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Investing.com -- HSBC strategists are skeptical that the current S&P 500 correction is nearly over, although investor sentiment and positioning are heading in the right direction.
The investment bank downgraded U.S. risk assets to underweight last week, encompassing both credit and equities, due to concerns about U.S. mega-caps, cyclicals, and the widening of US high-yield (HY) spreads.
The strategists note that the rebound in U.S. cyclicals, particularly consumer stocks, until early last week had not convinced them of a market turnaround.
They observed that equity market breadth is not at levels that would suggest capitulation, and there is potential for further selling according to systematic strategy signals.
“Whilst our sentiment and positioning indicators on aggregate are getting closer to a strong outright buy signal, we remain sceptical and aren’t buying the dip just yet,” they said in a note.
HSBC also highlighted that fundamental factors, such as the upcoming 2 April tariff deadline, could introduce additional uncertainty and prolong weakness in leading indicators.
Importantly, it is not necessary for an imminent U.S. recession to occur for risk assets to continue their correction, HSBC highlights. The market is currently focused on soft data narratives, but the bank suggests that even a few disappointing hard data points could extend the downturn.
The firm also discussed different scenarios that could influence the market, including classic risk-off due to U.S. recession risks, stagflation concerns, and concerns about slower data combined with U.S. debt issues stemming from potential tax cuts.
In all scenarios, HSBC anticipates that gold will become a stronger portfolio hedge against the U.S. dollar and U.S. Treasuries or developed market sovereigns in the coming weeks.