Investing.com -- In a note to clients on Monday, HSBC cautioned investors that the strong momentum in risk assets could fade in the second half of 2025, as early warning signs begin to flash.

HSBC analysts wrote that while equities have rallied into the second-quarter earnings season and even found support from tariffs, “there is an expiration date to our bullishness.”

The bank flagged stretched sentiment and positioning as immediate red flags. “Our short-term sentiment and positioning signals are now sending a sell signal and in fact the biggest one since mid-2023,” HSBC said.

Tariffs, ironically, have turned into a bullish catalyst for now, with HSBC arguing that “many investors are treating tariff deadlines as genuine deadlines,” when in fact they’re not.

The firm noted recent comments by U.S. Treasury Secretary Bessent hinting that the Aug. 12 China-U.S. deadline may be flexible, which “would likely be taken positively by risk assets.”

Moreover, the market’s reaction to tariffs is said to be evolving.

“We also think the market reaction to tariffs should increasingly resemble a COVID-like behaviour,” HSBC wrote. The firm compared current dynamics to 2020-2021, when investors began treating lockdown news as buy-the-dip opportunities.

Still, HSBC outlined five downside risks that could reverse the current optimism: “Return of the Danger Zone, stretched sentiment and positioning, significant softening of the labour market, the AI trade fizzles out, [and] a threat to Fed independence.”

While the bank remains constructive in the near term, it concluded that investors should be alert for signs that the rally’s foundation is starting to crack.

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