What Happened Last Week
- Ceasefire Optimism: The announcement of U.S. – Iran peace talks in Pakistan helped U.S. stocks to their best week of the year.
- Talks Collapse: The weekend’s talks to end the conflict did not reach a stable equilibrium, although the ceasefire has held so far.
- Cooler Inflation: A better-than-expected inflation reading helped sustain the rally in equities.
What We’re Watching This Week
- Hormuz Blockade: The U.S. is initiating a blockade of Iranian ports to attempt to force the Iranian side into concessions on its nuclear ambitions.
- International Response: We are monitoring the response of allies and adversaries to the new U.S. action in the Gulf.
- Q1 Earnings Season: Reports for the first quarter of the year begin Monday, as investors weigh the corporate response to a fresh bout of uncertainty.
Investment Management Team’s Views
A two week ceasefire in the Middle East war and a less-hot-than-feared inflation reading for March were enough to help equities to their best week of the year. Building on the rally from the prior week, the S&P 500 is up 7.5% from its lows and closed Friday about 1% away from its pre-war levels. Last week’s price action was once again clearly risk-on: energy stocks declined, growth and cyclicals led, the dollar weakened, and the VIX closed below 20 for the first time since the conflict began. Inflation hit a two year high on the recent energy price spike, although the details on the core measure and tariff impacts were more constructive. The Fed remains stuck waiting for developments to break one way or the other, and last week’s news had little net effect on interest rates. Yields are close to their most hawkish levels from late last month, opening up a yawning gap between equity and fixed income sentiment that merits our attention in the weeks ahead.
Last week’s ceasefire was already looking fragile heading into the weekend, and talks between the U.S. and Iran look to have dealt peace another body blow. According to reports, nuclear enrichment is the main point of contention. While the possibility of additional talks still remains, the main result of the weekend looks to be a blockade of the Strait of Hormuz by the U.S. This curious maneuver is not helpful for oil prices, and some of last week’s positivity in markets is being unwound in early trading. Still, markets remain hopeful that the general direction of events is positive, based on the playbook from Liberation Day. That is, trust the endgame and ignore the back-and-forth, believing that President Trump wants higher prices for the markets and lower prices for consumers above other geostrategic considerations. That feels right to us as a base case, but the downside risk scenario is large and growing every day the conflict rages on.
The situation in the Middle East will remain front and center once again in the week ahead. But equity investors will also have a welcome distraction – first quarter earnings season officially began today. As usual, the banks lead things off, and there is much to play for. Comments on the consumer and the overall macro environment will have a broader impact on investor sentiment and set the tone for the weeks ahead. Additionally, we expect additional scrutiny from investors around private credit exposures and asset performance.