Five Warning Signs for Stock Market Rally: HSBC Global Strategists

HSBC Global strategists identify five key risks that could break the stock market rally, including rising US Treasury yields, investor sentiment, global inflation, a stronger dollar, and geopolitical tensions. The Danger Zone, when yields rise past a certain threshold, could be reached through fewer rate cuts or inflation from tariffs. Strategists warn investors to monitor these factors closely.

HSBC Global strategists have warned investors of five key risks that could potentially break the ongoing stock market rally in the second half of 2025. The strategists outlined these risks in a recent report, highlighting potential challenges that could jeopardize the market's post-Liberation Day rally.

The first risk identified by HSBC is the potential for US Treasury yields to rise past a certain threshold, a scenario the bank refers to as the "Danger Zone." This could be triggered by either fewer rate cuts from the Federal Reserve or higher inflation due to tariffs. Higher yields globally could also jeopardize the carry trade in markets, where investors borrow cheaper currency to invest in US assets [1].

Investor sentiment is another risk factor that HSBC is monitoring. The bank's gauge for short-term investor sentiment and position is currently sending a "strong sell signal," with 20%-30% of inputs indicating a sell position. However, HSBC cautions that this does not mean investors should immediately pull out of risk assets, pointing to potential positive earnings surprises for companies reporting second-quarter results [1].

A softer labor market is also a significant downside risk to economic growth in the second half of the year, according to HSBC. While the job market remains strong overall, jobless claims could rise higher through late-July, and firms may become more cautious about hiring due to tariffs and other factors. This could lead to expectations for more aggressive rate cuts from the Fed, which would be negative for the market [1].

The fourth risk is the potential for markets to sour on artificial intelligence (AI). Much of the rally in US stocks this year has been driven by mega-cap tech and semiconductor stocks, which are seen as beneficiaries of the AI boom. However, investors are growing more concerned about whether companies can sustain heavy AI spending, and renewed tariffs on semiconductors could further hurt the AI trade [1].

The final risk identified by HSBC is geopolitical tensions, specifically the possibility of President Trump firing Federal Reserve Chair Jerome Powell. Trump has previously suggested he could fire Powell, and any unexpected changes at the Fed could spark a sell-off in the market, similar to the one seen in April [1].

In addition to these risks, U.S. Treasury yields moved higher on Wednesday after President Trump denied plans to fire Federal Reserve Chair Jerome Powell, but investors are still closely monitoring the situation [2]. The dollar index is down by -0.54% today, as strength in stocks has reduced liquidity demand for the dollar, and lower T-note yields are also pressuring the dollar [3].

Investors should closely monitor these risks and be prepared for potential market volatility in the coming months. By staying informed and adjusting their portfolios accordingly, investors can better navigate the challenges ahead.

References:
[1] https://www.businessinsider.com/stock-market-risks-outlook-sp500-rally-tariffs-inflation-recession-ai-2025-7
[2] https://www.cnbc.com/2025/07/17/us-treasury-yields-trump-denies-plans-to-fire-fed-chair-powell-.html
[3] https://finance.yahoo.com/news/dollar-slips-due-strength-stocks-145002934.html