HSBC: These 5 market forces will determine whether stocks regain their footing or plunge into a free fall

REUTERS/Aly Song

• There's ample uncertainty about whether stocks are on the cusp of a rebound to new highs, or whether the December sell-off was part of a more sustained move lower.
• HSBC has compiled a list of five factors that will determine the market's next direction and what investors should be paying attention to.

The question of how much longer the bull market in stocks will run is heavy on investors' minds.

They recognize the danger of wrongly timing the market and missing out on late-cycle gains, but are bombarded with signs that the end is near.

Amid this uncertainty, equity strategists at HSBC have compiled a list of five catalysts that will determine whether the market will retake its highs and live another day, or relapse deeper into a bear market. Their overall outlook is positive, as they expect four of the five items on this list to work out in the market's favor.

Without further ado, here they are:

1) A dovish Fed

After some seemingly mixed messages late last year, Federal Reserve Chair Jerome Powell has managed to convince investors that the central bank will not raise interest rates on a preset timetable.

In October, Powell scared markets with his remark that the Fed was a long way from the neutral interest rate that neither speeds up nor slows down the economy. He has since tweaked his tune, saying last week that the Fed had the ability to be patient and watch how the economy evolves.

Such a wait-and-see approach would avert a policy mistake, says Ben Laidler, the head of Americas research at HSBC. Fewer or no rate hikes would also support equity valuations that have faced competition from higher-yielding fixed income securities.

2) US earnings

Slower earnings growth is one of the market's biggest concerns, and analysts have promptly slashed their estimates for 2019 growth.

But there's no cause for alarm on this front, says Laidler.

That's because the expected earnings slowdown has been overstated when you factor in the boost companies got from the corporate tax cuts that were signed into law last year. The consensus forecast for 7.8% earnings growth is a step down from last year, but it's broadly in line with historical averages, according to Laidler.

Additionally, the weak expectations for profit growth mean companies have a lower bar to climb in order to beat. As the most important earnings season in recent memory heats up, it will be crucial to watch how companies perform relative to expectations, and what executives say in terms of forward guidance.

3) US-China trade

Laidler is also optimistic on this crucial market driver.

For starters, stocks have already priced in much of the damage of an escalated trade war, in his view. HSBC's screen of 40 US and Chinese stocks sensitive to tariffs is trading at a 2.5 standard deviation valuation discount to history, he says.

The companies that are hit by trade disputes can offset the damage by passing on at least a portion of their higher costs to consumers.

Laidler further says it would be wrong to underestimate how much China can concede in its fight with the US over intellectual property rights.

4) Global growth

China and the US are the key drivers of concerns about a slowdown in global growth.

Once again, Laidler views this with a glass-half-full lens.

He believes that China's corporate tax cuts and credit easing are sufficient enough to counteract the headwinds generated by the trade war. One word of caution, though: the economic data out of China could be noisy in the near term because of the Chinese New Year holiday on February 5.

In the US, he expects a slowdown in gross-domestic-product growth towards its trend level, down to about 2.5% this year.

5) Europe

This is the only factor that has HSBC cautious.

2019 is a big year for the continent, with so much uncertainty surrounding Brexit, a crucial EU parliamentary election in May, and possible leadership transitions in several countries.

When HSBC surveyed investors, a second Eurozone crisis emerged as one of the biggest risks for 2019.

There's ample evidence that the continent is in an economic slump three weeks into the year. Germany and Italy, the continent's no. 1 and 4 economies, are on the brink of recessions.

With growth already slowing, it may be too late to enact any structural reforms, Laidler said.