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.

 

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 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.

 

The "Sell in May and go away" slogan of yesteryear should stay there. In the last decade, following that advice in the stock market would have lost you money. This year, you would have really been disappointed.

 

Stocks continue to climb despite the conflict in the Middle East, oil prices, and inflation worries. The old Wall Street adage about May hasn't held true at all over the last decade, with the average gain topping 7 percent for the May through October period.

 

This year, the gains have been much better than average for the first week in May, and most analysts believe markets are set to continue their bull run. This is despite the latest results from the University of Michigan's Consumer Sentiment Index, which dropped to a record low of 48.2 in early May. One-third of those polled cited higher gasoline prices, and another 30 percent mentioned tariffs as reasons for their dour outlook.

 

And speaking of those two concerns, this week the Court of International Trade ruled that Trump couldn't use the 1974 Trade Act to impose his 10 percent tariffs. These levies were put in place in February after the Supreme Court struck down his "Liberation Day" tariffs. But consumers should not expect refunds for the extra costs they have incurred due to these tariffs over the last few months. The government and businesses will pocket any refunds.

 

Gas prices, however, continue to climb higher as Trump's War remains bogged down in mistruths, exaggerations, and ineptitude. The administration is claiming that the ‘ceasefire (which isn't) marked the end of the war (now called an "excursion"). His secretary of war, Peter Hegseth, testified before the Senate Armed Services Committee that the ceasefire stopped the clock on the eve of the 60-day mark of the war.

 

That avoided a major statutory deadline for the president to withdraw forces or seek approval from Congress to continue the fight. Since then, despite both countries trading missile fire, the supposed ceasefire is still in effect. In any case, the Straits of Hormuz are still closed despite last weekend's two-day Operation Freedom scheme to escort boats through the disputed straits.

 

Trump's go-to reliance on his own interpretation of events: "Attack, Deny, and claim Victory," is wearing thin. A new acronym, NACHO — "Not a Chance Hormuz Opens" — is making the rounds of an increasingly cynical Wall Street. However, financial markets are looking beyond this debacle.

 

First-quarter earnings were stellar, with more than 84 percent of companies beating estimates. In addition, their guidance seemed to reflect a more upbeat future than present circumstances might dictate. Technology companies in the artificial intelligence space are the most positive, which is one reason both large-cap technology and AI names are leading markets higher.

 

Next week, we should see the entrance of the new Fed chief, Kevin Warsh, although I do not expect any moves in either interest rates or monetary policy in the immediate future. In addition, President Trump, along with a gaggle of U.S. CEOs, is scheduled to visit China before the end of the month. Investors are hoping that the two sides will play nice and may even come to an agreement on how to end the "non-war" with Iran.

 

Bulls evidently want to push stocks higher. Momentum traders keep buying on every little pullback. The war has become old news. Only some concrete turn of events, rather than this continued war of words, would put it back on the front burner. Inflation, while still a risk, is still some time further into the future. In the meantime, May seems to be destined for further gains.

 

It seems you can't keep a good market down. Oh, the bears tried, but equities managed another up week of record highs even as oil prices surpassed $100 a barrel.

 

The market's gains were helped by some mega-cap stocks that blew out earnings expectations (two exceptions: Meta and Microsoft). Big tech certainly delivered, sending markets higher on a day when oil hit $108 a barrel. And the Fed chair's swan song turned out to be anything but — at least for the president.

 

On Wednesday, Jerome Powell, the outgoing Chairman of the Federal Reserve, first announced that "nothing done" regarding interest rates. However, during the Q&A session, he told financial markets that he would not be stepping down from his position on May 15 as previously expected. He explained that political pressure was "battering" the institution, influencing his decision to stay.

 

It was almost comical, given the pressure on the Fed and its officials over the past year, to watch the president and his henchmen huff and puff at how this was an unorthodox position, and so political, etc., etc. The news was just a warm-up for what I see changing in the staid Federal Reserve Bank's future.

 

For example, the dissension among Fed board members at this week's meeting was the greatest since 1992. Four dissenting members (the Trump appointees) wanted further interest rate cuts, while the rest leaned toward holding rates steady; three dissented because they did not support the FOMC's easing bias in the statement.

 

Powell will remain a board governor and voting member for the foreseeable future. So, with Powell and others ready to "batter" back against any further politicization of the Fed, the new chair, Keven Warsh's job could be problematic. The divisions could also lead to greater volatility in financial markets, making FOMC meetings and policy far less predictable.

 

The latest data from the Fed's key Personal Consumer Expenditures Index (PCE) highlighted the need for an independent Fed as inflation expectations reignited. In March, PCE prices rose by 0.7 percent, the sharpest monthly increase since June 2022. Goods prices climbed 1.4 percent, mainly due to a 20.9 percent surge in gasoline and other energy goods.

 

In addition, the U.S. first-quarter 2026 GDP growth, a measure of the country's economy, expanded at an annualized rate of 2.0 percent, up from the previous quarter's 0.5 percent. Be cynical of government data. There is a tendency by the government to present the economy's best foot forward on their first estimate of quarterly GDP, only to revise downward the numbers later.

 

As investors try to stay focused on big tech, AI plays, and earnings, we are closing out the ninth week of a war that, it seems, nobody but the president wanted. It has gone on far longer than promised, with the annihilation of Iran's military capabilities greatly exaggerated. There doesn't seem to be any off-ramp.

 

The president continues to try to cow the Iranian Revolutionary Guard into submission with social media posts of death and destruction. These are followed by further extensions of a ceasefire based on nonexistent peace talks. In the meantime, the Straits of Hormuz remain closed, oil climbs higher (up 75 percent since Feb. 28), OPEC is on the ropes, and the polls, well, the polls say it all. The midterms are approaching, and nobody's happy.

 

The equation is quite simple. Rising oil price = higher inflation = higher-for-longer interest rates. And yet, we are at all-time highs. April was the best one-month return for the S&P 500 Index since November 2020, roughly a 13.6 percent gain. The Nasdaq and small-cap Russell Index gained even more. Are we overbought and extended? Yes. Are markets in nosebleed territory? Yes.

 

Given that the oil/Iran story is getting worse and is beginning to impact the world economies, why are markets celebrating? They believe that everything will come out all right in the end. The war will be over, or, if not, higher oil prices will surely slow economies, which in turn will reduce inflation growth, allowing the Fed to cut interest rates.

 

In the meantime, earnings have been stellar over this last quarter, so why complain? As for the future, we will worry about it when it gets here. Short-sighted? Uh-huh, welcome to the nature of the new market.