The sentiment turn comes as the US and Iran consider extending their ceasefire, but tensions linger between rising optimism and unresolved macroeconomic risks, including volatile oil prices and inflation expectations.
The war in Iran that triggered a record oil spike and sent financial assets around the globe careening seems like a distant memory to investors -- even before it's over.
Stock market indexes are back at all-time highs. Big Tech is in the driver's seat again. A former sneaker company's foray into artificial intelligence yielded a 582% gain in a single day. And perhaps most importantly, retail traders are diving back into the action, as shares favored by mom-and-pop investors are on track for their best month relative to those preferred by mutual funds since November 2020.
"Animal spirits didn't just return, they came back swinging," said Dave Mazza, chief executive officer at Roundhill Investments.
The retail crowd's buy-the-dip instinct broke when oil spiked at the start of the conflict, exacerbating the selloff in the stock market. "Once the ceasefire hit, the core narratives around AI and innovation snapped back into focus, and retail favorites, particularly those with high volatility, started leading the market higher out of the bottom," Mazza said.
The S&P 500 eclipsed 7,000 points on Wednesday, notching its first record since late January. Its 11% gain since March 30 reversed a selloff that had pushed the gauge close to a correction.
Underneath the surface, individual investors are showing signs of euphoria again, with a Goldman Sachs Group Inc. basket of stocks most favored by retail investors up 22% since late March. Quantum computing stocks are soaring, as IonQ Inc., D-Wave Quantum Inc. and Rigetti Computing Inc., known for their parabolic moves, have all gained more than 40% this month. The Roundhill Meme Stock ETF, known by its ticker MEME, is has jumped 51% since March 31.
The sentiment turn comes as the US and Iran consider extending their ceasefire for two weeks and market expectations for an end to the conflict rise. Global stock exchanges are erasing their wartime losses despite extensive damage to the Persian Gulf energy infrastructure and the effective closure of the strategic Strait of Hormuz.
Still, the war's aftershocks remain unclear and tensions linger between the rising optimism and unresolved macroeconomic risks. For example, oil prices remain volatile and above $90 a barrel, keeping the pressure on inflation expectations and the monetary policy outlook after the consumer price index just posted its biggest monthly jump since 2022.
"The issues facing the Middle East and things like the private credit market have not disappeared, so this kind of action is definitely worrisome," said Matt Maley, chief market strategist at Miller Tabak + Co.
For now at least, the good market vibes are prevailing. Options contracts that bet on near-term upside in stocks are in demand. And retail buying, an important pillar of support for the stock market, is expected to be pronounced after the April 15 tax filing deadline with investors anticipating bigger than normal refunds from the Trump administration's tax package.
Barclays Plc's excess retail flow monitor turned sharply higher since hitting a trough at the start of the month and has been providing a tailwind to daily flows since April 8, according to global head of equities tactical strategies Alexander Altmann.
"Call it the return of 'animal spirits' -- or not, depending on your take with regard to the Iran conflict -- but retail flows are unequivocally an important part of the broader US equity dynamic," he wrote in a note to clients Thursday.