Interview, Conference Presentation
How Earnings, Volatility, and AI Capex Are Affecting US Markets
- The first U.S. earnings report is anticipated to establish a high performance bar, with bottom-up analyst projections indicating 22% year-on-year earnings growth and implied moves for average S&P stocks of 5.5%, a level 60 to 70 basis points above the long-run average.
- Given that approximately 75% of global equities purchased since April lows have been sold prior to earnings, opportunities to add positions remain for names capable of outperforming option-implied expectations.
- Hyperscalers are expected to require $5.5 to $6 trillion in capital between 2025 and 2030 for AI build-outs, creating challenges regarding the sheer size of issuances and concentration in technology bonds.
- Risks in the hyperscaler credit market include a projected 22 basis point widening of the bond basket and a divergence between credit default swap (CDS) and equity put markets for AI-related names.
- Market volatility is projected to diverge significantly by 2026, featuring extremely low realized index volatility contrasted with extreme volatility in individual stock performance.
- The proliferation of leveraged or inverse components, affecting roughly one in five current ETFs and one in three issued year-to-date, is expected to increase short gamma, thereby driving single-stock volatility while muting index volatility.
- Implied volatility skew is evident, with calls trading higher than puts in approximately 10% of S&P names and 15% of NASDAQ names, creating opportunities to fund out-of-the-money puts via calls.
- Specific derivative structures offer leveraged exposure to S&P downside: between now and August, a 7% drop would provide 5x leverage, while a 10% drop would yield 10x leverage.
- KOSPI implied volatility is expected to remain elevated relative to levels observed during the global financial crisis.
- Macroeconomic expectations suggest inflation data will regain prominence while job data has solidified, requiring the U.S. economy to manage inflation through specific mechanisms.