MW HSBC double-upgrades Europe stocks as it lowers U.S. rating to neutral

By Steve Goldstein

HSBC: U.S. tech valuations are tempting but Europe still steals show

The year has started with a big rally for European stocks as the U.S. market struggles to remain above water.

Now, HSBC strategists are changing their tune. HSBC gave a double-upgrade upgrade of Europe stocks, excluding the U.K., to overweight from underweight, while downgrading the U.S. to neutral.

An investor following HSBC's advice wouldn't be shifting their money that much, however. Their recommended allocation would have 11% going to Europe stocks and 64% to the U.S. But it follows a period in which the Vanguard FTSE Europe ETF VGK has gained 16% while the S&P 500 SPX has declined by 2%.

HSBC strategists started the year recommending an overweight on emerging market stocks, a call that has done well, with the iShares MSCI Emerging Markets ETF EEM up 6%. It's just not as good as Europe.

"What we underestimated was how the U.S.'s wavering support for NATO and Ukraine would trigger a watershed moment for the eurozone - with Germany expected to also follow through with sizeable fiscal stimulus," said strategists led by Alastair Pinder, head emerging-markets and global-equity strategist at HSBC.

The HSBC team said the proposed German constitutional change to go around the country's debt brake is likely to succeed, which they say can help sustain the momentum in European stocks. If the German package succeeds, it will open the door for other countries to follow, they added.

Granted, the enthusiasm for European military spending has boosted the value of the euro $(EURUSD.FOREX)$. Euro-to-dollar movements have consistently led relative earnings revisions by about three months, they said.

As for the U.S., they said tech-stock valuations are actually looking compelling. The "Magnificent Seven" now trades on 26.7 times forward earnings versus 31.1 times at the beginning of the year. Also, earnings-per-share revisions for the group have been upgraded by 6% since July, while they've been lowered by 5% for the rest of the S&P 500, the analysts add.

The next big litmus test will be at the beginning of April when nearly two dozen trade reviews and investigations ordered by President Donald Trump are due. But for all the headline risk, tariff threats and defense concerns may actually improve the medium- to long-term outlook for stocks.

"Tariff threats and defense concerns have clearly forced governments into action: China has stepped up and deployed more fiscal support. Germany is taking the fiscal lead in Europe and other countries could follow. In the coming months, we should also get more details of Trump's fiscal (i.e. extension of TCJA and potentially further tax cuts) and deregulation agenda," they said.

"If - and it is a big if - the tariff noise starts to settle down, this would set the stage for global equities to rally sharply again."

-Steve Goldstein

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March 10, 2025 07:37 ET (11:37 GMT)

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