HSBC turns bullish on US equities citing earnings momentum

HSBC upgraded U.S. equities to overweight from neutral, citing earnings momentum, 84% first-quarter beat rates, and $430 billion in announced S&P 500 buybacks year-to-date, up 20% year-on-year. It downgraded Europe ex-UK to neutral on weaker activity and higher energy costs, while warning that oil, energy prices, and Iran-related geopolitical risk could drive sector rotation. The firm also upgraded global basic materials to overweight and cut health care and industrials to neutral.

Analysis

The market message is less about one-off geopolitics and more about an earnings dispersion regime: companies with pricing power, low input-cost sensitivity, and buyback capacity should keep outperforming as long as growth remains intact. That favors U.S. large caps over cyclically exposed non-U.S. equities because the marginal increment to profits is being amplified by capital returns, while Europe still has a higher beta to energy and weaker operating leverage. In other words, the real trade is not “U.S. vs. Europe” in the abstract, but long businesses that can self-fund repurchases and short businesses whose margins are hostage to commodity inputs.

The second-order effect of elevated energy is a widening spread between downstream consumers and upstream beneficiaries inside the same equity factor bucket. Banks and insurers can absorb energy inflation better than industrials or health care because their cost base is less directly linked to physical inputs, while technology benefits from lower commodity exposure and a more resilient buyback bid. Basic materials is the tricky one: near-term earnings revisions can keep pushing multiples higher, but the trade becomes increasingly crowded if the market begins to price a durable commodity squeeze rather than a temporary geopolitical premium.

The main contrarian risk is that the market may be underestimating how quickly an energy shock can flip from a “sector rotation” story into a broader risk-off event. If crude stays elevated for several weeks, expect delayed margin pressure to hit Q2 guidance, especially in industrial supply chains and non-core sectors with limited ability to pass through costs. Conversely, any credible de-escalation in the Middle East would likely compress the geopolitical premium fast, leaving the commodity-sensitive winners vulnerable to an abrupt unwind in the next 2-6 weeks.

Key Decisions for Investors

• Go long U.S. equities vs. Europe ex-UK via a pair trade: long SPY / short VGK for 4-8 weeks. The setup benefits from stronger earnings revisions, buyback support, and lower energy sensitivity; stop if Brent falls back enough to remove the relative-growth premium or if Europe surprises on activity.
• Overweight technology and financials; underweight industrials and health care. Use QQQ and XLF as the expression on the long side, and XLI / XLV on the short side. Risk/reward is attractive for 1-2 months because these sectors have cleaner margin insulation if energy stays sticky.
• Tactical long XLB versus XLI for the next 4-6 weeks. Basic materials can absorb the commodity squeeze through pricing power, while industrials face delayed input-cost pressure; take profits if the commodity move becomes disorderly and valuation starts reflecting a full-duration supply shock.
• Consider selling upside call spreads on European cyclicals or industrial-heavy baskets for a 1-2 month horizon. The thesis is that the market is late to price margin compression from energy, but the risk is a rapid geopolitical de-escalation that forces a sharp squeeze higher.
• If you want optionality on de-escalation, buy short-dated downside in oil proxies or energy ETFs and fund it with covered calls on energy equities. This is a cleaner hedge than shorting crude outright because the key catalyst is a discrete political headline, not a slow-moving demand shock.