On the back of several incrementally positive news headlines pointing to a potential clawback of the initially proposed tariff rates, the SPY is now less than 3% from a full retracement of the Liberation Day sell-off. Even though volatility has dropped significantly, the market continues to be whipsawed in both directions from one headline to the next, as the tariff-related news flow is still significant. Low-to-negative market dealer Gamma and the very low top of the book futures liquidity further contributes to the swings, with the extremely negative positioning in equities favouring upward advances. Of particular note, the SP500 is currently trading just below the short-term CTA buy trigger levels and technical resistance levels ahead of a heavy earnings week. We expect the market to continue to advance, bar any negative tariff news, as we see the recent surge mainly driven by short covering rather than organic institutional flow positioning back into equities.
Even though news headline sentiment over the past two weeks resembled near apocalyptic panic levels, we believe that most of the sell-off has been mostly driven by a sharp reversal of the previously stretched systematics positioning and a reduction in hedge fund leverage in equities. Looking at long-only institutional players, although there has been a reduction in allocation to equities since the February highs, it still remains elevated in the grander scheme of things and nowhere does it mirror the pessimism reflected in the all-time low CTA and Hedge fund positioning. On the other hand, retail investors appear unfazed as flows into long leveraged US Equity ETFs have reached record levels over the last two weeks, reminiscent of the dislocation in investor behaviour during COVID in 2020. Nevertheless, the YtD flows into spot US equities have been one of the highest seen in the last few years, also supported by increasing insider buying. Further positive flows are expected from corporate buybacks, as c.30% of companies have exited the blackout window as of the last week and expected to increase significantly over the coming weeks in a record year for expected buybacks.
In terms of events this week, micro will dominate, as roughly 40% of the S&P500 market cap reports, with four of the Mag7 publishing their 1Q25 earnings (Meta & Microsoft on Wednesday, Amazon & Apple on Thursday). Roughly 35% of companies in the US have reported their 1Q25 results, of which 73% have beaten EPS estimates, (below the 5Y average 77%) while in aggregate, companies are reporting earnings that are 10 % higher than consensus estimates, (5Y average of 8.8%, 10Y average of 6.9%) likely reflecting the largest downward revision in earnings over the last few months leading into the reporting season. Reflective of the pessimism is also the market rewarding positive earnings surprises more and punishing negative earnings surprises less than usual. The largest contributors to overall earnings growth is mainly coming from Communication Services and Financials. At the index level, the blended earnings growth in 1Q25 is 10.1% today vs. 7.2% at the end of March, marking the second consecutive quarter of double-digit growth. Full-year 2025 earnings and revenue growth have only decreased slightly from 11.3% to 9.7% and from 5.4% to 5%, respectively.
Other key US events during the week are the US Payrolls on Friday, for which the market forecasts 125k+ new jobs mean reverting from the seasonally strong previous print of 228k. 1Q GDP and PCE on Wednesday are expected to be on the softer side, only expected to grow 0.4% annualised (prev. 2.4%) and 0.1% (+0.4% prev.), respectively. The key economic release in Europe relates to Spain, Germany, France and Italy CPIs between Tuesday and Wednesday, as well as GDP growth in the Eurozone. The focus in Asia is on the BOJ meeting on Thursday, where it is expected to maintain interest rates unchanged. In European micro, we would point to Novartis, which stands out as potential candidate to own Gamma given that it is not exhibiting a big premium vs. history and has one of lower absolute vols among its peers. The company also tends to raise its full-year guidance in its 1Q results. German cyclicals, BAS and MBG, also report this week, although they screen at the richer end of expected earnings moves. We reiterate our call ideas on both Novartis and BASF.