HSBC upgrades EU stocks, downgrades EM on increased volatility

Investing.com -- HSBC is shifting its regional equity allocation heading into the second half of 2026, revealing in a note on Wednesday that it is closing its overweight in emerging market equities and upgrading eurozone stocks to overweight, while maintaining its maximum overweight on global equities overall.

Chief Multi-Asset Strategist Max Kettner said the decision to close the EM overweight reflects "heightened volatility in EM Asia," warning that the narrative around AI overspending and any signs of AI capital expenditure being cut "can hurt semi stocks and therefore disproportionately affect EM equities."

In its place, HSBC raised eurozone equities to overweight, highlighting banks in particular. Kettner said that "lower consensus growth expectations and the weaker euro should help over the summer months."

On the broader outlook, HSBC remains constructive on risk assets heading into the second half, with neutral sentiment and positioning alongside the upcoming second-quarter reporting season acting as "the next upside catalysts."

The firm said sequential U.S. earnings per share expectations for the second quarter are actually negative ex-energy and materials, which it sees as a low bar to clear.

HSBC expects U.S. exceptionalism to "unwind a little" in late third quarter, which it believes risk markets will initially interpret positively in a "bad-news-is-good-news Goldilocks regime."

The firm pushed back on four common investor concerns, including AI overspending, geopolitics, higher U.S. rates and excessive risk-taking, saying the bar "to out-hawk the already 40 basis points of hikes in the price is high" and that geopolitical risk is "firmly in the rear-view mirror."

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