Equity markets continued their upward trajectory last week, bolstered by a robust job print despite softer GDP growth in 1Q25, which saw a 0.3% decline driven predominantly by a surge in imports in anticipation of tariff hikes, although strong personal consumption and business investment mitigated the impact. Similarly, the hit to 1Q GDP from front-loading imports will likely reverse in 2Q pointing to a likelihood of a beat, supporting improved sentiment down the line. The SPY marked its ninth consecutive positive day, the longest streak since late 2004, having now rebounded 8% over the last two weeks, fully recovering from the post-Liberation Day sell-off. While negotiations progress slowly, the market's optimism reflects growing confidence in a resolution, supported by the U.S. administration’s more constructive tone towards cooperation with China and its trading partners.
Although several technical indicators point towards an overextended move in the short term, as pointed out in our last week’s note Is the worst behind us? Institutional and systematic investor positioning or the lack of it in equities still remains supportive of further upside. Retail investors continue to add to flows with April being a record month of flows for the cohort while the decreasing volatility is also expected to drive reallocation by volatility control funds which have seen a 60-70% reduction in their positioning in equities. In addition, c75% of companies have now exited the buyback blackout window from c.30% last week. Part of the short squeeze has also been driven by dealers in large negative gamma across the board exacerbated by the ongoing low top of the book futures liquidity. The squeeze has forced participants to chase the rally but have also been motivated to buy downside protection reflected in the disconnect between a falling VIX but a bid in skew pointing to a very fragile market with limited shock absorbers, driving exaggerated market reactions to small catalysts.
In terms of earnings, c.70% of the S&P 500 companies have reported 1Q25 earnings, with 76% exceeding expectations, surpassing the 10-year average of 75%, and achieving 12.5% YoY earnings growth, above the anticipated 11.5%; however, 2Q guidance has dropped to 5.8% growth due to consumer uncertainty and tariff concerns, down from the previously expected 11.3%. The deep cut in earnings growth expectations for the quarters ahead have likely set a very low bar to beat should the tariff negotiations be resolved favourably. In Europe, earnings for STOXX 600 companies have also exceeded expectations, with a YoY decline of 1.7% vs. the estimated 3% decline a few weeks ago, while revenue growth remained modest at 1.4%. Approximately 60% of firms exceeded analyst earnings estimates, trailing the U.S. beat rate of 76%.
The main events for the week will be the Fed and BOE rate decision meetings on Wednesday and Thursday, respectively, where the FED is expected to keep rates unchanged and to offer limited forward guidance about the policy path ahead while the BOE is expected to cut rates by a further 25bp. Following the strong jobs report, rate cut expectations for the FED have been scaled back for 2025 with the market now pricing in three cuts vs. four cuts a month ago. Fed funds futures are pricing a 30% probability of a cut by June, with a full 25bp cut priced by July.
We reiterate our call ideas on Carrefour, Novartis, Rio Tinto, BP, BMW, IFX and BASF.