The big rebound in US stocks on Wednesday was entirely due to short covering? Under the shadow of tariffs, a real recovery is still out of reach

Trump Temporarily Suspends Some Tariff Decisions led to an epic rebound in U.S. stocks on Wednesday; however, the optimism brought by this news lasted less than a day. On Thursday morning, all three major U.S. stock index futures fell over 1%, with the Nasdaq 100 index futures dropping nearly 2%.

Analysts believe that the significant rebound in U.S. stocks on Wednesday lacked real conviction. Despite the massive trading volume, it was mainly driven by short covering and extremely low liquidity. Historical data shows that after the S&P 500 index falls more than 15% in a year, the probability of ending the year in positive territory is minimal. Considering that the Federal Reserve has not signaled an impending rate cut, the outlook for the S&P 500's recovery this year is concerning.

Fragile Foundation of the Rebound

After Trump announced the tariff suspension, traders rushed to reduce their short positions accumulated during the market downturn. Meanwhile, Goldman Sachs data shows that the top-level liquidity of S&P 500 futures order books (i.e., the amount displayed on the screen as tradable) has fallen to historic lows, further exacerbating market volatility.

The analyst team at JPMorgan Market Intelligence warned:

Since the deep sell-off on April 2, technical factors and short covering have intensified the rebound, but investor visibility remains very low, and the possibility of further escalation in the trade war still exists.

According to nearly 17 years of data compiled by Bloomberg, approximately 30 billion shares were traded on U.S. stock exchanges on Wednesday, the highest level ever recorded. Last week, hedge funds reached a historic high in short bets on U.S. macro products (such as indices and ETFs) in terms of weekly trading volume. On Wednesday, Goldman Sachs' most shorted stock basket surged over 12%, outpacing the S&P 500 index's gains.

Goldman Sachs trading expert Michael Nocerino noted in a report to clients:

Asset management companies net bought over $13 billion, chasing the market rally and covering a large amount of recently sold sectors—AI beneficiaries, semiconductors, large tech stocks, and cyclical sectors.

He added that short flow in macro products increased by 42% year-on-year, "we are seeing aggressive short covering and long buying in tech stocks."

Concerning Outlook for Year-End Recovery

Even after the frenzied rebound in the stock market on Wednesday, the likelihood of the S&P 500 index ending the year in positive territory remains low.

According to data compiled by Ryan Detrick of Carson Group LLC, in the 16 instances when the U.S. stock market benchmark index fell 15% or more at any point during the year, the S&P 500 index only recovered and achieved positive growth within 12 months three times It is worth noting that these situations (2020, 2009, 1982) all occurred during periods when the Federal Reserve intervened to support the economy, and now, as the White House's trade policy threatens to reignite inflation, the Federal Reserve has not signaled an impending "preventive rate cut." Detrick said:

This year is different from the past three years of significant stock market rebounds, because the Federal Reserve may not come to the rescue this time, as they are still very concerned about inflation. This puts them in a difficult position now.

Wall Street is skeptical about any sustainable rebound, as they are preparing for continued tariff increases. These tariffs could bring more uncertainty to American businesses and consumers, potentially leading to stagflation or a full-blown recession.

Kathryn Rooney Vera, Chief Market Strategist at StoneX Group Inc., stated:

A lot of damage has already been done on the economic front, and I expect we will see some corresponding hard data