Five key reasons why global equities are poised for upside before Q4 risks – HSBC

[Global Perspective International Stock Market Outlook 3d Illustration]
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Global and U.S. equities (NYSEARCA:VT [https://seekingalpha.com/symbol/VT]), (URTH [https://seekingalpha.com/symbol/URTH]), (NASDAQ:ACWI [https://seekingalpha.com/symbol/ACWI]), (SP500 [https://seekingalpha.com/symbol/SP500]), (DJI [https://seekingalpha.com/symbol/DJI]) – which are already up about 10% year-to-date – have further room for tactical upside before greater downside risk materializes in the fourth quarter, according to HSBC Securities.

Alastair Pinder, head of Emerging Markets and Global Equity strategist at HSBC Securities, identified five key factors that markets may be overlooking, which could drive equity prices higher in the near term.

“We believe the market is underestimating the potential for a big U.S. earnings beat in Q2,” he said, pointing to healthy consumer spending data and limited tariff pass-through to consumer prices.

The first factor supporting potential equity outperformance is unexpectedly strong Q2 earnings, with the strategist noting recent high-frequency credit card data showing a sharp increase in consumer spending in early April.

This front-loaded demand should deliver “at least a temporary boost to Q2 EPS, rather than the sequential decline that is expected,” he said. However, this pull-forward raises the risk of a sharper slowdown in the second half of the year.

A weaker dollar (DXY [https://seekingalpha.com/symbol/DXY]) represents the second overlooked factor that could lift U.S. earnings, particularly benefiting the tech sector (XLK [https://seekingalpha.com/symbol/XLK]), (VGT [https://seekingalpha.com/symbol/VGT]), (IYW [https://seekingalpha.com/symbol/IYW]), where approximately 55% of S&P 500 (SP500 [https://seekingalpha.com/symbol/SP500]) revenue is generated overseas.

“FX movements over the past year should contribute a tailwind of 2 percentage points to S&P 500 (SP500 [https://seekingalpha.com/symbol/SP500]) EPS this quarter as a result of translation effects,” Pinder said. Conversely, he noted this creates a headwind for European (VGK [https://seekingalpha.com/symbol/VGK]), (IEV [https://seekingalpha.com/symbol/IEV]), (IEUR [https://seekingalpha.com/symbol/IEUR]) and Japanese (EWJ [https://seekingalpha.com/symbol/EWJ]) companies, potentially shaving 5 percentage points off Q2 EPS for European companies.

Despite U.S. President Donald Trump’s administration announcing fresh tariffs effective August 1, including 30% on goods from the EU and Mexico, and higher rates for other trading partners, Pinder suggested these tariffs remain manageable for now.

“Less than 10% [of companies] flagged tariffs as a major near-term earnings threat, while c20% expect a delayed impact,” he said, and added that it could take six to 12 months for tariffs to fully impact corporate bottom lines, allowing for near-term earnings resilience.

The “One Big Beautiful Bill Act” (or OBBBA) signed into law on July 4 represents a fourth potential tailwind, particularly through its overhaul of R&D expensing rules. Under OBBBA, “companies can now deduct 100% of domestic R&D expenses in the year incurred, replacing the prior five-year amortization requirement,” Pinder explained.

This provision matters significantly for innovation-heavy companies, especially tech giants (MAGS [https://seekingalpha.com/symbol/MAGS]) that account for 47% of S&P 500 R&D, providing “more cash to reinvest in growth, or return to shareholders.”

Finally, the strategist pushed back against concerns that equities are already too expensive, noting that while the FTSE All-World trades at an elevated 12-month forward PE of 18.6x, the median global stock sits at a more reasonable 16.3x.

“Even within the U.S., important areas of the market don’t look stretched,” he said, pointing out that the Magnificent 7 (MAGS [https://seekingalpha.com/symbol/MAGS]) trades at 29.5x forward earnings, in line with its five-year average.

Emerging markets (EEM [https://seekingalpha.com/symbol/EEM]) appears particularly attractive – Pinder added – trading at a 30% discount to developed markets (NYSEARCA:VEA [https://seekingalpha.com/symbol/VEA]), (IDEV [https://seekingalpha.com/symbol/IDEV]), well above the long-term average gap of 20%.

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