Week of May 04 2025

The economic landscape similarly presents contradictory narratives. Chinese petroleum demand has collapsed across virtually all categories (gasoline -8.2%, diesel -5.1%), suggesting deflationary rather than inflationary pressures from the world's second-largest economy. Yet AI infrastructure investment contributed nearly 1.0 percentage point to US GDP growth in Q1 2025 – a level matching or exceeding any previous peak in the data series dating back to 1947. McKinsey projects AI data centers will require $6.7 trillion in global capital expenditure by 2030, creating a secular growth trend potentially insulated from broader economic challenges. Meanwhile, Commodity Trading Advisors have established extreme short positions against the dollar (DXY -2.82% with -1.46 Z-score) while simultaneously technology stocks continue to attract capital. These contradictory positioning signals suggest a market where sentiment and capital flows have decoupled from fundamental and valuation considerations – creating potential for sharp reversals if catalysts disappoint.

Earnings present a similarly mixed picture. Q1 reporting has demonstrated impressive resilience with S&P 500 earnings growth rising from early estimates of 6% to 9.7% currently. However, forward guidance has been notably weak, with earnings estimates for the remaining three quarters of 2025 declining significantly. Forward earnings peaked at record highs recently but may stall until trade uncertainties are resolved. This creates a fundamental valuation challenge, with the S&P 500's forward P/E rebounding from 18.1 on April 8 to 20.5 currently – making further multiple expansion difficult to justify even as Yardeni Research reduces recession odds from 45% to 35%.

The technical picture shows remarkable improvement across multiple dimensions. Beyond the nine-day winning streak, volatility has contracted dramatically, with S&P 500 implied volatility dropping from its highest levels in years to more moderate readings. High-yield bonds have triggered a breadth thrust with advancers significantly outpacing decliners – historically a reliable positive signal with 100% win rates over six and twelve-month periods. The Fear & Greed Index has recovered from extreme fear to neutral territory, while the Zweig Breadth Thrust indicator has activated, signaling extraordinary buying pressure. However, these positive technical developments are accompanied by concerning extremes, particularly in volatility metrics where the vol-of-vol relationship has compressed to levels not seen since late 2022, creating asymmetric risk where even modest market declines could trigger disproportionate volatility increases.

The left tail risk scenario centers on a potential political-monetary crisis where Powell's efforts to maintain Fed independence trigger either presidential escalation or market concerns about institutional framework erosion. The extreme concentration of technical buying coupled with compressed volatility creates vulnerability to sharp reversals if data or policy disappoints. Additionally, continued Chinese demand deterioration could accelerate global deflationary pressures, threatening corporate earnings beyond current expectations. The relationship between spot returns and implied volatility sits among the strongest in recent memory, creating an amplification mechanism where even modest market declines could trigger disproportionate volatility spikes.

The right tail opportunity emerges from several potential developments. First, meaningful diplomatic progress leveraging China's economic weakness could reduce tariff uncertainties and support global risk assets. Second, Powell could successfully acknowledge growth concerns while maintaining independence and creating pathway for June cut, allowing markets to extend recent momentum. Third, continued AI infrastructure investment could provide structural support for technology and utility sectors regardless of broader economic conditions. Finally, deflationary pressures from China could give central banks greater flexibility to address growth concerns without worrying about inflation consequences.

Week 19 brings a sequence of critical catalysts that will test whether technical resilience can continue to prevail over structural vulnerabilities. Monday's ISM Services PMI will provide crucial insight into whether trade disruptions are spreading beyond manufacturing to services. Wednesday's Fed decision represents the week's central event, with Powell's characterization of Q1 GDP contraction, inflation risks, and forward guidance determining near-term market direction. AMD's earnings the same day will test whether persistent technology inflows are justified by actual AI-related business performance. Thursday brings both the Bank of England decision (expected 25bp cut highlighting policy divergence) and Chinese trade data providing the first meaningful evidence of tariff impacts. Throughout the week, any developments in US-China trade negotiations could significantly influence market sentiment, particularly given the evident economic pressure on China revealed by petroleum demand collapse.