HSBC: Market Earnings Forecasts Are Too Pessimistic Ahead of Q2 Season

With second-quarter earnings season about to begin, HSBC says the market is underestimating corporate performance — setting the stage for positive surprises.

Despite recent shifts in U.S. trade policy, HSBC strategists, led by chief multi-asset strategist Max Kettner, believe markets are no longer as reactive to tariff headlines. “The tariff debate has faded into the background following the U.S.-China trade pause,” they note. “Risk assets are showing less sensitivity to these developments.”

They point out that the U.S. economy remains solid, especially with consumer spending rebounding. As a result, current consensus earnings forecasts may be too low. “Pessimistic estimates create room for upside surprises, which could lead to positive earnings revisions and support further gains in risk assets,” the strategists explain.

While tariffs carry inflation risks, HSBC says there’s little evidence of that so far — in fact, inflation appears to be cooling. Tariffs may also serve to keep investor positioning in check.

Looking ahead to Q2 results, HSBC challenges the market’s expectation for a quarter-on-quarter earnings decline. “We don’t agree,” the team states. “Earnings estimates have seen the largest cuts in three years, and the front-loading of economic activity should provide a temporary boost to Q2 EPS.”

Concerns about market valuation are also overstated, according to HSBC. On an equal-weighted basis, the S&P 500 is only slightly above its historical average — far from overvalued, in their view.

In fact, many widely held bearish views on the U.S. — from slowing growth to a weaker dollar and continued equity underperformance — could be misguided. HSBC sees these as “pain trades” likely to catch investors off guard.

Reflecting its bullish stance, HSBC raised its U.S. equity allocation by 4 percentage points, now recommending a 31% weight in its multi-asset portfolio. The full portfolio allocation is: 50% equities, 25% government bonds, 10% corporate credit, 5% commodities, and 5% cash.