Opinions

Next Tuesday will bring the start of the Q2 earnings reporting season and a CPI release with key implications for the trajectory of Fed policy. Earnings growth should determine the overall direction of equity market travel, but we would expect stocks to struggle in the short term if the Fed were to hike. Three reasons: First, while growth is more important than rates for equities, Fed tightening would weigh on the market outlook for growth. Second, the AI boom has made the current cycle particularly capital-intensive, increasing the likely sensitivity to changes in the cost of capital. Third, Fed tightening is one of the conditions that has marked the peaks of past high-valuation, high-concentration bull markets. We expect S&P to peak around 7700 levels in our base case scenario and 7900 levels in bull case scenario. The bear case might see 7200 if earnings disappoint or Fed hike probabilities increase further. Event risks such as middle east conflict might further act as headwinds for US equities as higher gasoline prices reduce consumer discretionary spending power.

H2CY26 might see European equities faring better than US equities on account of continued defence spending in Europe along with fading impact of the energy conflict which impacted Europe much worse than US. Also, it seems that H2CY26 might see the onset of crack in AI led capex theme which has worked out well for US till now. S&P 500 has given a YTD return of 15.82% compared to Eurostoxx YTD return of 14.23%. Both are in dollar terms. This we believe is likely to change in favor of Europe in H2CY26.

SpaceX is perhaps the most ambitious IPO ever even by Elon Musk standards. It is attempting to secure a valuation approaching $1.75 trillion despite reporting significant operating losses across major divisions. In it's prospectus filed last week, SpaceX sees a total addressable market of $28.5 trillion and said in its prospectus that identifying and creating trillion-dollar market opportunities is one element of its “repeatable business model.” The vast majority of its addressable market is outside of SpaceX’s existing businesses. There’s an $870 billion market for Starlink’s broadband business, a $740 billion market for Starlink’s mobile unit, a $600 billion digital advertising market for X to pursue and a $2.4 trillion AI infrastructure market. Then there’s enterprise applications, a $22.7 trillion market, based on an estimate from the Digital Cooperation Organization. The issue is not with this forecasts. In fact what SpaceX is doing or attempting to solve is actually unique. It is a leader in launch services market. In fact it's launch revenue understate economics. SpaceX's launch sales were $4.1 billion in 2025, though that understates the segment's full economic power because services for its largest customer, the Connectivity division, aren't included in reported revenue and would likely add another $10-$12 billion. That could make launch a top revenue contributor. SpaceX has no worthy competition except perhaps Blue Origin. In 2025, SpaceX accounted for 81% of large rocket launches vs. 46% in 2019. Measured by kilograms, SpaceX lifted 85%. SpaceX is also well positioned for the Golden dome play via launch, interceptors & satellite communications. It is at the perfect place for defence space inflection point although there is a bit of regulatory risk. Once certified for national-security missions, that payload jump can enable faster missile-warning deployments, rapid satellite replacement and large-scale LEO constellations at a pace no current launcher can match. The near-term ceiling is regulatory restrictions, where the FAA has capped Starbase at 25 Starship launches annually, and SpaceX is pursuing overseas sites to exceed that limit. The problem happens when this vision needs support in public markets. Public investors are being asked to support one of the largest valuations in modern market history while accepting unusually high execution uncertainty. Interestingly Elon Musk controls roughly 85% of SpaceX voting power through special class shares, limiting the influence outside shareholders will have over strategic decisions after the IPO. SpaceX is targeting $75-$90 BN raise at a valuation of $1.75 TN. To put it in context, the entire U.S. IPO market raised roughly $170 billion in 2025, across more than 1,300 deals. If one uses SOTP model, Starlink’s consumer business might be valued at 30 times revenue, launch services at perhaps 5 times & the direct-to-cell segment at around 35 times. Those are very aggressive numbers. But the xAI business had revenues of roughly $500 million in 2025 — and at a $250 billion valuation, it’s being priced at 500 times trailing revenue. At the full $1.75 trillion IPO target and SpaceX’s projected 2026 revenue of around $28.5 billion for the combined entity, we arrvie at forward revenue multiple of roughly 61 times. On a trailing basis, the multiple is closer to 100 times. To justify a valuation at that level, SpaceX needs to sustain roughly 40% annualized revenue growth for a decade. Moonshot organisations such as SpaceX are best funded by private credit which has the comfort of long gestation capital with them. Using public markets to raise funds does not serve the purpose of SpaceX or the public investor. In the end the only winner in this IPO is Elon Musk himself. He’s the largest single shareholder, and a $1.5 to $1.75 trillion valuation would make him, by most estimates, the world’s first trillionaire. And that is where we believe the objective of this IPO lies. Also SpaceX is targeting a listing on the Nasdaq and has reportedly been pushing for fast-track inclusion in the Nasdaq 100 — within just 15 days of listing, compared to the standard waiting period of up to a year. The logic is straightforward: Nasdaq 100 inclusion forces passive index funds to hold the stock, providing an automatic boost to demand post-IPO. The Nasdaq is apparently open to adjusting its rules. Welcome to the new world of Elon Musk where public funds will crown him the world's 1st trillionaire.

Friday saw a record $2.6 TN trading in notional S&P 500 options with a heavy skew toward call buying (almost 60%). The concentrated call purchases created a textbook gamma squeeze: dealers who had sold calls took on negative gamma and were forced to buy futures and equities to remain hedged, mechanically amplifying the rally. But Friday’s Gamma squeeze was unusual to say the least. Normally when stocks go up, the VIX (fear/volatility gauge) falls. But on Friday, stocks were rising and VIX is staying high/rising because traders are aggressively buying call options on AI stocks, forcing market makers to buy more shares and helping drive a gamma squeeze higher. The speculative call buying has become so aggressive on Friday that market makers were being forced to hedge at increasingly higher prices. When traders aggressively buy calls, dealers often take the opposite side of those trades and are then forced to buy the underlying stocks or index futures to remain hedged. That hedging activity pushes prices even higher, which triggers even more call buying, creating a reflexive feedback loop that can become self-reinforcing. The $2.6 TN turnover notional in S&P500 options is staggering to say the least. In these options, retail share is at new highs, driven by Tech. The most traded options were in the following names, echoing previous weeks: TSLA, MU, NVDA, GOOGL/GOOG, AMD, META, AMZN, SNDK, INTC and AAPL. We believe we are in the final stages of a bubble for sure. We believe Friday’s gamma squeeze should be a signal to exercise caution for investors. Chasing parabolic moves fuelled by leverage and options momentum may feel safe while prices are rising, but history repeatedly shows that the final stages of a bubble are often the most dangerous. The simple passage of time will cause dealers to start to sell even if the market remains up here (charm). And likewise, if tensions in the Middle East don’t pick up and implied vol falls, dealers will have to sell down their hedges (vanna). While above are just mechanics, the important takeaway is that investors need to step away from these final stages of melt up from a risk reward perspective.

We have been proved wrong big time on risk assets specially US equities. Though we are likely not yet out of the woods with respect to geopolitics; markets could show more weakness on a renewed escalation, but we are now of the view that if one has a longer time horizon, a timeframe of 3/6/12 months, then one should be using the weakness to buy. We think the relative performance of RoW vs US should move to fresh highs in 2H. This should especially be the case when USD loses the safe haven bid, once conflict de-escalates, and on potential shift in Fed reaction function under new leadership in 2H. We still believe inflation might stay elevated but central banks may chose to see through it. Also, S&P 500 2026 EPS has continued to move higher through the conflict. Consensus estimates for S&P 500 2026 EPS growth stand at 18.4%, up from 15.4% as of end-Feb. This is a notable development - earnings momentum has not been derailed by the geopolitical shock. Earnings growth this year should be supported by solid fundamentals, with US ISM manufacturing near 3-year highs. We now see S&P 500 range to be 6900-7400 in medium term. We also believe the current setup provides an attractive entry point into EM given the light positioning and compelling valuations at 12x forward P/E - a 34% discount to DM. Eurozone and EM are more reliant on energy imports and therefore have been more vulnerable during the conflict. MSCI Eurozone has fallen 4.0% over the past six weeks, underperforming MSCI US which is down 0.8%. But with today’s announcement on SoH being open for commercial ships during the period of ceasefire, implies this underperformance might soon catch up.

The 4Q 2025 earnings season will kick off next week. By the first week of February, 68% of S&P 500 market cap will have reported. NVDA, the largest stock, will report on February 25th. For Q4 2025, the estimated (year-over-year) earnings growth rate for the S&P 500 is 8.3%. If 8.3% is the actual growth rate for the quarter, it will mark the 10th consecutive quarter of earnings growth for the index. For 2026, we forecast S&P 500 EPS will grow by 12% to $305, driven by sales growth of 7% alongside margin expansion of 70 bp. The 4Q earnings season will represent another important test for big tech and the AI trade. Consensus estimates show hyper scaler year/year capex growth slowing from 75% in 3Q to 54% in 4Q and to 24% by the end of 2026. Overall, 107 S&P 500 companies have issued quarterly EPS guidance for the fourth quarter. Of these companies, 57 have issued negative EPS guidance and 50 have issued positive EPS guidance. At the sector level, the Information Technology sector has the highest number of companies issuing positive EPS guidance of all 11 sectors at 32. At the industry level, the Semiconductors & Semiconductor Equipment (9) and Software (9) industries have the highest number of companies issuing positive EPS guidance within the Information Technology sector. Heading into the start of the earnings season, both analysts and companies have been more optimistic than normal in their earnings outlooks for the fourth quarter. However, it should be noted that most of this optimism is concentrated in one sector: Information Technology. As a result, estimated earnings for the S&P 500 for the fourth quarter are higher today compared to expectations at the start of the quarter. The bottom-up target price for the S&P 500 is 8047.85, which is 15.52% above the closing price of 6966. At the sector level, the Information Technology (+25.0%) sector is expected to see the largest price increase. The Financials (+9.0%) sector is expected to see the smallest price increase. Analysts are particularly pessimistic regarding Consumer Discretionary margins.