In European morning trading, stocks are on the rise, with S&P 500 futures up by 0.4%. European markets are also improving, as the DAX increases by 1.1% and the CAC 40 rises by 1.6%, erasing earlier weekly losses. This follows a trade deal between the US and Japan, with future outcomes possibly influenced by Japan’s political climate.
Broad market sentiment is influenced by upcoming tech earnings reports. Alphabet and Tesla are the key companies expected to release their earnings. For Alphabet, concerns exist about Google potentially needing to divest its Chrome browser, which could affect its search dominance. Additionally, competition in the AI sector, particularly with Gemini, is a focus, as increased capital expenditure in AI is expected.
Tesla’s Struggles
Tesla faces challenges as its stock has dropped nearly 18% this year. A fallout with Trump and changes in tax legislation, such as the removal of the federal EV tax credit, have negatively impacted Tesla. The company continues to underperform, and these factors contribute to its current struggles.
The current bullish trend in equities might be difficult to maintain while facing challenges from these two major tech companies. More significant companies are set to report earnings in the coming week.
The current upbeat mood in equities feels fragile, so we believe traders should be cautious. The CBOE Volatility Index (VIX), often called the market’s “fear gauge,” is currently hovering near 13, which is historically low and suggests a high degree of complacency. This makes it an opportune time to buy protective put options on major indices, as they are relatively cheap hedges against a potential downturn sparked by earnings.
Market Strategies Overview
For the first company on the agenda, uncertainty is the main theme. The options market is pricing in a potential post-earnings stock move of around 6%, reflecting the significant questions around its browser and AI progress. We see this as a clear signal to trade volatility itself through strategies like a long straddle, which profits from a large price move in either direction.
With the electric vehicle maker, the sentiment is overwhelmingly negative, and we plan to act on that. After the company already reported a 9% drop in quarterly deliveries, its biggest miss in years, the headwinds mentioned by Musk are clearly taking a toll. We are positioning for further disappointment by buying put options, anticipating the stock will break below its year-to-date lows.
Historically, the performance of these major tech components has a strong influence on the broader market. A negative reaction to these two reports, especially given their existing struggles within the Magnificent 7, could easily halt the bullish momentum seen in S&P 500 futures. The positive trade developments involving Ishiba may not be enough to offset weakness from these key players.
