop to resemble early-cycle conditions—not late-cycle. Our consensus GDP forecast dispersion index—a measure of the breadth of Bloomberg’s consensus forecasts for major global economies—has risen sharply recently; this surge in optimism will support risk assets. Since mid-2023, our global manufacturing PMI model has also rebounded significantly. HSBC believes financial conditions are poised to ease further as the easing cycle advances. Regional Federal Reserve surveys of manufacturing have also improved markedly. As global central banks shift from tightening to easing, we should increasingly consider the lagged tailwind of accommodative monetary policy—not the headwinds of prior tightening.

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