US Market Recovery Dynamics Earnings expectations for the S&P 500 and Eurostoxx 600 have been lowered, but Q1 earnings and sales have outperformed predictions. Although growth is slower compared to Q4, there is still optimism for the future. The recent market rally shows strong buying power, likely boosted by retail traders who are helping stabilize stock markets. Continued participation from retail traders could support the recovery of US stocks. This overview highlights the differing performances of European and US equity markets over various timeframes. Early in the year, European stocks, especially Germany’s DAX, performed well. Recently, however, US indices have rebounded strongly, with technology-focused benchmarks quickly recovering. There is clear momentum in high-growth sectors, even with changes in the bond market that typically lower equity valuations. Rising bond yields, such as the increase in the 10-year US Treasury last week, often create challenges for equities by raising borrowing costs and making stocks less appealing. Surprisingly, US stocks have still risen, suggesting a larger trend at play. We are also seeing a decline in market volatility, which often precedes stable buying and allows growth and momentum stocks to lead. Focus on Bond Markets and Equity Implications When we look at the fundamentals, earnings are crucial. Even though expectations for 2024 earnings have been adjusted down for the S&P 500 and Euro Stoxx 600, the reported numbers for revenue and net income have exceeded predictions. This has boosted market sentiment, especially since early reports indicated slower growth after the highs of late 2024. However, a slowdown does not mean poor performance; it simply involves adjusting expectations for growth rather than raising alarms. Traders need to pay attention to upcoming economic data and central bank communications. Interest rate changes have become more responsive to macro surprises in inflation and labor data. With yields rising, especially in the UK, we must keep in mind the higher cost of capital and its negative impact on valuations. This consideration is vital as we factor in long-term assumptions into equity derivatives, where implied volatility can change quickly. US stocks have remained strong partly due to substantial retail inflows. We are seeing money coming in through structured products and options strategies, which have likely softened market drops. This stabilization alters the risk-reward balance for short-term option sellers and delta-neutral participants, requiring them to be more accurate when choosing entry points. Create your live VT Markets account and start trading now.

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