SUPERNEWS

Macro

Surprise Rally Nears S&P, Nasdaq Peaks: Investors Caught Off-guard

Market rally surprises investors as S&P 500 and Nasdaq near historic highs, fueled by dovish Fed signals and AI optimism.

By Bill Bullington

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5/7, 09:32 EDT
S&P 500
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Key Takeaway

  • Surprising market rally nears historic highs, with S&P 500 and Nasdaq close to breaking records, defying investor expectations.
  • Earnings growth and dovish Fed expectations fuel optimism, pushing U.S. stocks and European small caps/Emerging markets up.
  • AI's expanding role in various sectors like utilities and industrials underpins market strength, challenging the case for a major selloff.

Market Surges Defy Expectations

The recent rally in the U.S. stock market has taken many investors by surprise, with the S&P 500 nearing its previous closing high and the Nasdaq just a fraction away from its historic peak. This unexpected upturn, described by Tim Anderson of MND Partners as the "pain trade," contradicts the bearish sentiment that prevailed just weeks ago, driven by fears of persistent high interest rates and possible Federal Reserve actions. The shift in market dynamics was sparked by a less aggressive jobs report and Fed Chair Powell's indication that rate hikes were unlikely, leading to a modest market melt-up.

Earnings and AI Fuel Optimism

Contrary to the belief that the Federal Reserve's dovish stance alone is propelling the market, Nicholas Colas from DataTrek emphasizes the underlying confidence in future economic growth. This confidence is reflected in the forward earnings estimates for the S&P 500, which continue to rise, defying the usual trend of declines at the quarter's start. Additionally, the artificial intelligence narrative is expanding beyond tech, notably boosting utilities to 52-week highs due to anticipated increases in power demand from data centers. This broadening of the AI story underscores the diverse drivers of the current market rally.

Zero-Day Options Boom Amid Split Opinions

The explosion in zero-day options trading, capturing 45% of the S&P 500 options volume, highlights a growing fascination with these high-risk, high-reward instruments. Despite the surge to approximately $862 billion in notional value, the Bloomberg Markets Live Pulse survey reveals a divided sentiment, with nearly half of the respondents bracing for a potential market disaster. This division reflects the speculative allure of zero-day options, even as concerns about their impact on stock volatility and retail investor losses persist. Yet, the majority of professional investors argue for keeping these options accessible, citing fairness.

Street Views

  • Tim Anderson, MND Partners (Neutral on the market):

    "The pain trade is up."

  • Nicholas Colas, DataTrek (Bullish on U.S. stocks and European small caps/Emerging markets):

    "Without investors being fundamentally confident in future economic growth, Fed policy alone would not be enough to be pushing U.S. stocks near new highs and European small caps/Emerging markets past their 1-year highs."

  • Alec Young, MAPsignals.com (Cautiously Optimistic on the market):

    "You’re not going to get some huge selloff to get back into the markets... If we get more data that is inflation friendly, we are going to be at new highs fast."