Markets extended their rebound for a second straight week, as signs of de-escalation in the Middle East shifted investor sentiment from fear to cautious optimism. The uptrend held despite the fragility of the situation. This rapid repricing on marginally positive developments is showing how impatient investors are for good news. This minor step toward peace appears to be enough progress to hold on to for the time being.
Major U.S. indexes gained between 3% and 5%, with the Nasdaq leading at 4.68%, as the two-week ceasefire involving the U.S., Iran, and Israel helped drive oil prices sharply lower. Crude fell roughly 15%, though it remains up more than 30% since the start of the conflict. While pressure on global supply has not meaningfully changed, the recent price decline may offer some temporary relief as negotiations (hopefully) begin.
Sentiment improved quickly following the emergence of the ceasefire framework, reinforcing the view that a worst-case energy shock may be avoided. That said, markets may be getting ahead of concrete progress. There is no shortage of risks that could derail this rally if optimism fades. Oil prices remain elevated, regional tensions persist, higher input costs and decreased demand are likely to weigh on growth, and inflation pressures are reaccelerating. Investors are pricing in progress that could prove short-lived. While markets often bottom well ahead of hard economic data, the current conditions leave room for a sharp reversal if conditions deteriorate.
Fixed income markets also reflected optimism, with Treasuries gaining as yields declined. Technology and communication services led the advance, supported by renewed enthusiasm around artificial intelligence and semiconductor demand, while energy lagged as oil prices pulled back. This rotation suggests a shift back toward growth-oriented leadership, at least for now.
Inflation is back like a bad penny
While geopolitical risks eased at the margins, inflation data delivered a one-two punch to close out the week. A labor market that can’t seem to decide whether it’s strengthening or weakening, combined with inflation reaccelerating, serves as a timely reminder that the economic backdrop remains highly complex.
The March Consumer Price Index rose 3.3% year-over-year, accelerating sharply from 2.4% the prior month. Nearly three-quarters of the increase was driven by surging gasoline prices. Since February, prices have jumped 0.9%, which is the largest increase since June 2022. Gas prices rose 21.2% month over month, marking the largest percentage gain since the Bureau of Labor Statistics began tracking the data in 1967.
Core inflation was more contained, rising 2.6% year-over-year, but broader trends still point to building pressure. The Fed’s preferred measure, core Personal Consumption Expenditures (PCE), remains elevated at 3.0% for February. Recent data suggests much of the stubborn underlying inflation is driven by higher goods prices and lingering tariff effects. Even if oil prices continue to moderate, the lagged impact of energy spikes is likely to keep inflation elevated in the near term.
There are some offsets worth noting. Shelter inflation continues to trend lower* for now, and services price increases remain relatively stable. However, the current reality is that higher prices are weighing more heavily on consumers. Personal spending growth has been modest, and sentiment has deteriorated sharply, with the University of Michigan index falling to 47.6, an all-time low. Concerns about inflation, hiring, and asset values are rising.
*There are serious questions about the validity of the October shelter assumptions, which the BLS had to estimate following the government shutdown. The risk is that shelter inflation is lower than it should be, further exacerbating inflation. Some data will be updated in the next April CPI report, but the year-over-year numbers won't be completely error-free until October.
Hope is not a strategy
Despite the inflation uptick and lingering geopolitical uncertainty, markets have shown notable resilience. The S&P 500 has rebounded nearly 8% from its mid-March lows, with small caps and international equities posting even stronger gains. The recovery has been swift and, in many ways, reflects a market eager to move past the recent shock.
Robust until now, fundamentals are beginning to show signs of strain. Economic growth expectations have softened, as reflected in the downward revision of fourth-quarter GDP to 0.5%, and earnings estimates have edged lower. Still, corporate profitability is expected to remain positive, supported by structural drivers, including ongoing investment in technology and stable, but slower, economic growth.
Expectations for interest rate policy are also shifting again. The Federal Reserve meets in three weeks, and I expect it to close the book on rate cuts through 2026. Dovish voices may push to reintroduce the idea of cuts later this year, assuming inflation eases as oil prices stabilize. But the path forward remains too murky to price in additional cuts, even months from now.
It remains to be seen who will draw more criticism on Truth Social by month-end: the “Aya-Toll-ah” or “Too-Late Powell,” who may still be serving as Chair at the June meeting. Could the environment shift enough to bring rate cuts back into consideration? Maybe, but it’s not a scenario I would bet on yet.
The key risk is that markets are moving too far ahead of the data. Negotiations have only just begun, and it appears both sides have already found little to talk about. With nothing foundational to agree on, President Trump is raising the stakes but threatening a military blockade of the Strait of Hormuz starting on Monday at 10 am EST. While little oil has been flowing through the Strait, many Iranian boats bound for China and other destinations have traversed the waterway. A blockade shuts off the flow to everyone and further isolates Iran. It’s the recipients of that flow of oil that this move is likely aimed at.
Investors were giving the ceasefire the benefit of the doubt on Friday, but doubt seems to have won the day. I expect plenty of finger-pointing over which side is the most obstinate, but also repeated future attempts to settle this peacefully. This is likely just part of what will be an exceptionally messy negotiation that plays out more like pre-fight trash talk than highbrow diplomacy.
What this means for investors and what’s next
The focus now turns to whether diplomatic progress can hold as the April 21 ceasefire deadline approaches. Any signs of continued negotiations or improvements in oil flows would likely support markets, while setbacks could reintroduce volatility. Earnings season is also beginning, with major banks set to provide early insight into how companies and consumers are navigating the current environment.
Thus far, credit card and banking data suggest consumers are holding up well, and I don’t mean just the J.P. Morgan Chase Private Client crowd. Feedback from institutions such as Ally Bank and Capital One has been encouraging over the past 12 months. However, the next two earnings cycles may introduce more nuance, as this latest wave of rising inflation could prove to be the straw that breaks the consumer’s back.
For investors, the path forward remains balanced. Fundamentals point to continued growth, but near-term risks tied to inflation and geopolitics remain elevated. I’ve been cautioning readers to stay attentive to risks without overreacting. The past two weeks illustrate why: all the market needed was a small catalyst to set up a move higher. My advice remains unchanged, even as risks persist.
Staying disciplined, monitoring inflation trends, and avoiding overreactions to headlines will be critical. Given that the initial negotiations have fallen flat and the U.S. is pushing its conventional military advantage again, it’s hard to see any of this as progress. Markets are set to open lower as of this writing. If the ceasefire somehow evolves into a more durable resolution, the past two-week uptrend could extend to new highs. If not, we know this bumpy road won’t be pleasant, but it will remain navigable with the right attitude toward risk.
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