Market Outlook: 3 ‘Pain Trades’ Raising Risks for Investors in the 2nd Half

There are a handful of consensus views on Wall Street that risk being proven incorrect in the back half of this year, raising the risk for some traders betting on things like the impact of tariffs and the direction of US stocks.

That’s according to strategists at HSBC Global Research, who see a risk that markets may not react to headwinds like tariffs and the GOP tax bill in the way that most investors may be expecting.

In a note to clients on Monday, the bank said it identified several “pain trades” if the market bucked expectations on Wall Street in the second half of the year.

“A lot of views going into H2 have become quite consensus and widely-held. Therefore some of our sentiment and positioning indicators are showing increasing signs of stretched views. What if Q3 turns out to be the quarter where these widely-held views unwind though?” the bank wrote.

The analysts added that they believed the US stock market could continue to see “broad-based melt-up” — a situation where risk assets keep moving higher — contrary to some of Wall Street’s gloomier forecasters.

Here are three of the largest pain trades the bank sees potentially impacting investors.

1. US stocks keep outperforming the rest of the world

There’s a growing view that the US stock market will underperform international stocks this year. Investors are mainly concerned that tariffs could hit corporate earnings and increase uncertainty in the US, which could hit high stock valuations.

In a survey conducted by Bank of America in June, 54% of global fund managers said they believed international equities would be the best-performing asset over the next five years, compared to just 23% of investors who said they believed US stocks would be the top asset.

But there are a few reasons the US could continue to dominate the world market, HSBC said.

For one, corporate earnings may not be as affected by tariffs as investors are predicting. Strategists estimated that around 20% of the cost of goods sold, or goods that American firms need to make profits, are imported from other countries.

Meanwhile, large-cap and mega-cap firms are benefiting from a weaker dollar, which could make US products more attractive to consumers abroad, HSBC said.

HSBC said weekly announcements of stock buybacks from US companies also hit a record high after the first-quarter earnings season.

“Yes the US equity market is expensive. That’s because it makes the most money,” strategists said. “We can easily envisage a backdrop where things like the big beautiful bill, potential efforts around deregulation coupled with further evidence of profitability benefits from AI leads to an even larger gap in return on equity between the US and RoW equities in the coming quarters.”

2. The US economy avoids a recession

Most investors also expect economic growth to slow sharply in the US and the broader global economy in the second half.

But there are several indicators of economic expectations that have shown soft signs of a rebound in recent weeks, HSBC said.

The Bloomberg consensus GDP forecast diffusion index, one measure of GDP growth expectations, perked up in June.

High-frequency consumer spending datapoints have also shown a slight uptick, a possible sign that consumers are beginning to feel better about what’s ahead.

“Despite the calls for a slowdown, high-frequency data show that after a temporary slump in May, US activity has in fact recovered again in June,” strategists said, adding there could be upside risk if political and economic uncertainty begins to decline and the unemployment rate remains low in the US.

3. The US dollar makes a comeback

Most forecasters also don’t expect the US dollar to recover in value anytime soon, given the uncertainty surrounding geopolitics and trade.

The US Dollar Index, which weighs the value of the greenback against a basket of other major currencies, has declined 10% year-to-date.

HSBC’s base-case is that the dollar will remain “soft” in the second half of the year, but there are two ways the US dollar could stage a recovery, something that would be “surprising yet painful” to investors, strategists said.

1. There’s a large global shock that drives currency traders back to the US dollar. The US dollar saw a brief spike as conflict between Israel, Iran, and the US unfolded last month.

2. US policy uncertainty and structural forces stop weighing on the dollar. That could indicate to markets that the narrative of US exceptionalism is returning, causing the dollar to trade more in-line with what interest rates would imply.

   In that scenario, the Dollar Index could strengthen to 102, HSBC estimated, implying a 5% increase from current levels.