As global financial markets navigate through an ever-evolving set of challenges, from the rapid rise of artificial intelligence to ongoing trade tariff issues, the economic outlook remains a subject of intense scrutiny. A recent report from HSBC offers a nuanced perspective on the current state of the global economy, highlighting the fundamental strengths that underpin market activity despite a range of risks and uncertainties. The report emphasizes a continued optimistic outlook for the first half of 2025, asserting that while challenges remain, the global economic engine is set to deliver meaningful returns in the coming months.

A central focus of HSBC’s analysis is the dynamic interplay between economic growth and inflation, particularly within the U.S. economy. The bank predicts that the United States will experience sustained economic expansion, fueled by easing inflationary pressures. This disinflationary trend, which HSBC expects to unfold gradually between January and April of 2025, is poised to act as a stabilizing force in the market. Such a backdrop of slower inflation, combined with robust growth expectations, suggests that the first half of 2025 may witness further economic resilience, offering positive momentum for investors across a broad spectrum of assets.

In terms of investment strategy, HSBC makes use of its proprietary Valuation Adjustment Momentum Score (VAMOS) to assess the relative performance of different asset classes. The report’s findings indicate strong performance from stocks in both developed and emerging markets, alongside promising returns from emerging market credit and high-yield bonds. These assets are positioned to outperform in a favorable market environment, which, according to HSBC, will benefit from steady liquidity support. In contrast, the bank expresses caution towards developed market sovereign bonds and investment-grade credit, where valuation risks remain more pronounced, especially as interest rate movements become an increasingly critical factor.

Equity markets are expected to continue to benefit from supportive macroeconomic factors. HSBC's machine learning model, MARViN, suggests that equities are currently more attractive than sovereign bonds in the prevailing market climate. With interest rates remaining high and inflation pressures beginning to recede, equities, particularly in the U.S., appear poised for further growth, even though challenges persist in the form of tech stock underperformance. The shift in investor sentiment observed in early January 2025 reflects this cautious optimism, where the absence of a pronounced market pullback combined with neutral sentiment readings suggests that investors are willing to stay the course for now, betting on long-term market recovery.

One key area of focus for HSBC is liquidity. The U.S. Treasury’s recent announcement regarding the steady scale of treasury auctions indicates that liquidity support will remain robust in the coming months. This is a crucial factor that will provide a cushion against potential market tightening, which is a concern for many investors, especially those focused on fixed income assets. HSBC views this development positively, anticipating that liquidity risks will remain minimal in the first half of 2025, thereby contributing to the broader market’s ability to sustain growth.

In terms of asset allocation, HSBC advocates for a multi-asset strategy that favors equities and credit bonds while recommending caution regarding sovereign bonds and oil. The bank's analysts continue to favor U.S. stocks, emerging market credit, and high-yield bonds, with an additional positive outlook for gold. Given the geopolitical and trade uncertainties, which persist in the background, HSBC’s decision to maintain a positive stance on gold underscores its role as a hedge against systemic risks. On the other hand, the bank is underweight in oil, a sector that faces significant challenges due to potential economic slowdowns and fluctuating global demand.

The global market environment is far from homogenous, however. While HSBC remains optimistic about the U.S. stock market, it acknowledges that European equities face more immediate headwinds. The European market's struggles can be traced to a combination of geopolitical risks and trade-related tensions, particularly in relation to the European Union's interactions with the U.S. and China. Despite these challenges, HSBC highlights that certain sectors within Europe could still see growth, particularly those that are benefiting from currency depreciation and persistently high interest rates. In this context, select European markets and industries could offer attractive opportunities, especially as the global economy begins to recover from the shocks of recent years.

The outlook for emerging markets remains more complex but optimistic. HSBC’s strategists recommend focusing on markets with strong economic fundamentals and sound monetary and fiscal policies. In particular, China is seen as a prime market for investment, given its substantial economic potential and the alignment of its policies with global economic trends. While the broader emerging markets face pressure from various global headwinds, corporate earnings within these regions could help offset the adverse effects of weaker growth and trade challenges.

In the fixed income sector, HSBC maintains a bullish outlook on U.S. Treasuries, which continue to offer compelling real yields relative to other fixed-income markets. U.S. government securities are likely to remain an attractive asset for investors, particularly as the Federal Reserve is expected to lower interest rates by 75 basis points in 2025. These cuts will likely be phased in over the course of the year, with HSBC projecting 25 basis point reductions in June, September, and December. This anticipated shift in U.S. monetary policy is expected to further support the demand for Treasuries, cementing their status as a safe haven in times of global uncertainty.

Conversely, HSBC is more cautious about investment-grade bonds, taking a neutral stance in this asset class. The bank is also slightly bearish on high-yield bonds, which face greater risks due to potential credit downgrades and economic slowdown. While high-yield bonds typically perform well in a growing economy, the current uncertainties surrounding inflation and interest rates suggest that these assets may struggle to generate consistent returns in the near term.

Foreign exchange markets are another area where HSBC sees potential for significant shifts. The report suggests that the U.S. dollar will continue to strengthen against other major currencies, driven by the ongoing disparity in growth rates and monetary policies between the U.S. and other parts of the world. The dollar’s strength is expected to persist, making it an attractive asset for investors seeking stability. At the same time, gold is expected to hold its value, supported by a mix of fiscal, economic, geopolitical, and trade risks. As a result, gold continues to be a key component in HSBC’s recommended asset allocation strategy.

In conclusion, HSBC’s 2025 outlook reflects a cautious optimism about the global economy. Despite the persistent challenges posed by technological advancements, trade tariffs, and geopolitical risks, the bank remains confident that the market will continue to generate solid returns in the first half of the year. Investors are advised to maintain a balanced portfolio, with a focus on equities, credit bonds, and U.S. Treasuries, while staying cautious towards sovereign bonds and high-risk sectors such as oil. The strength of the U.S. economy, along with a gradual easing of inflationary pressures and stable liquidity, creates a favorable environment for risk assets. However, ongoing geopolitical uncertainties mean that investors must remain agile, adapting to shifting market conditions and global economic developments as they unfold.