(Bloomberg) — Equity investors pushed back into the market by a relentless rally are about to find out that the real challenge is just beginning.

Most Read from Bloomberg

As Coastline Erodes, One California City Considers ‘Retreat Now’ A New Central Park Amenity, Tailored to Its East Harlem Neighbors What’s Behind the Rise in Serious Injuries on New York City’s Streets? How Finland Is Harvesting Waste Heat From Data Centers Lawsuit Challenges Trump Administration Policy on Migrant Children

A sharp rebound in risk assets — fueled by progress in trade talks, economic resilience and receding volatility — is turning skepticism into a trade that nobody’s really comfortable with, following a month in which the consensus was to brace for the worst. The three-month pause in US-China trade tensions is reassuring investors, yet lurking in the background is the risk that stocks get so extended that they’re vulnerable to any fresh surprises.

“Markets are in limbo as world leaders scramble to agree deals within the 90-day tariff pause,” notes the TS Lombard research team including Steven Blitz and Davide Oneglia. “What matters is the potential for permanent damage during and after the trade war purgatory.”

The powerful move off the April lows was almost impossible to predict or to fully participate in. A mix of out-of-the-blue headline risk, blurry data and a flip-flopping narrative created an unprecedented rebound. The speed of the drop and the still-unfolding rebound resembles the Covid market of 2020. Hence, a full recovery for the S&P 500 (^GSPC) might be much quicker than other bear markets.

Feeling the Squeeze

Monday’s surge offered a stark example of the squeeze facing underexposed investors. Stocks leveraged to global growth and China-sensitive sectors surged on a wave of fast-money buying.

Data compiled by Bloomberg shows that many risky themes, which suffered losses of as much as 60% since the S&P 500 peaked in February, are back in favor. “Stocks are bid on the back of the cooling trade war temps, but it’s the low-quality themes that are pacing stocks,” note the traders at Goldman Sachs Group Inc.’s equity trading desk. They add that client activity levels were up by 71% on Monday.

Systematic strategies are adding to fuel to the rally. This cohort of investors uses quantitative models to buy stocks and cares not one bit about headline risk. Those flows push the market higher into areas where risk/reward becomes thin for everyone using classic valuations or a lack of conviction due to economic uncertainty.

SNP - Delayed Quote•USD

(^GSPC)

Follow  View Quote Details

5,886.55

-

+(0.72%)

At close: May 13 at 4:58:25 PM EDT  Advanced Chart

Even retail investors — often the first to give up and the last to join rallies — were constantly buying during the selloff.

Story Continues

Mindful of Risks

Professional investors, however, seem far from all in on stocks. Data from the Commodity Futures Trading Commission shows that asset managers remain light on S&P 500 futures.

Meanwhile, data from Goldman Sachs’ Prime Desk showed global equities had the second-largest notional net buying from hedge funds in five years on Tuesday. That was “driven by short covers and to a lesser extent long buys,” the desk wrote in a note to clients.

That positioning disconnect means the squeeze may not be over. Deutsche Bank AG strategists argue that the US-China trade announcement alone justifies a re-risking shift. “It exceeds anything the market could have anticipated back in March,” they wrote. “Stay bullish.”

Technical indicators also suggest the rally could run further. Market breadth isn’t overextended, and potential turning points such as the 200-day moving average posed little resistance.

Also, V-shaped recoveries have a habit of leaving cautious investors behind. Data complied by SentimenTrader shows that performance, while weak in the short-term, is offering good returns for steady hands.

“Based on behavior since the April low, the rally does seem more likely than usual to be sustainable,” SentimenTrader said. “Of course, nothing is guaranteed, and all we’re dealing with are probabilities. The good news is that the probabilities shifted in bulls’ favor.”

But this chase has its own risks. The stronger the rally, the more asymmetric the setup becomes - higher prices and lower volatility increase the chance of a painful reversal if good news stalls. The risk-reward balance is thus pivoting back toward unappealing levels for many.

That’s especially true as many of the tailwinds fueling this surge aren’t rooted in hard data just yet. Signs that the economy did get hit even from the very short-lived punitive tariffs could cause optimism to fade quickly and stocks to eventually face a buyer’s strike.

“It’s not all perfect out there,” warned Charlie McElligott, managing director of cross-asset strategy at Nomura Securities International Inc. Things could get turned upside down again when moving closer to the tariff pause deadline in case President Trump “can’t help himself and risks twisting the knife again.”

Most Read from Bloomberg Businessweek

Cartoon Network’s Last Gasp DeepSeek’s ‘Tech Madman’ Founder Is Threatening US Dominance in AI Race Trump Has Already Ruined Christmas Why Obesity Drugs Are Getting Cheaper — and Also More Expensive The Recession Chatter Is Getting Louder. Watch These Metrics

©2025 Bloomberg L.P. Sign up for the Yahoo Finance Morning Brief Subscribe

By subscribing, you are agreeing to Yahoo's  Terms  and  Privacy Policy

View Comments