HSBC: S&P 500 Can Climb Despite Rich Valuations

Willem Sels, HSBC’s global chief investment officer, told investors the S&P 500 can still advance because revenue, earnings and productivity gains from artificial intelligence are not fully reflected in US equity prices, even though valuation multiples are elevated.

Sels noted the S&P 500 trades at roughly 19 times forward earnings versus about 15 times for Europe’s Stoxx 600. He said that gap has narrowed and increasingly reflects stronger expected earnings growth and the scale of AI investment in the United States. “The US is not expensive,” he added.

He highlighted a widening performance gap between companies that have adopted AI and those that have not. Companies deploying AI report faster revenue, earnings and margin growth, particularly among large U.S. firms, and corporate use of AI is moving from pilot projects to broader deployment.

Semiconductor firms remain a focal point for investor caution. Some market participants are discounting parts of the industry because they doubt firms will meet earnings projections for 2027. Sels expects that skepticism to ease as chipmakers and suppliers provide clearer demand signals through order books, customer commitments and forward guidance.

Recent corporate results show strong headline growth. S&P 500 earnings per share rose 50.7% year over year in the second quarter, up from about 19% growth in the first quarter. Excluding mark-to-market investment gains, underlying earnings expanded roughly 25%. Forward earnings hit a record near $402 a share recently, and forward price-to-earnings multiples on the index have fallen about 12% this year while the index has gained around 13%.

Sels and other market observers identified rising bond yields as the main risk to equities. He flagged the 10-year US Treasury yield near 5% as a level likely to spark significant volatility, because higher yields make fixed income relatively more attractive and increase borrowing costs for companies. “The bond market has been back in the driving seat for stock investors recently,” he said, pointing to higher oil prices, inflation concerns, fiscal pressures and prospects for tighter monetary policy as factors pushing yields up.

Other analysts have stressed the psychological importance of a sustained 5% 10-year yield and warned it would prompt renewed scrutiny of equity valuations. The concern is magnified by rising corporate borrowing to finance AI-related projects such as data centers and infrastructure; higher financing costs could reduce returns on those investments and weigh on future earnings.

Sels remains generally positive on equities, citing resilient corporate fundamentals and AI-driven productivity gains. The central question for investors is whether earnings growth can continue to outpace concerns about higher rates and stretched multiples; so far quarterly results and forward earnings have supported a constructive view, while faster rises in Treasury yields could determine whether further gains are sustained.