Let the Bulls Run

U.S. equities remained resilient amid geopolitical turmoil as stocks rallied back to all-time highs last week. The tech-heavy Nasdaq Composite rose 2.3%, while the S&P 500 gained 0.6%. The Dow bucked the uptrend, ending the week down 0.4%. All eyes are on a U.S./Israel-Iran war ceasefire, but conflicting headlines fail to instill confidence that a deal can be struck. Many people are confused as to why stocks snapped back to all-time highs despite an energy crisis that is threating economic instability to many European and Asian countries dependent on oil imports. Strong first-quarter earnings results and artificial intelligence (AI) optimism are giving markets the needed backdrop to let this bull market run.

Last week, sentiment was initially buoyed by hopes for diplomatic progress, but optimism faded quickly after U.S. Vice President J.D. Vance canceled his planned trip to Islamabad for peace talks. In the wake of stalled negotiations, President Trump announced an indefinite extension of the temporary ceasefire with Iran, which helped stabilize risk appetite. The extension was described as a bridge to allow Iran’s fractured government time to produce a unified peace proposal, though the naval blockade in the Strait of Hormuz remains firmly in place. While Washington appears to be searching for an offramp to the conflict, oil prices remain the critical macro variable and the primary risk to the durability of the current rally.

West Texas Intermediate crude oil prices have risen less than many experts have expected despite severely reduced traffic through the Strait of Hormuz. It is estimated that the strait closure has removed more than 10% of the global crude oil supply in April, a shortfall that has been offset by dramatic drawdowns on inventory from commercial and strategic reserves. Iran has offered a new proposal to the United States for reopening the strait and ending the war while suggesting that nuclear talks be deferred.

Five of the 11 S&P 500 sectors finished the week in positive territory, with technology and energy both up more than 3%. Investor optimism around AI has been a large contributing factor to the snapback rally, with the release of Anthropic’s Mythos model acting as a key catalyst. Technology stocks continue to be a notable tailwind, with the sector up more than 18% over the past five weeks. Each new model seems to be evidence of the rapid innovation across the AI industry.

To put the optimism surrounding the technology narrative into perspective, there are 29 stocks in the S&P 500 up 50% or more year-to-date, with the vast majority of these stocks in one way or another connected to the AI trade. Given it has only been four months since the start of the year, these moves seem a bit extreme and amplify the frothiness of certain industries. Other areas of the market have been left for dead, such as software amid AI disruption fears. For example. ServiceNow, a leading enterprise software company, lost roughly one-fourth of its value on Thursday despite posting 22% growth in revenue year over year. Simply put, there are clear dislocations beneath the surface despite the major indices being at all-time highs.

One of the biggest takeaways from last week was that earnings season is off to a historically strong start. This is the driving force behind the V-shaped rebound in equities. According to FactSet, 28% of S&P 500 companies have issued first-quarter profit results with earnings growth on pace for 15.1%. This would mark the sixth straight quarter of double‑digit earnings growth for the index, indicating margins remain strong and profits are accelerating off last year’s record highs. Furthermore, the overall economy appears healthy, with corporations issuing record buyback authorizations and merger and acquisitions activity trending well above last year’s pace.

Don’t give into the old adage “Sell in May and go away,” as earnings growth is expected to continue to trend at this double-digit pace for the rest of the year and into 2027. One way the S&P 500 can continue to grind higher is if the trillion-dollar market capitalization companies make it back to all-time high levels. As a group, the famed Magnificent 7 (Amazon, Meta Platforms, Nvidia, Microsoft, Apple, Tesla and Alphabet) remain 3.6% off of record highs despite the S&P 500 being up 5% year to date. This cohort makes up one-third of the S&P 500 Index and will likely need to be a key contributor for this bull market to continue marching higher. 

Looking ahead to this week, investors will have a jam-packed week of earnings releases, economic releases and central bank news. Investors are entering peak earnings season with the world’s largest companies set to issue profit results for the first quarter. Microsoft, Alphabet, Amazon, Apple and Meta will be closely watched for updates on AI spending as well as how the technology so far has been able to generate a return on invested capital.  Other notable companies reporting earnings this week include Verizon, Domino’s, UPS, Coca-Cola, Spotify, Visa, Robinhood, Amphenol, Ford, Caterpillar, ConocoPhillips, Eli Lilly, Amgen and Merck.

Meanwhile, on Wednesday, attention will turn to monetary policy as the April Federal Open Market Committee meeting is expected to leave rates unchanged. Lastly, the economic calendar will be headlined by inflation and consumer updates. On Tuesday, a report on consumer confidence is expected to slightly decline from the previous month, while on Thursday, investors will be picking apart the Personal Consumption Expenditures Price Index report for impacts to inflation from the Strait of Hormuz closure. On Friday, the week will be capped off with updates on the manufacturing industry, which is anticipated to remain in expansionary territory.

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