US Market Recovery Dynamics

Earnings expectations for S&P 500 and Eurostoxx 600 have been revised downward, but Q1 earnings and sales have exceeded estimates. Despite lower growth compared to Q4, optimism remains for future growth. The market rally suggests strong buying power, potentially driven by retail traders stabilising stock markets. Continued involvement by retail traders could sustain equity recovery, especially for US stocks.

What we see here is a snapshot of contrasting performances between European and US equity markets over different timeframes. While European stocks — particularly Germany’s DAX — led early in the year, US indices have surged back strongly in recent weeks, with technology-heavy benchmarks posting quick recoveries. There’s clearly momentum in place, predominantly in high-growth sectors, even amidst moves in the bond market that usually dampen equity valuations.

Rising bond yields—like the 10-year US Treasury pushing higher last week—usually spell challenges for equities by making borrowing costlier and equities less attractive in relative terms. Surprisingly, we’ve observed US stocks climbing regardless, suggesting something broader is at play. There’s been a noticeable drop in volatility, which often precedes stable buy-ins, giving enough room for growth and momentum names to keep leading.

Focus on Bond Markets and Equity Implications

Digging into the fundamentals, earnings remain a key piece. Even with lowered expectations for 2024 earnings across the S&P 500 and Euro Stoxx 600, reported figures have come in above estimates for both revenue and net income. That’s buoyed market sentiment, especially as early reports hinted at slower growth coming off the highs seen late in 2024. But a slowdown doesn’t necessarily mean poor performance—it means recalibrating assumptions around expansion rates rather than sounding any alarm bells.

Traders will want to be especially sensitive to upcoming economic data and central bank communication. Moves in rates have become more reactive to macro surprises, both in inflation and labour-related data. With yields climbing, especially in the UK, we must consider the higher cost of capital and its dampening effect on valuations. This is particularly relevant as we price in longer-term assumptions into equity derivatives, where implied volatility has room to shift suddenly.

The persistently strong showing in US stocks has been stabilised in part by a large wave of persistent retail inflows. We see flows coming through structured products and options strategies that have likely put floors under the market during sell-offs. That stabilisation mechanic shifts the risk-reward profile for short-term option sellers and delta-neutral participants, who’ll need to be more precise in picking entry points.

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