The S&P 500 has dropped by 3.3% at the start of the week, experiencing nearly no recovery throughout the day. The broader trend shows that the pause in declines is diminishing, with the index nearing a 5% drop from the lows seen in April.
Companies releasing their earnings reports this week may face challenges, especially if the reports are unfavourable. Prominent companies such as Tesla and Alphabet are among those scheduled to release their earnings, potentially providing insights into the current economic conditions.
Market Sentiment and Defensive Positioning
This early pullback sets a different tone than we’ve seen in recent weeks. The steady drip lower, without the usual signs of short-term support, indicates a market that’s inching towards a more defensive footing. Within just a few sessions, price action has wiped out much of the late-April strength. While selloffs of this size aren’t uncommon, the pace and the absence of dip-buying suggest we may not yet be at equilibrium.
With companies such as Tesla and Alphabet set to unveil earnings, any shortfall in guidance or delivery will bring more pressure across multiple sectors. These reports tend to act as a barometer not just for individual performance but also for broader sentiment among institutional holders. If margins tighten, or forward-looking statements become more cautious, we tend to see a ripple effect throughout the rest of the index.
Recent volatility in options markets also points to shifting expectations. We’re seeing a build-up of open interest around downside strikes, particularly in the near-dated puts. This isn’t unusual ahead of earnings-heavy weeks, but paired with thinning bid sizes and less aggressive call overwriting, it tells us that participants have moved to a more protective stance. Put-call skews are beginning to lean heavier again, and that often happens before a wider repositioning.
Furthermore, sector rotation is offering subtle clues. Money is flowing more consistently into utilities and staples, while tech and discretionary names are seeing net outflows. This kind of rotation usually implies less risk appetite. Momentum names that had been leading have stopped making fresh highs, while volume on red days has begun to overtake that on greens.
Rate Sensitivity and Positioning Insights
It’s also worth paying attention to the rate-sensitive corners of the market. Bond yields have started to tick higher again, and parts of the financial complex are beginning to reflect concerns over tighter conditions. In past episodes, this has increased stress on leveraged positions. When we’ve seen this, option premiums can expand swiftly, especially in more volatile names.
From a positioning point of view, implied volatility on broad equity indices remains below historical realised readings—an uncommon divergence if pressure persists. This gap typically closes not because volatility falls, but because the realised readings climb. That might mean a rebalancing of risk-adjusted strategies ahead, particularly in volatility-linked products.
Meanwhile, the VIX futures curve has been flattening, implying an increase in shorter-term hedging. When traders move protection forward like this, it’s generally not because they foresee long-lasting trouble, but because they perceive the next fortnight or two as vulnerable. This skews our expectations towards shorter-term swings rather than deeper collapses, but those moves can be steep due to lower initial liquidity.
As we monitor all this, we’re keeping a close eye on gamma exposure around key levels. Current readings suggest dealers may be hedging against downside movement by selling into weakness. This can amplify trend-following moves, particularly when we break through major strike levels. In those moments, there’s little incentive for mean-reverting behaviour to return quickly.
So, attention for us remains fixed not only on the direction of earnings reactions, but also the underlying flow and how it changes day-by-day. What’s increasingly apparent is that passive flows alone may not provide the floor they often have. Discretionary flows, especially from larger funds, will do more of the work. If those fade, we could lose even more ground in the near term.
