HSBC says rotation out of U.S. stocks and into international will continue

Investing.com -- HSBC analysts predict that the ongoing shift from U.S. equities to international markets will persist as concerns about U.S. growth and the impact of tariffs intensify. 

The recent announcement of significant reciprocal tariffs by President Trump has increased global volatility and raised concerns about the future of U.S. corporate earnings. 

"The size and scope of the tariffs exceeded expectations and will reinforce concerns around global growth," HSBC (LON:HSBA) notes, adding that U.S. companies could face the biggest challenges due to limited scope for substitution.

This growing uncertainty around U.S. stocks has prompted a rotation in global equity flows. HSBC observes that foreign investors remain heavily invested in U.S. equities, leaving room for substantial outflows. 

"Foreign ownership in the US stands near all-time highs at 18%. That’s significant. With geopolitical tensions elevated, a reversion to pre-COVID-19 levels of 15% foreign ownership could trigger USD1.7trn in outflows from US equities," the analysts highlight.

The shift away from U.S. stocks is also linked to growing recession risks, with HSBC's equity market implied recession probability indicator suggesting a 40% chance of a recession by the end of the year. 

As U.S. consumer fragility builds and corporate earnings expectations are lowered, the outlook for U.S. equities appears dim. 

"The upside for equities in the next few weeks is also capped and we expect further US underperformance," HSBC states.

Meanwhile, international markets, particularly in Europe and emerging markets, present more attractive opportunities. 

HSBC remains overweight on both emerging markets and Europe, with a focus on sectors such as China’s internet and consumer discretionary, and Europe's capital goods, banks, and MDAX. 

The bank believes European equities are positioned to outperform the U.S., emphasizing the appeal of undervalued European stocks despite the challenges posed by tariffs.