U.S. equity indexes are off to a strong start this year, and our momentum factors have profited from rising market trends despite occasional short-term volatility. Investors may remember "DeepSeek Monday," which illustrated how quickly sentiment can change, even when conditions seem favorable.
We believe the market's recent resilience to negative news (such as DeepSeek, CPI, and tariffs) stems from several factors that are now nearing their conclusion. In the short term, equities appear poised to reach new highs, but as the year progresses, the likelihood of returning volatility is significantly increasing.
Here are three factors that we believe have supported equities, and what happens next.
Major Macro Overhangs Lifted Last week.
Consumer Price Index (CPI) Report.
With all eyes on the current pace of inflation, the monthly CPI report will continue to be a market-moving event. And while the latest report showed some stickiness in prices, it wasn't disruptive enough to derail the market’s bullish trajectory.
Producer Price Index (PPI) Report.
Wholesale inflation data can be an early signal of business cost pressures, but again, the market largely absorbed it.
Fed Chair Powell Testimony.
While Powell’s comments before Congress reinforced a data-dependent Federal Reserve, he didn’t introduce any unexpected hawkishness, which helped clear uncertainty for equity markets.
Strong Seasonal 401(k) & Pension Flows.
We are in the heart of retirement funding season, a period in January and February when 401(k) contributions and pension fund inflows provide a steady bid for equities. This influx of capital has historically helped support markets during the first two months of the year. This year, demand for stocks from U.S. households has been particularly strong. Retail investors have been aggressively buying equities, with record inflows recorded by JPMorgan and Vanda Research. These flows create a persistent tailwind for the market, helping absorb selling pressure and pushing prices higher.
Corporate Buybacks in Full Liquidity Mode.
We are right in the middle of the quarter when corporate stock repurchases are typically in full swing. Large-scale buyback programs provide another layer of demand for equities.
Volatility Compression Setup
The above factors help create a positive liquidity environment for broad equity indexes and compress volatility. Compressed volatility tends to reinforce bullish sentiment in the short term, potentially leading to new highs in the S&P and NASDAQ Indexes.
As we have seen time and again (see our recent commentary here and here), periods of low volatility inevitably set the stage for abrupt reversals and periods of high volatility. A compressed VIX can indicate rising complacency, leading to conditions where even small shocks trigger outsized reactions.
The bulls have control for now, but this rally has a finite runway. As we transition into March, the list of positive catalysts will likely fade, opening the door for a return of more significant price swings and creating new opportunities for our Volatility factors to profit from price dislocations.
