Markets took a breather this week, but the broader uptrend (and ceasefire) remains intact. The S&P 500 edged slightly higher after three straight weeks of strong gains, while the Nasdaq and Russell 2000 also pushed to fresh highs before consolidating. The Dow lagged and finished lower, a reminder that leadership remains uneven and the markets can’t go straight up forever.
After a rapid rebound through April, this week’s more muted performance suggests markets are beginning to digest gains rather than extend them. This is a healthy sign, and another week or two of muted performance as earnings roll in would be a healthy way to preserve this recent bull run.
The foundational element of the uptrend has not changed. A ceasefire in the Middle East continues to hold, helping prevent a worst-case energy shock. There has been continued disagreement over whether the Strait is closed, to whom, and by whom. Oil prices remain elevated at roughly $95 per barrel, but the only surprising part is that they aren’t higher.
Investors appear increasingly comfortable looking through the conflict, pricing in an eventual resolution while acknowledging that the path forward may not be smooth. At the same time, Treasury yields moved higher, and bonds struggled, suggesting that rate pressures have not fully faded.
Generation V
What stands out most is how well markets are still responding to uncertainty. Rather than reacting sharply to each new geopolitical headline, investors are focusing on the broader trend. The rapid recovery from March’s selloff has erased earlier losses in the U.S. completely. International markets still have a little wood to cut, but have also rallied sharply since March. Staying invested through volatility continues to be critical to both managing and profiting from this volatility.
Source: Edward Jones
This shift reflects a growing belief that the conflict will not derail the global economy. That confidence is supported by stable earnings expectations and a steady flow of capital back into equities, particularly in growth-oriented areas. Technology and artificial intelligence-related stocks continue to lead, while more defensive sectors have taken a step back.
It’s not all sunshine and daisies, unfortunately. With stocks near record highs, any setback in diplomatic progress could trigger more market volatility. Starry-eyed investors are riding high, but the relative calm in the Middle East is tenuous at best. The base case has shifted in a more positive direction, but the possibility of re-escalation is still very real. Little has really changed in the past few weeks, and a growing list of countries are feeling the squeeze from extended disruptions to their supply chains.
Frustrated consumers turn to retail therapy?
Economic data surprisingly paints a picture of stubborn resilience, especially on the consumer side. Retail sales rose 1.7% in March, driven mainly by higher gas prices, but underlying spending remained solid. Even after adjusting for inflation, spending still increased, suggesting that households are absorbing higher energy costs better than expected.
Tax refunds appear to be playing a key role, providing a meaningful boost to disposable income and helping offset rising fuel expenses at just the right time. Estimates suggest that even with elevated gas prices, only a portion of this added income is being absorbed, leaving room for continued consumption in the near term. It would take gas at over $4.50/gal (another $0.50) to start to eat up the entirety of the increased refunds. Frustratingly, it is middle-income Americans who are netting the least from the fuel price / tax refund cocktail.
Source: J.P. Morgan
Business activity is also holding up, with PMI data pointing to modest expansion. Manufacturing has strengthened, while services remain softer but are still growing. Rising input costs and selling prices highlight ongoing inflation pressures. Consumer sentiment remains punishingly dreary, reflecting concerns about affordability and future conditions even as the spending grinds on.
What this means for investors and what’s next
The next phase for markets will likely be driven by two key factors. First is progress on the geopolitical front, particularly whether negotiations can move toward reopening the Strait of Hormuz and securing a more durable agreement. Second is earnings season, which is ramping up and will provide a clearer picture of how companies are navigating higher costs and shifting demand.
Numerous heavy-hitters are reporting next week, including five of the Mag 7 companies, Visa, Mastercard, Exxon, Chevron, and various semiconductor companies.
The Federal Reserve is expected to stay on hold for now, balancing elevated inflation against an uncertain growth outlook. While some investors are looking ahead to potential rate cuts, that path likely depends on a sustained easing in energy prices and soft goods and shelter inflation. The path has also been paved for Kevin Warsh to take the reins of the Fed sooner than later, but that deserves its own deep dive later.
For investors, the message remains boring but consistent. The foundation for markets is still solid, supported by steely consumers and strong corporate earnings. Risks have not disappeared, but they have faded to the background, which could pay off or backfire depending on how the next few months truly play out. A diversified approach across sectors, asset classes, and capitalizations remains the most effective way to navigate an environment where progress is advancing amidst a maelstrom of change.