The S&P 500 has rebounded from the losses incurred due to the conflict between the US and Iran, with optimism building around a potential agreement between the two nations. The Middle East Resilient basket continues to face challenges, down by 1.4%, while the Airlines sector has seen a significant bounce, up by 5.6%. This is likely due to both the easing of geopolitical risk and renewed M&A optimism.

Under the hood, there is evidence of risk-on sentiment, with rallies across the L/S Volatility factor and Speculative Growth basket. The AI Risk / Software sector is also seeing gains, up by 70bp and 70bp respectively. While yesterday’s major short squeeze in these baskets was less pronounced today, short covering has driven the move ahead of EPS, alongside investors increasing their net positioning due to improving geopolitical sentiment.

The long leg of the AI trade continues to rally, with AI Power up by 2% following BE/ORCL deal headlines. UBS’s flagship AI Winners basket is now 12% higher than at the start of the war. Large Cap Banks have seen a minor drift lower, weighed down by misses in NII and overshadowed by broad earnings beats and record trading results at JPM. Both were very crowded longs heading into Tuesday.