Strong earnings and AI enthusiasm continue to fuel the market rally, with US indices reaching fresh record highs with the SPY and QQQ rising c.17% and c.27% respectively from their late-March lows. As per FactSet, SPX 1Q blended EPS growth is c.28% YoY, well above consensus of +13% at the end of March, representing the sixth consecutive quarter of double-digit growth where the majority of upside has been driven by the Magnificent 7, with their blended 1Q26 EPS growth reaching +61%, (22% at March end). Excluding the Mag7, blended EPS growth is also increasing to +16% (10% at March end).
Despite the strong overall earnings performance, companies that reported negative earnings surprises have seen an average price decline of 4.9%, notably larger than the 5Y average of 2.9%, suggesting prices may be getting ahead of underlying fundamentals. The recent rally has pushed investor sentiment back to extreme levels with enthusiasm extending to Asia, where allocations into AI-related plays have hit record highs as investors position for a broader AI-led expansion. Dealer gamma has also flipped from one of the most negative readings on record at the end of March to one of the highest positive gamma setups today with such elevated levels often preceding sharp reversals or local market tops. With OPEX (15 May) and VIX expiration (19 May) approaching, the risk of a reversal rises with dealer hedges unwinding and the current gamma cushion fading.
Reflecting the broad-based euphoric risk appetite, the average SPX single-stock put-call skew has fallen to the lowest percentile recorded in the last decade, a clear sign of growing complacency in options markets. Although the rally may continue in the near term, as key Tech indices break market structure to the upside, we still see asymmetric downside risks for risk assets in general and even more so in Europe given ongoing Middle East tensions and elevated rates. We roll our SX5E Jun26 5700 puts to Sep26 expiry. Broader macro thoughts can be found in our GM Weekly Equity Views.