"Investors are underestimating, heavily, how much we could see a melt up and a squeeze into the summer months," says Max Kettner, chief multi-asset strategist at HSBC, as he explains the upside catalysts he sees for markets.

New York

Max Kettner, chief multi-asset strategist at HSBC, believes markets are currently facing a 'classic wall of worry,' with investors focused on risks such as geopolitical tensions, upcoming tariff deadlines, and concerns about U.S. economic growth. Despite these worries, Kettner notes that investor positioning remains bearish, particularly in high-yield credit, even as some market indices reach new highs.

Kettner argues that these low expectations and cautious positioning could set the stage for a market rebound, or 'melt up,' in the coming months. He highlights technical factors and consensus forecasts for declining earnings as additional reasons why markets could surprise to the upside.

Markets are facing classic wall of worry, HSBC's Kettner says

So what are the upside risks to your outlook at this moment. Yeah. Good morning Danny. I think actually what we're facing right now is this classic wall of worry. If you had to write a textbook on what wall of worries is it is right now. We obviously had just geopolitics that markets were facing you know still fretting around whether that ceasefire holds or not. We obviously have the 9th of July deadline on tariffs. We then had the 12th of August deadline. Even if that passes I guess people will still be fretting around perhaps the possibility of some sort of possibility of a failed bond auction in treasuries. Then of course the narrative now for the second half a lot that we've been hearing particularly from macro guys from economists as well. Fine. Second quarter U.S. growth is OK but none of that is genuine strength. It's only just front loading. In fact under the hood the U.S. consumer will feel the strain. And by the second half maybe third maybe fourth quarter we're going to start to see the reversal of those front loading effects. To me actually one of the catalysts one of the upside catalysts is just climbing this perennial wall of worries. It reminds me a lot about the beginning of 2023 when also people were very very bearish. Positioning is another catalyst. In fact when we look at our measures of long only positioning people long only investors in particular are as bearish on high yield credit as they've been in 2022 and 2023. We look at you know you just were talking about a new all time highs in the NASDAQ. And despite that all of our shorter term positioning stuff is still sending a buy signal. So there is a lot I think to go for a lot of sort of technical factors but also very low growth expectations very low earnings expectations. Look at Q2 the Q2 reporting season. Actually consensus is saying earnings are going to drop quarter on quarter despite the second quarter from a top down perspective being really really strong. So I do think there's a lot to go for and I really really think investors are underestimating heavily how much we could see a melt up and a squeeze into the summer months now.

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