HSBC Warns Markets Are Ignoring the Biggest Risk Heading Into the Second Half of 2026

Investors celebrating record highs in U.S. stocks may be overlooking the possibility that consensus trades unwind violently if economic or geopolitical conditions change in the second half of 2026, HSBC warned.

In a new report, the bank said that markets have become increasingly vulnerable to so-called “pain trades,” unexpected moves that go against the prevailing consensus and force investors to unwind crowded positions rapidly. Rather than focusing on the risks everyone expects, the bank argues, the biggest market moves may come from scenarios few investors are currently pricing in.

The concept of a pain trade is simple. When most investors share the same economic outlook, any unexpected development can trigger a rush to reposition portfolios, amplifying price swings across stocks, bonds, and currencies.

One of HSBC’s most surprising calls involves artificial intelligence. Although skepticism surrounding AI has grown as investors question whether companies can justify massive spending on data centers and computing infrastructure, the bank believes the real surprise could be that AI-related stocks continue to outperform.

“Trade in the artificial intelligence sector is expected to be bogged down by bearish narratives over the coming months,” the bank wrote. Yet it noted that many companies leading the AI boom are facing lower expectations for full-year 2026 earnings growth than the strong year-over-year gains reported through the second quarter of 2025.

That lower bar could create room for upside surprises if earnings exceed expectations.”The pain trade in this case could be continued strength and upside surprises on AI in the second half, even as the narrative on AI continues to search for cracks,” HSBC said.

The bank also challenged the widespread belief that U.S. markets will continue to dominate global equities. European stocks, which have largely lagged their American counterparts because they lack the same concentration of AI-related companies, could outperform if investors begin rotating away from expensive technology shares.

Currency markets could deliver another surprise. HSBC expects the U.S. dollar to stage what it described as an “explosive” rally, catching investors who have largely positioned for a weaker greenback as the Federal Reserve eventually cuts interest rates.

To back its claim, the bank pointed to the Fed’s more hawkish tone in June, which pushed short-term Treasury yields higher. If policymakers signal they are prepared to keep rates elevated for longer or tighten policy more aggressively than markets currently expect, the dollar could strengthen sharply. “A stronger USD would be painful, but we see the ‘pain trade’ in the FX market taking the form of a more explosive period of USD strength,” HSBC said.

Bond markets may also be underestimating inflation risks. The bank warned that oil price shocks linked to instability in the Middle East could keep both headline and core inflation elevated, leading to a steeper U.S. Treasury yield curve instead of the flatter curve many investors currently anticipate. “We think the evolution of risks to the Fed’s dual mandate and skews to forward rate pricing increasingly reflect a market primarily concerned about Treasury curve flattening,” HSBC said.

Emerging markets round out HSBC’s list of potential surprises. Most investors currently expect developing economies to keep interest rates relatively high as they battle persistent inflation and contend with a stronger dollar. However, HSBC believes declining bond yields in emerging markets could instead become the unexpected move if inflation pressures ease more quickly than anticipated.

“In other words, investors appear to have positioned for persistent inflation pressure, limited monetary easing, and continued underperformance of local rates amidst a stronger U.S. dollar,” the report said.