HSBC Strategist: Equity Markets Have Fully Discounted Rate Hikes, Earnings Drive Rally

The Quick Take

• HSBC's chief multi-asset strategist says equity markets have '100%' discounted higher interest rates
• Max Kettner argues that strong corporate earnings are the real driver sustaining the current stock rally
• The view implies limited additional downside from central bank tightening as rate expectations are already in prices

HSBC's chief multi-asset strategist Max Kettner made a notably constructive case for global equities, arguing that financial markets have already fully priced in the current trajectory of interest rate hikes by major central banks. This 'complete discounting' thesis — expressed as '100%' priced-in — suggests that the primary bear case for equities from rate-hike headwinds has largely been neutralised. The ongoing global tightening cycle, while still in progress, no longer represents a novel risk premium for equity investors because it is embedded in discount rate assumptions across earnings models.

The earnings-driven rally thesis places company fundamentals rather than monetary policy at the centre of the current market regime. When rate hikes are fully priced, outperformance shifts to companies that can sustain earnings growth in a higher-cost-of-capital environment — typically large-cap technology, healthcare, and consumer staples businesses with pricing power. For tactical asset allocators, Kettner's view implies rotating away from pure rate-sensitive positioning and toward quality earnings factors as the dominant performance driver for the remainder of the year.

The watch point for validating this thesis is the upcoming US earnings season — if S&P 500 companies collectively deliver earnings per share growth at or above consensus estimates, it confirms that the earnings engine is capable of overriding cost pressures from higher rates. The macro variable that could break the thesis is a scenario where rate hikes continue faster than expected and simultaneously trigger a hard economic landing, collapsing the earnings backdrop that Kettner identifies as the bull's core support. Jobs data and credit spreads are the early-warning indicators of that deterioration.

Synthesized from 1 source.