What Happened Last Week
- Yield Relief: Last week saw rates fall modestly, helping the S&P 500 Index to an eighth straight week of gains.
- Broader Price Action: For the first time since the end of March, the equal-weight S&P 500 Index outperformed the index as equity breadth improved.
- Nvidia Delivers: The AI giant delivered a beat and raise, but declined after its report in a sign of investors’ very high expectations.
What We’re Watching This Week
- Price Action Beyond Tech: New headlines about the U.S. and Iran inching towards a deal may help global equities build on last week’s outperformance.
- Fed’s Preferred Inflation Gauge: The Personal Core Expenditures (PCE) report will highlight the extent to which the war in Iran has flown into core inflation.
- Negotiations: Despite new “defensive strikes” in the Persian Gulf, the administration continues to tout progress towards ending the war.
Investment Management Team’s Views
Falling bond yields finally gave the rest of the market room to participate in the rally. The S&P 500 Index extended its gains for an eighth straight week, but unlike the prior seven, the average stock outperformed the cap-weighted index last week, suggesting AI enthusiasm has become somewhat stretched after a historic run. Improved overseas sentiment, particularly in the UK, combined with a hawkish speech by Fed Governor Waller and easing oil prices, helped drive bond yields lower. Even as the S&P 500 Index continues to make new highs, the conflict in the Middle East has weighed heavily on sentiment outside the AI infrastructure trade. A close examination of recent price action reveals latent demand for the rest of the equity market if the war in the Middle East is resolved.
De-escalation in the Middle East is increasingly becoming the base case for investors. Weekend reports outlining the contours of a potential U.S.-Iran agreement reinforced the market’s growing view that neither side wants a broader conflict. This week’s early price action has pointed toward lower yields, a weaker dollar, and improving participation across cyclical and international equities if shipping through the Strait of Hormuz normalizes. European stocks and growth-sensitive cyclicals appear particularly well-positioned in that scenario, while lower rates could also provide additional support for domestic small caps.
The week ahead will test whether the rally can broaden beyond AI leadership. Earnings from several software and consumer companies will provide important insight into enterprise spending, AI infrastructure demand, and consumer resilience after a powerful run in technology shares. On the macro side, markets will focus on PCE inflation, international inflation reports, and updated manufacturing data. Investors must evaluate whether resilient growth and the specter of inflation will continue to put a floor under yields. At the same time, developments in the Middle East and the trajectory of oil prices remain critical, particularly as investors assess whether the recent improvement in risk appetite beyond the tech sector is sustainable.