Stocks Have Survived Inflation, Tariffs And War. HSBC Says This Is What Could Finally Break The Market.

Global stock markets have absorbed a succession of economic and geopolitical shocks in recent years without suffering a prolonged breakdown, but HSBC strategists have identified several conditions that would leave investors more exposed after a period of unusually resilient returns.

Markets have weathered inflation, higher interest rates, tariff disputes, wars, the unwinding of leveraged carry trades and concerns about private credit. HSBC strategists have described risk assets as "Teflon," reflecting how quickly markets have moved past developments that previously might have produced longer periods of stress.

The bank identified higher corporate taxes, a renewed increase in private-sector leverage, changes in the relationship between stocks and bonds and the loss of perceived central-bank support as factors that would weaken that resilience. The bank said the biggest risks were concentrated in the U.S. because of its large share of global equity and credit markets.

Higher corporate taxes are one pressure point because they would reduce company profitability, while increased borrowing by businesses and households would leave the private sector more exposed to economic shocks. Private-sector leverage is currently near multidecade lows, giving households and companies more room to absorb disruptions than during previous periods of market stress.

Corporate earnings have also helped support U.S. equities. Profits and economic growth have repeatedly exceeded expectations, while gains in household wealth have provided another buffer. HSBC noted that the strength has extended beyond the technology and artificial intelligence companies that have accounted for a large share of stock-market gains in recent years.

The market's resilience is being tested again this week as the U.S.-Iran conflict pushes energy prices higher. Brent crude approached $100 a barrel Tuesday after renewed hostilities in the Middle East.

Another issue identified by HSBC involves the relationship between stocks and bonds. Government bonds have historically provided investors with diversification because bond prices often rise when equities fall. That relationship has been less reliable during the recent inflationary period, when inflation shocks have at times pushed bond yields higher while simultaneously hurting stocks.

HSBC said a return to inflation near or below central-bank targets could restore the more traditional negative correlation between stocks and bonds. That would make bonds more useful again as a hedge against equity declines and could encourage some investors to reduce their stock allocations, putting pressure on equity valuations.

Central banks represent another part of HSBC's assessment. Investors have long operated with the idea of a central-bank "put,'' the expectation that policymakers will intervene when financial conditions deteriorate sharply. HSBC said removing that perceived backstop would have an adverse effect on markets, although its strategists said such an outcome was difficult to envision in the U.S. because stock prices, household wealth and broader financial conditions have become closely connected.

HSBC's assessment comes as other major banks identify tensions between resilient risk assets and changing conditions in interest-rate markets. Deutsche Bank strategist Henry Allen said in a research note this week that the current market equilibrium was "unsustainable," with investors pricing relatively limited additional tightening by the Federal Reserve and European Central Bank even as inflation pressures remain elevated.

Deutsche Bank pointed to higher energy and agricultural commodity prices alongside stronger-than-expected economic growth. The bank's Sept. 7 analysis said rates markets were not fully reflecting the amount of monetary tightening that would be required if inflation remained elevated, while equities and credit continued to show relatively little stress.

Bond markets have already adjusted substantially from the era of ultralow rates and large-scale central-bank asset purchases. Heavy government borrowing, persistent inflation and the retreat from quantitative easing have contributed to higher yields globally, while stronger economic growth and investment linked to artificial intelligence have also supported demand for capital, the Financial Times reported.

Those conditions have not prevented stocks from repeatedly recovering from bouts of volatility. HSBC's analysis points instead to the financial buffers that have helped markets absorb them: relatively low private-sector leverage, strong household balance sheets, corporate earnings and the continuing expectation that major central banks retain tools to respond to severe market stress.

The latest oil surge has put that resilience back in focus. Brent briefly moved close to $100 on Tuesday as fighting in the Middle East intensified, while Treasury yields remained elevated and Wall Street traded lower. The moves came three days before the next U.S. consumer inflation report and ahead of the Federal Reserve's September policy meeting.