Momentum traders can't get enough of all things AI. The entire technology sector is on fire. Other areas of the market are struggling. Concentration risk is rising, but that's nothing new, and most traders are optimistic.

 

That doesn't mean all is well. On the geopolitical front, the U.S. and Iran are still not playing nice. This week, missiles were exchanged. The present arrangement is almost comical. The definition of ceasefire is a "temporary halt to active fighting between opposing forces in an armed conflict." That is not what is happening, but the Trump White House and evidently the majority in Congress insist that this fictional ceasefire is in place.

 

Amidst these tensions, some well-placed cabinet members, such as Treasury Secretary Scott Bessent, are claiming that a 60-day ceasefire is in the works. But he hedged his bets, claiming the president must agree to it, and it may not hold in any case. Supposedly, it's an agreement to allow Iranian oil to ship in exchange for the opening of the Straits. Iran's non-existent navy would also remove the mines they planted.

 

But what about the nuclear issue? Oh, that both sides agree to negotiate over the next 60 days and come to a solution. Of course, Iran has already said that it is not up for discussion, but what the heck, the administration gets more time and hopefully a little lower oil prices in exchange for Iran's ability to profit from its oil sales.

 

Building on last week's discussion, remember I explained that we were approaching a critical line in the sand in the next few weeks on global oil supplies. A 60-day ceasefire kicks the can down the road for two more months. In any case, oil prices have subsided, trading around $88.37 a barrel on Friday, which is an improvement of sorts. It is enough to relieve investors' fears that we are on the brink of oil Armageddon.

 

With that reprieve in oil markets, investors can turn their attention to other things, like the knock-your-socks-off results of first-quarter earnings. Analysts entered the season predicting an average earnings growth rate of 13 percent. That was more than respectable, but that is not what happened. Instead, companies' earnings results doubled that estimate, chalking up 28.4 percent overall.

 

I had to look back to the second quarter of 2021 to find a comparable period where earnings were as good. More than 84 percent of companies beat Wall Street's earnings projections — and not by a little. The usual quarterly beat rate is about 7 percent. This time, the average beat was by 18 percent!

 

Some analysts are questioning whether, in some cases, these earnings were inflated by the AI boom. Meta, Alphabet, and Amazon were the largest contributors to the S&P 500's surging earnings growth. All three reported unusually large contributions from outside their core business. Their private equity investments in Anthropic, for example, threw off billions in profit for the quarter.

 

While sales were higher than expected, 9.7 percent gains versus 8.2 percent forecasted, it was profit margins that astounded the equity market. They came in at 14.8 percent. This has never happened before and was the highest in history. Given these results, is it any wonder that analysts are now projecting 18 percent earnings growth for the S&P 500 for the full year?

 

Meanwhile, the Fed's preferred inflation gauge, the PCE for April, came in at 3.8 percent, almost double the Fed's 2 percent inflation target. First-quarter GDP was also revised downward to 1.6 percent due to weaker investment and lower consumer spending. You can forget about an interest rate cut this year, in my opinion.

 

Looking at market movement in May, all the worries about how long it would take companies to begin showing profits from AI spending have fallen by the wayside. Tech was up 13.25 percent, led by semiconductors. Beyond tech, consumer discretionary gained 5 percent, and everything else gained by less than that, with materials and energy. Financials and utilities are down.

 

As I wrote last week, inflation remains a problem for the economy. As a result, investors are seeking stocks and sectors where price appreciation keeps pace with, or even beats, inflation. Obviously, tech was where investors flocked to in this kind of environment.

 

The euphoria over the upcoming IPOs of three mega tech companies — SpaceX, OpenAI, and Anthropic — is feeding market participants' animal spirits and helping drive stocks higher. That said, markets remain overbought and are due for a pullback. Exactly when that happens is anyone's guess. My guess is that sometime after the SpaceX offering in two weeks, we might see some profit-taking.

 

A year ago, Colossal Biosciences introduced to the world their version of the dire wolf, an animal extinct for over 12,500 years. The company's scientists are hoping to bring back the woolly mammoth by 2028. On the list for resurrection are the blueback, extinct for two centuries, the giant moa, and the beloved dodo, among others.

 

Before you ask, Velociraptors, the highly intelligent, deadly predators of "Jurassic Park," are not on the list of extinct species being studied, nor are any other dinosaurs. The company is headquartered in Dallas, Texas (not Isla Nublar). It was co-founded in 2021 by CEO Ben Lamm and Harvard University geneticist George Church, with initial support from venture capitalists totaling $15 million.

 

Since then, Lamm, who originally made his money in gaming and AI startups, has used his Silicon Valley know-how and entrepreneurial drive to raise more than $10 billion in funding. While the company remains private, some of its notable investors now include Paris Hilton, filmmaker Peter Jackson, and NFL quarterback Tom Brady.

 

The world has already bestowed a name on Colossal Bioscience's ambitions — De-extinction. De-extinction is the process of reviving extinct species using advanced scientific techniques. It is a growing field that represents the meeting point of several scientific pursuits, including biotechnology (the use of living systems or organisms to develop products), ancient genomics (the study of DNA from extinct organisms), cloning (creating genetically identical organisms), and genome editing (precisely altering the genetic material of an organism).

 

The idea of de-extinction was first popularized back in 1979 by the Piers Anthony book "The Source of Magic" and Michael Crichton's 1990 sci-fi novel "Jurassic Park." The authors raised the possibility back then that long-extinct organisms could be cloned from preserved DNA.

 

Fast forward to 2024, when company scientists worked secretly for months in their Dallas labs growing grey wolf blood cells and extracting DNA from them. They made 20 edits in the animals' genomes — changing specific DNA sequences — and injected the altered DNA into egg cells from a domestic dog to create clones. These cloned embryos were placed into the wombs of surrogate dogs, eventually resulting in the birth of three pups. In April of that year, the company announced that "the first de-extinct animals are here."

 

The pups were described as dire wolves, a large-bodied wolf species of the North American Ice Age, 11,500 years ago. You may remember the Stark kids' dire wolves from "Game of Thrones." The two males, Romulus and Remus, were born in October 2024, while the female, Khaleesi, was born in January.

 

The news triggered a worldwide media sensation but also sparked an ongoing battle between the company's team and other scientists over exactly what constitutes a de-extinction event.

 

Some scientists argue that the company's dire wolves are not authentic but are simply genetically engineered dogs with wolf-like characteristics. They worried the hype around the company's work on extinct species is exaggerated and can mislead the public about what de-extinction can achieve.

 

Taking their lead from Jeff Goldblum's Dr. Ian Malcolm, the chaos theorist who warned the Jurassic scientists about the dangers of dinosaurs, other critics fret about the ecological risks of letting loose in the wild predators like these new dire wolves, or the damage giant woolly mammals may do roaming the countryside.

 

Colossal Bioscience frames its work as part of the global effort to reverse biodiversity loss. The company and its shareholders believe in conservation; though modern conservation efforts, they add, are being outpaced by climate change and the rapid eradication of species after species. At the same time, many of the dwindling populations of endangered species have become dangerously inbred. By introducing lost genes from museum specimens, Colossal Bioscience hopes to reintroduce genetic diversity.

 

In May, the company announced it had cloned four critically endangered red wolves. This species is on the brink of extinction. The red wolf once roamed the Eastern and Southern U.S. By the 1970s, systematic hunting and habitat loss reduced their numbers to fewer than 20. The company's long-term goal is to reintroduce red wolves into the ecosystem with the help and guidance of government agencies.

 

Worldwide, the United Arab Emirates has funded a research lab at the Museum of the Future in Dubai. An accompanying biovault — a secure facility designed to safely preserve genetic material — will store a wide range of DNA from many species for preservation and de-extinction. The UAE is also interested in saving the Arabian leopard, the smallest and rarest of big cats, which is locally extinct.

 

In New Zealand, $100 million was raised to launch the giant moa project. The flightless bird, extinct for several hundred years, is the country's national symbol. "Lord of the Rings" director Peter Jackson, as well as M?ori groups and scientists, are backing Colossal Bioscience's efforts on that project.

 

The bottom line, for me, is this: Anything or anyone that captures people's interest and imagination in conservation is vital. Do I care if this dire wolf, woolly mammoth, Tasmanian tiger, dodo, or Moa is an exact replica of an extinct species? Not at all — nor will it matter to kids, adults, my readers, or the world at large. If it excites us or convinces us to join efforts to preserve and reverse threats to our ecosystem, I am all for it. Are you?

 

The clock is ticking. The red line in the sand on oil prices indicates July as the date when oil could do real damage to the economy and the stock market if it remains above $100 a barrel.

 

Why July? For one, that's peak seasonal gas demand in the U.S. At the same time, global oil inventories are projected to be scraping the bottom of the barrel by then. Structural supply constraints — shale production flat, OPEC production down, and seasonal demand due to record heat in the Middle East — will also be a factor. 

 

These restraints will result in a delicate balancing act worldwide where even a small disruption in supply could trigger exponential price spikes. Unless there is an end to the war before then, this perfect storm of conflict, supply, and inventory depletion will descend upon us all. It could become a global race to the bottom in oil supply.

 

With that background, are bulls whistling past the graveyard in the equity markets? As I wrote last week, stock investors seem to be the last man standing in the financial markets. The prices have plummeted worldwide again this week. Recall that I warned readers that 4.5 percent on the benchmark 10-year U.S. Treasury bond was the level where equity investors should start paying attention to yields. We are now at 455 percent.

 

Inflation fueled by higher oil prices continues to climb. The last FOMC meeting minutes of the Fed indicated a more hawkish stance on interest rates would be warranted if inflation continued to rise. It has. Precious metals are no help. Higher bond yields are like kryptonite to that area. Crypto is not helping much either.

 

So why equities? The gains revolve around artificial intelligence and little else. SpaceX, for example, is scheduled to be the single largest IPO in history with the first day of trading on June 12. This first tranche of Elon Musk's rocket company will raise $75 billion, valuing the entire company at $1.75 trillion. This is a company that is losing $5 billion a year and whose founder controls 85 percent of the voting stock.

 

And yet, Wall Street is salivating in anticipation. SpaceX combines rockets, satellites, connectivity, AI infrastructure, and social distribution. Most consumers would recognize the company's Starlink. The successful subscriber service generated $11 billion, doubling the subscriber base to 10 million. So why the loss? It is all about AI. The company spent more than $20 billion in capital expenditures, more on the buildout of artificial intelligence than on rockets and connectivity combined.

 

No, never mind, say the bulls. It's Elon, it's Starlink, it's Mars and beyond, AI dominance, orbital data centers, and the largest potential addressable market in history! Get some! And speaking of AI, Nvidia reported gangbuster earnings this week, and the stock fell. When a company does that, it is time to look at why. I detect a shift afoot, away from the handful of darlings spending trillions on AI buildout and toward those that make AI work.

 

These are companies that provide the data center buildouts, power management, optical connectivity, servers, memory, networking, etc. That doesn't mean that the big spenders are toast, just that the bloom may be off the rose and there are more fertile fields around.

 

So here the markets sit, watching the clock tick. The social media posts that promise a whole lot but deliver nothing have left investors largely immune to what comes out of the White House. Consumer sentiment is cratering as pump prices climb.

 

In any event, most analysts now expect oil prices to remain higher for several more months, even after an actual agreement is signed, the Straits of Hormuz are reopened, and both parties finally declare the war over.

 

Let's hope we get some good news on that front over this Memorial Day weekend. Vague statements from the Trump team have given markets hope over the last few days. But remember, hope is not an investment strategy. Stay invested but keep an eye on yields and oil prices.

 

There is a brave new world out there for crypto miners, brokers, and blockchain entities. The same process that allows cryptocurrencies to trade and settle in the blink of an eye is now being applied to other assets. The hope is that this new technology can help some companies escape another long, crypto winter.

 

It is called asset tokenization. And whether we are talking about stocks, bonds, real estate, or anything else that trades in the real or digital world, all these areas can be tokenized. The first question many ask is what is a digital token?

 

It is a programmable digital asset, just like any crypto currency, issued on an existing blockchain such as Ethereum. But unlike cryptocurrencies such as Bitcoin, which have their own blockchain, tokens can be issued on just about anything, including asset ownership of things (paintings, properties, dollars), access rights, voting power, identity, predictions etc.

 

A stock, for example, which trades on a digital market (and most of them do), can now be converted into a digital token on a blockchain. This allows for fractional ownership, faster transactions, and broader market access. While tokens can be applied to anything, they have an obvious use in expanding financial infrastructure where settlement of money is extremely important.

 

One way to think about this technological trend is as a new way to handle the flow of financial assets that trade globally, 24 hours a day. Money changes hands constantly and the expression ‘time is money' takes on real meaning when trillions of dollars are involved. Tokens act as a new kind of plumbing that allows money, instead of water, to flow faster, with fewer cracks, leaks or clogs, and therefore greater predictability. In past columns, I have written about stablecoins, which also use blockchain technology to effect fast, secure, and borderless transactions in the currency world. This is simply another use for this technology.

 

Crypto companies have embraced digital tokenization with open arms. Bullish, a crypto exchange run by the former head of the New York Stock Exchange, acquired a tokenized equity company, Equiniti, for $4.25 billion in a stock transaction a week ago. Recently, Centrifuge, which specializes in tokenizing exchange-traded funds and credit products, announced a deal with Coinbase, a leading cryptocurrency company.

 

Robinhood, the broker, is also interested in the area but has yet to ink a deal. CEO Vlad Tenev did say that "our strategy is to take crypto infrastructure and apply it to assets that have real-world utility. That's why we care so much about tokenization."

 

Crypto companies hope tokenization will allow them to expand beyond simple cryptocurrency trading. As readers know, crypto currencies can be notoriously volatile and have been subject to periods of massive underperformance. Over the years, the crypto companies have had to weather periodic "crypto winters," which can last for years. If tokenization catches on, it could allow the industry to diversify away from volatile crypto trading toward a more stable and predictable business model.

 

But tokenization is in its infancy. As it stands, there are only about $27 billion in tokenized real-world assets on the blockchain. That's a drop in the bucket when one considers the $200 trillion plus in global digital equities alone.

 

However, the settlement arms of Nasdaq and the Depository Trust and Clearing Corp. (DTCC), which do the lion's share of equity settlements, are now engaged in pilot programs studying both blockchain-based settlement and tokenized securities. Larry Fink, the CEO of BlackRock, the mega-billion-dollar asset management company, believes tokenization could transform finance. He may be right. One thing is for certain: blockchain technology is here to stay, and its uses will continue to multiply.

 

There is a widening gap between how players in the financial markets perceive the future. Momentum traders in the equity market continue to push technology stocks to new highs while bond traders are becoming more bearish. Can both be right?

 

In the short run, yes, in the medium term, not so much. Friday, markets pulled back amid pressure on bond prices, which sent yields higher. Bond yields on the U.S. 30-year Treasury bond surpassed 5 percent this week. The benchmark ten-year U.S. Treasury bond hit 4.57 percent. Both are usually warning signs for the stock market.

 

Here's what you need to know. The higher the yields go, the more expensive it becomes to borrow. The more it costs to borrow, the less likely new investments are to be made down the road. Fewer investments lead to weaker earnings, which in turn lead to lower stock prices. Capisce?

 

The issue that has the bond market in such a dour mood is inflation. I have been warning readers for months that inflation is rising. The Iran war has made it worse. This week, the Consumer Price Index (CPI) and Producer Price Index (PPI) for April removed any doubt that inflation is making a big comeback. The PPI numbers were up 1 percent from the prior month. That's the highest since March 2022. The CPI was also hotter than expected and will be much higher when the May numbers are announced in a month's time.

 

That should come as no surprise to you, since you are paying north of $4.50 per gallon at the pump for gasoline, while diesel is above $6. You may have noticed your credit card bills are also higher (and you're spending less), as are your weekly grocery tabs. It is an inflationary spiral that will continue.

 

As inflation rises, bondholders will insist on a higher real rate of return — meaning returns after inflation. Consequently, as inflation increases, investors demand higher yields to compensate. This cause-and-effect relationship suggests bond investors see significant risk, so why is the stock market at record highs?

 

The rate of return has something to do with that. Market participants can't seem to get enough of anything and everything related to artificial intelligence. More than a trillion dollars a year is being poured into this area, with more expected next year. Ask any of the mega companies making these investments, and they will tell you that the rate of return they expect will be stupendous sometime in the future.

 

How much? Well, no one really knows but "a lot." Certainly, a "lot" more than whatever the inflation rate is right now and "a lot" more than whatever a measly old bond is yielding. That is the name of the game. Momentum traders are having a field day. There is a buying frenzy underway to protect one's capital. It will work until it doesn't.

 

Trump's tariffs, the continued closure of the Straits of Hormuz, the resulting rise in oil prices, the fiscal spending spree underway, the skyrocketing deficit and national debt — it's all inflationary. Buying stocks that can outperform inflation and bond yields both now and in the future is how it's done. Is that working? Just look at the returns of the semiconductor sector so far this year or technology overall.

 

In the meantime, Kevin Warsh has taken over as the central bank's head. Given the rise in inflation, it seems almost impossible for him to acquiesce to the president's desire to see interest rates lower. In reality, the betting markets are starting to price in the possibility of interest rate hikes by the end of the year.

 

As for the president's visit to China, it appears to have been mostly pomp with little in the way of circumstance. Disappointed by the lack of major trade announcements or other economic breakthroughs, investors sold off Southeast Asian markets, including China, as well as markets in Europe and the U.S.

 

The breadth of U.S. stock markets has been shrinking as indexes climbed. Fewer and fewer stocks, mostly large-cap tech stocks, have been largely responsible for the market's gains over the last few weeks. We are overdue for a bout of profit-taking in this "V" shaped recovery since March 31st. I would like to see a few percentage points shaved off this market. It would pave the way for further gains over the summer.