Thursday marked the 39th time that the president has announced a deal with Iran. One of these days, it will come true. Until then, expect continued volatility in the markets.

 

His decision to back off his threat to increase this week's series of military air strikes on Iran triggered yet another rally in the stock market. The fact that the markets all recovered on Thursday what they had lost on Wednesday highlights the heightened volatility in financial markets.

 

For those watching this ceasefire circus, the news from the White House came after markets had already soared on Thursday. It is just another example of how those closest to government decision-makers continue to profit day after day by advance warning of the news. Back when, this would have been considered insider trading. Today, it is simply another way to repay loyalty and favoritism.

 

This time, the deal being discussed is nowhere near a final agreement. The idea would be to extend the non-existent ceasefire by two months. During that time, the two nations would then try to negotiate a more substantive agreement. As usual, interpretations of the supposed terms of the deal widely differ. The Iranians deny that any agreement has been reached or signed.

 

Just hours later, the president once again posted on social media, accusing Iran of leaking the terms of the U.S. deal. He says that their statements "bear no relation to the truth." He concludes by posting, "They better get their act together, and FAST." At this point, my view is that when the world has proof that the Straits of Hormuz are open to traffic on a consistent basis, I will believe real progress has been made.

 

Skipping to more substantive issues, the SpaceX IPO finally arrived today, Friday, June 12. It appears that all systems are go. At 10:30 a.m., SpaceX shares were indicated to open at $150 per share. That is well above the IPO price of $135 per share. The deal was reported to be 4-5 times oversubscribed, as institutions and retail investors sought to get in on the largest initial public offering of the year.

 

The ebullience around the Musk-powered technology company has influenced investors' psyche and should not be underestimated. As for me, I am immune to IPO hype and will watch the action from the sidelines.  I suspect SpaceX may carry the markets for at least a few days. That would give technology and AI stocks time to repair after their recent declines.

 

My previous guesstimate that we would see a 5 percent pullback in the S&P 500 Index came close (4.5 percent as of Thursday). The Tech-heavy NASDAQ did much worse, falling almost 10 percent with some smaller stocks dropping 20 percent or more. A quick bounce back would not surprise me over the next few days. July and August are what concern me.

 

I recognize that the themes that have carried the markets to new highs thus far this year have been twofold. Better-than-expected economic growth and higher earnings. Is there more of the same ahead, or have we seen a peak in these trends, at least in the short term?

 

If I were a betting man, I'd wager on a summer of discontent for investors at least through August. I know betting against the crowd is always dangerous and never popular. And yet it's just what I do on occasion.

 

A look at the bond market, which I believe is where the adults hang out, indicates we have seen a peak in the trend of higher yields. The benchmark U.S. Treasury 10-year bond reached 4.67 percent but has since dropped to 4.5 percent. That is at my level where I worry about further upside in stocks.

 

All along the yield curve from the short to the long end, I am starting to see yields stall out. That's important, especially in the face of inflation and the never-ending need for more money to finance the country's continued spending spree. Credit-sensitive areas are also coming under pressure. What, therefore, would make bond traders slow their selling of U.S. debt?

 

It could be that we are seeing the peak in inflation, at least for now. As readers know, I have been on the side of higher inflation for the entire year. This week's Consumer Price Index and Producer Price Index both justified that position. However, I'm thinking the next month's set of data points might show inflation a bit lower than the increases we have seen thus far.

 

Another sign may be that the prices of inflation hedges like gold, silver, copper, and steel have also peaked and are declining even amid strong inflation numbers. I also noticed that cyclical stocks have been on a decline. Equity areas such as industrials are weak, and emerging markets, including China and especially commodity countries, seem to be experiencing profit-taking.

 

Readers should remember just how serious a continued shutdown of the Straits would be for oil prices if nothing is done to increase supply before July. That's a little over two weeks away. Markets are flirting with all-time highs. From a purely price perspective, volatility in markets always increases when markets are at the bottom or the top. Maybe I am being overly cautious or just tilting at windmills, but if storm clouds gather, you will be first to know.

 

The non-farm payroll numbers for May, announced on Friday, were met with dismay by the market. The consensus forecast was for a gain of 89,000 jobs. Instead, the Bureau of Labor Statistics announced 172,000 and revised the last two months of jobs data upward. Together, that amounted to the strongest three-month stretch of job growth in two years.

 

You might think the stock market would celebrate such good news, but all three averages declined more than one percent on the news. This was a classic case of what is good news for Main Street may not be the same for Wall Street.

 

It comes down to interest rate expectations. Investors had already reduced their expectations for any interest rate cuts this year. This is despite a new Fed president whom many believe is beholden to the president's easy-money demands. The reasons are obvious.

 

Inflation continues to climb, helped by oil prices that hover above $90 a barrel. On June 10th, another Consumer Price Index reading will be released. Readers already know I expect that number to show inflation climbing even higher. And now, the last hope of interest rate bulls has been dashed with the jobs report.

 

The Fed's mandate is to keep employment buoyant and inflation at 2 percent. Stronger labor gains leave the Fed on the sidelines, but it is worried about rising inflation. Some members of the FOMC committee, which meets June 16-17, are already contemplating a possible rate hike sometime in the future. That is not good news for stocks, bonds, commodities, and much else.

 

In the meantime, the financial media has been hyping SpaceX's pending IPO all week. Evidently, the price has been set at $135 a share, which values the company at $1.77 trillion. It would make the rocket/AI/Bitcoin firm the seventh-largest company in the U.S. Pricing the offering prior to the scheduled launch date was unorthodox and "not how it's done," according to the traditional underwriting community. However, given that Elon Musk is in charge, one should expect some unorthodoxy.

 

As for the market's pullback this week, it should come as no surprise. It was about time. Nine straight weeks of gains had to come to an end at some point. Profit-taking began midweek and continued through Friday. Most of it was centered on the technology area.

 

Broadcom, one of the largest semiconductor companies, disappointed investors earlier this week when its AI chip forecast fell short of expectations. That seems to be the straw that broke the market's back. That may be so, but I believe traders were looking for any excuse to take profits.

 

As for the ongoing embarrassment in the Middle East, even Trump's congress seems to have had enough. The Republican-controlled House passed a continuing resolution this week directing Trump to end the war in Iran. The extended ceasefire continues to play out and oil remains above $90 a barrel.

 

I expect we will continue to see selling next week as markets work off their overbought and extended condition. Is this simply another buying opportunity, or is it the beginning of something more serious? I wish I knew.

 

 At this juncture, I'm betting on a quick 5 percent pullback. That's something we see three or four times a year. The decline has been largely led by semiconductor and AI stocks. That makes sense given those are the areas that have seen the greatest price appreciation. Who knows, the pullback may set us up for next Friday's SpaceX IPO and reinvigorate the tech trade.

 

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.