Major US equity indices have soared to new all-time highs, fuelled by optimism about trade negotiations with Canada, the EU, and India, reigniting optimism in the narrative of "US exceptionalism”. Canada’s decision to rescind its digital services tax on US tech firms further boosted market sentiment in tech names creating a broader barbell performance in the market with index gains driven predominantly by AI names and heavily shorted and non-profitable tech stocks, which have been driven by short squeezes. Despite breaking all-time highs, the MAG7 names make up roughly 58% of the Nasdaq, below the 61% peak we saw in February leaving additional room for upside. However, European indices are still c.4% below their all-time highs, as the beneficial-to-US-firms ongoing weakness in the USD is a headwind for European stock earnings.
Although the move in US markets appears increasingly overstretched, investor positioning is still a long way from reflecting any form of exuberance, as sentiment, measured by AAII Bulls/Bears, remains subdued with allocation by long only institutional only just getting going. Systematic funds are currently in the middle of historical positioning and with the latest advance in US equities, are estimated to extend in length over the next few weeks, thus offsetting any potential negative effect from the ongoing corporate buyback window. The hedge fund cohort has continued to add length, and contrary to predominantly short covering induced buy pressure over the last few months, are now more skewed towards long buys reflecting what appears to be chasing the advance in markets as lingering pessimism has left a lot of market participants in the dust. The hedge fund US long-short ratio is still very low at the 10th percentile on a 3-year look back. Tech and Financials continue to be the most bought sectors, while Energy and Health Care are still amongst the least favoured sectors. Also supportive of accelerant upside flow is the meaningful negative dealer gamma all the way up to 5% above current spot levels for the SP500, which roughly coincides with the resistance levels of the broader bullish channel seen since mid-2023.
As US inflation has been lower than initially feared, reflected in the latest CPI/PPI misses and with only a mild uptick in the PCE, we believe the market will now focus on the upcoming employment data on Thursday, as this will be the main driver of any potential recalibration of FED rate cut expectations. Although the US macro backdrop has generally been resilient, hard data are starting to show signs of weakness and we anticipate that absent any significant uptick in unemployment data, moderate weakness will once again turn the market towards a ‘’bad news is good news’ attitude, where a slightly weak jobs print would support expectations of further rate cuts, a positive for equities. Consensus expects a Non-Farm Payrolls print of +113k for June (prev. 139k), and 108k for private payrolls (prev. 140k). The unemployment rate is expected to see a slight uptick to 4.3% vs. 4.2% previously.
Given the ongoing undemanding equities positioning by market participants, deep cuts in earnings estimates ahead of the upcoming earnings season and a seasonally strong July, we maintain our Long QQQ Jan26 565 calls.