S&P 500 surges back to pre-Omicron levels close to 4700 as investors rush to price out economic pessimism

• The S&P 500 surged around 2.0% on Tuesday to close to 4700, bringing it back to pre-Omicron levels.
• Investors rushed to price out prior pessimism about the economic outlook amid the emergence of Omicron, with symptoms looking mild.

US equity markets have been enjoying a broad-based rally on Tuesday as investors continue to price out the Omicron-related economic pessimism that had weighed heavily on the market in recent weeks. Over the past few days, information out of South Africa (the current epicenter of the Omicron Covid-19 variant outbreak) has continued to point to much milder symptoms associated with infection. This lowers the risk of a sharp spike in hospitalisations in the US (and elsewhere) that might weigh on economic growth in Q1 2022.

Thus, investors seem to have come around to the view that last wee’s panicked downside was an overreaction and have instead opted to pile back into risk in what some commentators called a “melt-up”. The S&P 500 currently trades roughly 100 points above Monday’s close at just under 4700 and is now trading back at pre-Omicron levels. The index trades just over 1.0% below record highs printed back on 22 November.

The Dow, meanwhile, was up 1.5% and also back to pre-Omicron levels, though still trade some 2.0% below early November’s record highs. The Nasdaq 100 was up closer to 3.0% despite a further rise in yields across the US treasury curve and leapfrogged the 16K level to hit 16.3K again. For reference, the index trades about 2.7% below November’s record highs just above 16.7K. The CBOE S&P 500 Volatility Index (often referred to as the VIX) was down more than 5.0 points to around 22.0 and near its lowest since the emergence of the Omicron variant.

Outperformance in tech stocks was helped by a surge in Intel’s shares price of more than 4.0% on Tuesday. Investors cheered the news that the co. plans to take its self-driving car unit public in mid-2022 at an estimated valuation of more than $50B. The news helped push the Philadelphia SE Semiconductor index higher by nearly 5.0%.

Ahead, US equity market focus is set to remain on the theme of Omicron. When cases start to spike in the US in the coming weeks, this might cause some volatility, especially if it sparks an overreaction from state governors/health authorities when reimposing economic restrictions. But so long as the severity of illness associated with infection doesn’t surprisingly worsen, investors will likely continue to assume that Omicron doesn’t pose a severe threat to the economic outlook. As long as investors remain confident in the health of the US economy, a high US inflation print on Friday (which would solidify expectations that the Fed will agree to accelerate their QE taper next year) shouldn’t cause equity markets any problems.