Far be it from me (of all people) to be the optimist in the room — and without wanting to belabor the point about the Trump administration not being able to afford, from a political capital perspective, a severe equity drawdown — but absent evidence that stocks are inclined to a “war gap” on the wrong headline, a melt-up may be on the cards.
I’ve hinted at that for days now, and it comes with the (not insignificant) caveat that a cacophony of potentially hawkish banter from central bankers in the days ahead could be a wet blanket for risk sentiment.
Looking through any potential drag from the inflation-cautious commentary that’s likely to emanate from monetary policymakers over the balance of this week, it’s becoming more difficult to speak definitively about what stocks “can’t take.”
On the war front, we’ve seen ~$120 crude accompanied by a (virtually) unprecedented spike in oil volatility amid a worst-case scenario in the Gulf. On the rates front, we’ve seen a mini-VaR shock at the European front-end and a sharp repricing in Fed expectations such that STIRs went from tipping 62bps of 2026 easing to less than 20bps. And on the private credit front, we’ve seen Blue Owl make like a coal mine canary.
But here we are, barely worse for wear, at SPX 6720 (as of this writing), a mere 4% off the record highs.
The figure above, which plots the S&P along with one- and three-month trailing rVol, shows you the (stark) juxtaposition between this year’s “nothing ever happens” dynamic and the tumult around “Liberation Day.”
As discussed here on multiple occasions of late, surface-level calm masks (and is a function of) underlying churn, but that doesn’t change the fact (and I think this is a fact, despite being a hypothetical) that if you’d asked 100 people in December where the S&P would trade in mid-March if the first three months of 2026 included a US commando raid to abduct Nicolas Maduro followed almost immediately by an all-out war with Iran that closed The Strait of Hormuz, 6700+ wouldn’t have been the consensus.
The question, then, is what’s it gonna take? What tape bomb gets us that gap move lower in stocks that vindicates all the wingy hedging on the downside in equities and on the upside in the VIX? I don’t know, frankly. This is an equity bull market that’s absorbed everything anyone’s thrown its way, and unlike Ali Khamenei, it’s still alive.
As BofA’s Michael Hartnett noted in the color accompanying an otherwise bearish monthly fund manager survey on Tuesday, overall stock allocations remained above the long-term mean even as growth expectations tanked among professional investors.
There’s the chart. Equity allocations fell to 37% overweight (purple annotation) this month, down from 48% in February. But that’s still 0.5 standard deviations above average and by no means indicative of fear (the red annotations are the GFC and the 2022 Fed tightening campaign).
I should mention that resilient equity allocations are in no small part attributable to the highest EM overweight in five years, but the point is that there’s no en masse exit from risk assets. Indeed, the title of this month’s BofA survey was, “Cash surge but no equity capitulation.”
So… what? Well, coming full circle, we “need” that gap move down in stocks or else we could be at “risk” of melting up.
“Not surprisingly, most [are] extremely skeptical” of a melt-up scenario, as the consensus view remains that at least “from an equities market perspective, we are fighting a war on too many fronts,” Nomura’s Charlie McElligott said. “But the more we continue to absorb, that consensus risks becoming the very source of ‘buyers are higher’ equities flows,” he added.
Trump actually warned us that one day we would be tired from “so much winning!” I don’t think I had any idea how truly exhausting his concept of “winning” would be. Can’t we just pause and “be” for a while without having to constantly worry about winning or losing?
Yeah, I gotta admit: The war with Iran is an example of the US winning under Trump, and I am indeed tired of it.
I’m not 🙂 I like winning.
Indeed, what would the great Vince Lombardi say about losing?
Or even finishing second?
I am reminded of Lord Rothschild’s saying “Buy on the sound of cannons, sell on the sound of trumpets”. Still, a lot has changed since Britain’s wars in the 1800s.
I think investors are confident that this war will be over “soon”, and whatever comes after “over” won’t trouble corporate profits (war is a profitable racket, n’est-ce pas?) or interest rates (either the Fed will look through “transitory” inflation or higher oil prices are deflationary, pick your reason).
On the other hand, aren’t CTAs going to be mechanically selling more?
Cut and paste (and not news to anyone reading this crap):
Nvidia (NVDA) expects to secure over $1 trillion in orders for its advanced AI processors, including Blackwell and Vera Rubin systems, through 2027. Announced by CEO Jensen Huang at GTC 2026, this figure doubles the company’s previous projection of $500 billion, driven by an unprecedented 1 million times increase in computing demand over the last two years.
NVDA hasn’t broken out but doesn’t seem to want to break down.
Caution to the wind and a rising tide – not unreasonable.
Mechanically, could unwind at any second, right? I’ll take caution to the wind on this one.
No wonder the wings remain so expensive even though they keep not happening. Before climate change, this used to be what the weather was like – a lot of attention and noise about extremes and possible changes, but with tomorrow mostly looking like today, which looked a lot like yesterday. Now we get 60 degree intra-day swings and 3 months of rain in one day.
But I got my eye on Pam Bondi. She pinpointed the last top at “50,000 dollars” on the Dow and is scheduled to be deposed by the House on April 14th. If necessary, she’ll surely revise that figure to avoid being accused of perjury, which would clash with all the radical transparency.
US government has printed $12.6T (cumulative Federal expenditures in excess of revenues) in the last 6 years. Gotta end up somewhere.
The markets not responding to all the uncertainty is what makes me nervous, like taking your foot off the accelerator but the car keeps going faster. Hopefully there are no sharp turns up ahead.
Where is Xi? If there were ever a time to take Taiwan, wouldn’t it be now? He must be dead set on not using force to take it, only leverage.
Why bother? His strategy of not doing anything but watching us implode has been very successful so far.
“Never interrupt your enemy when he is making a mistake.”
–Napoleon Bonaparte.