To The Moon

Insights from last week's changes in investor sentiment:

The 90-day truce in the trade war slightly improved investor sentiment in Global Developed markets and Japan, shifting from bearish to negative. However, it did not prevent sentiment from deteriorating further in Australia, the UK, and the US, where it turned bearish from negative previously. Sentiment in China recovered from bearish to neutral due to strong market support from authorities and indications from the Trump administration that current tariffs would be significantly reduced soon. Sentiment in Asia ex-Japan, Global Developed markets ex-US, and Europe remained bearish, as the fate of the global economy still hinges on the US-China relationship.

Trade War II: In his interview with Time magazine, Trump was asked about his strategy in the trade war. What followed was ten minutes of gloating, repeated finger-pointing, and some really bad grammar. Trump claimed he had already made 200 deals on trade, but none were officially announced by the White House, and he refused to name any specific ones. Investors would like to think that it's because all the details haven't been worked out yet, but the truth is probably a good deal more self-serving than that. And would somebody please tell Donald Trump that not a single kid in America today dreams of becoming a factory worker when they grow up.

The Financial Times reports that Apple, in a significant acceleration of its supply chain diversification strategy amid trade war and tariff concerns, plans to shift all production for U.S.-sold iPhones from China to India – not the U.S. - by the end of 2026. Meanwhile, Trump and China can't even agree on whether they've already had a call.  To prevent the awkwardness of the moment from hardening into something uncomfortable for investors, Treasury Secretary Scott Bessent hopes to patch through an incoming call from Xi, so Trump can tell him, "You had me at 'hello’”.

Q1 Earnings: This week is significant for earnings, 180 S&P 500 companies (including 11 Dow 30 components) are scheduled to report results for the first quarter. Factset predicts that the dominance of the Magnificent-7 will persist, though slightly weaker than in previous quarters, with year-over-year earnings growth of 14.8% for the first quarter. In comparison, the blended (combining actual and estimated results) earnings growth rate for the remaining 493 companies in the S&P 500 is expected to be 5.1% for Q1 2025. On the plus side, this will mark the 18th consecutive quarter of revenue growth for S&P500 companies. On the shocking news side, BYD’s sales have risen 60% in Q1 and are now well past Tesla’s own sales despite its vehicles not being available in the U.S. (yet)!

The Economy: Southwest Airlines CEO Bob Jordan told Bloomberg that a recession is already here as “travel has fallen in a way not seen since the pandemic”. The airline is more reliant on domestic leisure travel than other airlines and as such acts as a canary in the coalmine in terms of the health of discretionary spending. The CEOs of other airlines (American and Delta) have also pulled their revenue guidance, saying only that they will be doubling down on “cost discipline and network optimization”. Investors will be closely monitoring the guidance, or absence of it, from CEOs in this week's corporate earnings releases for insights into how geopolitical uncertainty is impacting the economy, particularly regarding planned investments.

Wars in Ukraine and Middle East: In Ukraine, there are two peace plans: the Ukrainian and European proposal, and the US and Russia proposal, each presenting an opposing vision of peace. Over the weekend, the US and Iran held their third round of “direct and indirect” talks, focusing on technical conditions from the US. The four-hour discussion ended with Iranian Foreign Minister Abbas Araghchi stating that there are “still differences in major issues and details” and that Iran is “hopeful but cautious” about reaching an agreement. Both situations represent the status quo for investors, who will view anything other than an escalation in hostilities as a positive sign for the time being.

Investor sentiment remains quite 'raw' and susceptible to overreacting to negative news, as the balance of supply and demand for risk continues to be very unfavorable in the short term. Investors are having to continuously adjust their estimates of a worst-case scenario and how to prepare for it. As Trump’s 100-day mark approaches, polls indicate that most Americans now see him as gravy – all flavor and fat. No meat. And he has 1, 360 days left in his second term to dilute the taste even further.

Potential triggers for sentiment-driven market moves this week[1]

• US: Q1 GDP estimates, core PCE, personal income and spending, manufacturing PMI data, and the April jobs report. Earnings from 180 S&P 500 companies including Big Tech.

• Europe: Eurozone Q1 GDP estimates, inflation, and unemployment data.

• APAC: China manufacturing PMI data. In Japan, interest rate decision by the BoJ.

• Global: De-escalation of US tariffs on China as a prerequisite for talks.

[1] If sentiment is bearish/bullish, a negative/positive surprise on these data releases could trigger an overreaction.

Note: green background = bullish, red background = bearish

Changes to investor sentiment over the past 180 days for the ten markets we follow:

How to Interpret These Charts:

Top Charts:

The top charts illustrate the ROOF ratio, which represents investor sentiment. This ratio is depicted in green on the left axis, while the cumulative returns of the underlying market are shown in black on the right axis. Key reference lines include:

• A horizontal red line at -0.5 (left axis), marking the threshold between negative sentiment (-0.2 to -0.5) and bearish sentiment (< -0.5).

• A horizontal blue line at +0.5 (left axis), indicating the boundary between positive sentiment (+0.2 to +0.5) and bullish sentiment (> +0.5).

• A horizontal grey line at 0.0 (left axis), around which sentiment is considered neutral (-0.2 to +0.2).

Bottom Charts:

The bottom charts display the levels of risk tolerance (green line) and risk aversion (red line) within the market, representing investors' demand and supply for risk, respectively. Key insights include:

• When risk tolerance (green line) exceeds risk aversion (red line), more investors are willing to buy risk assets than there are investors willing to sell them at the current price. This scenario forces risk-tolerant investors to offer a premium to entice more risk-averse investors to trade, thereby driving markets upward.

• Conversely, when risk aversion (red line) surpasses risk tolerance (green line), the market dynamics reverse.

The net balance between risk tolerance and risk aversion levels is used to compute the ROOF ratio shown in the top charts, reflecting the sentiment of the average investor in the market.

Blue Shaded Zone:

The blue shaded zone between levels 3 and 4 for both indicators signifies a reasonable balance between the supply and demand for risk in the market. When both lines remain within this blue zone, the market is considered ‘emotionally’ stable. However, when both lines move outside this zone, the significant imbalance in demand and supply for risk can lead to overreactions to unexpected news or risk events.