Good morning,
Markets are no longer trading on a single narrative; instead, they are balancing a stack of competing forces. Chief among them: the surge in AI-driven capital spending, evolving global central bank policies, the ongoing closure of the Strait of Hormuz, and a surprisingly powerful earnings season. At its core, the market is navigating the tension between growth, inflation, and policy.
The AI story remains dominant. Since the start of earnings season, it has been powerful enough to overshadow concerns around inflation and monetary policy. But that may not last. Inflation risks—particularly those tied to energy—have the clearest path to reassert themselves. With the Strait of Hormuz still closed and no credible resolution in sight, the backdrop for higher input costs remains firmly in place.
At the same time, sentiment is beginning to stretch. After April’s sharp rally, markets are drifting toward overbought conditions. It would not take much—a geopolitical escalation, renewed missile activity, or simply a shift in focus back to inflation—for a near-term pullback to develop and relieve some of that overbought pressure.
Looking ahead, the week’s macro focus turns to Friday’s U.S. jobs report, which could help shape expectations for the Federal Reserve’s next move. Markets are currently pricing in no further rate hikes through year-end. On the earnings front, the AI narrative remains in focus, with Palantir Technologies reporting today and Advanced Micro Devices tomorrow.
Stepping back, April’s strength followed a difficult March, and while valuations are no longer too stretched thanks to the surge in earnings, conviction is harder to come by. With Iran appearing resolute in maintaining control over Hormuz and continuing its nuclear posture—and with little clarity from global leadership on a path forward—the outlook feels less certain.
“Uncomfortably bullish” may be the most accurate way to describe the current setup: strong fundamentals on the surface, but with enough underlying tension to warrant caution.
Be well,
Mike