🔎 At a Glance

• S&P Earnings Record May Be A Warning
• Market Brief & Technical Review
• From Lance's Desk: A Robot Economy: Who Gets Rich, Who Gets Left Behind - RIA
• Market stats, screens, and risk indicators

🏛️ Market Brief - Mag Earnings Accelerate Rally

The S&P 500 closed at a fresh all-time high Friday, capping a week in which the market did something remarkable: it largely stopped caring about Iran.

That wasn't recklessness. It was earnings. Five of the Magnificent Seven reported this week, and the results were, on balance, strong enough to shift the market's center of gravity from geopolitical fear to fundamental momentum. As we wrote in "Hormuz, Why The Markets Are Shrugging Off The Oil Shock," the market ultimately reprices around what matters most: earnings. We're seeing exactly that play out now.

Microsoft kicked off Wednesday's earnings barrage with EPS of $4.27, beating estimates by $0.21. The headline number was solid, but the real story was Azure. Alphabet was the star of the night. Google Cloud revenue surged 63% year-over-year against a 47% estimate, and the company's cloud backlog nearly doubled to $460 billion. Amazon delivered AWS growth of 28%, 200 basis points above consensus, though free cash flow collapsed from roughly $26 billion a year ago to just $1.2 billion as data center spending consumed capital at a historic pace. Meta beat on revenue but disappointed by raising its 2026 capex guidance to $125–$145 billion, up $10 billion at both ends, and by reporting a 20 million-user decline, partly attributed to internet disruptions in Iran. The stock fell on the news.

Then came Apple on Thursday. It was the company's best March quarter ever: EPS of $2.01 versus the $1.95 estimate, revenue of $111.18 billion against $109.66 billion expected, iPhone revenue up 22%, and Services hitting another all-time record. The stock rose, and Tim Cook confirmed he would step down as CEO on September 1, with hardware chief John Ternus succeeding him. That is a transition that, based on the market's reaction, investors appear to have accepted with confidence.

The broader earnings backdrop is even more constructive than the Mag 7 headlines. With 140-plus S&P 500 members now having reported, 84% have beaten EPS estimates, and 81% have beaten revenue estimates, both above the 1-, 5-, and 10-year averages. The blended Q1 earnings growth rate now stands at 15.1%, tracking toward the sixth consecutive quarter of double-digit growth. Goldman Sachs notes that S&P 500 EPS estimates for 2026 have risen 4% since late January despite the conflict, a revision cycle running in exactly the opposite direction from what pessimists predicted when Brent hit $113.

Which brings us back to the Iran question. The Strait of Hormuz remains technically closed. Brent crude still trades near $95–$100 a barrel. The ceasefire is fragile and unverified. And yet the S&P 500 hit all-time highs. Why? As BofA's research puts it: "Earnings estimates have continued to climb despite the conflict." The market is behaving precisely the way history says it should, discounting a geopolitical event that has not meaningfully impaired corporate earnings power. The AI capex cycle is accelerating, not slowing; combined hyperscaler spending now tracks toward $725 billion in 2026, a figure that was unthinkable twelve months ago. That capital expenditure is earnings for GE Vernova, Nvidia, Vertiv, TSMC, and the entire AI infrastructure chain, and those earnings are showing up in the actual results.

The risk is not that the market is wrong to look past Iran. The risk is that it's right until it suddenly isn't. Brent at $100 compresses margins in airlines, consumer staples, and industrials over time. A genuine diplomatic breakdown that sends oil back toward $110–$115 would test the market's new complacency. For now, though, the bull case has earned the benefit of the doubt. Corrections can come in the form of price declines or time consolidations. Currently, the market has broken out to new highs on improving fundamentals, which is not a sign of market distribution. Respect the trend, but don't abandon the risk management discipline that got you here.

📈Technical Backdrop - Pullback Likely

The S&P 500 closed Thursday at a new all-time high of 7,220 on Friday following Apple’s blowout earnings (+3%). From the March low of ~6,300, the index has rallied roughly 15% in five weeks, which blew through BofA’s 7,168–7,206 target we flagged as resistance just two weeks ago. Both the Nasdaq and S&P 500 posted consecutive record closes; breadth was solid in the equal-weight index; the Russell 2000 outperformed; and Q1 earnings are beating across the board.

The technical picture is unanimously bullish but increasingly stretched. According to Investing.com, 12 of 12 moving average signals are at a “Strong Buy.” The 14-day RSI sits at 71.18, touching the 70 overbought threshold, and momentum is extended and rising, but closing in on a "sell signal.". The 50-DMA has surged to ~6,821, while the 200-DMA stands at ~6,728, now 5.2% below the index. VIX is also at its lowest since January. The nuance, however, is that overbought does not mean overvalued. RSI can remain above 70 for weeks during a strong trend, and 12 of 12 buy signals means momentum is confirmed, not exhausted. But the higher it climbs, the sharper the eventual mean-reversion pullback.

The most striking feature is that the S&P 500 is hitting records while oil sits above $105, gasoline has surged 42–44% to $4.30 per gallon, and consumer sentiment hit its lowest on record. The Iran conflict remains unresolved, with Trump saying Friday that “no one knows the status of talks aside from himself.” PCE came in line, and Q1 GDP was resilient, but AI investment is carrying the load while private consumption slows. The market is pricing in a resolution: strong earnings growth, expanding multiples, and a ceasefire narrative gaining ground. But the consumer is flashing red, and the war premium hasn’t unwound. The longer oil stays above $100, the more the economic damage compounds beneath the surface. As we noted on Friday:

"The market is not pricing oil at $90 in 2027; it is pricing it at roughly $70. That is either a generational good hedging opportunity for any business that buys energy, or a generational mistake that gets corrected violently. Below is the updated three-scenario framework. The structure from March holds; the probability weights and price targets have shifted to reflect the new reality."

Time is the most important factor in the market. We are in the rare position of holding a technically perfect tape, new highs, broad breadth, all MAs flashing buy, VIX at 17, while the fundamental backdrop includes a war, $105 oil, record-low consumer sentiment, and a Fed on hold. The technicals say stay long. The fundamentals say this market is priced for perfection with zero margin for error. Both can be true. Trail stops, take partial profits, and use any pullback to the 50-DMA (~7,158) or the 7,000 level to add. The March lows at 6,300 feel like ancient history; they’re not. That was five weeks ago. Stay humble. Trade accordingly.

🔑 Key Catalysts Next Week

After last week's FOMC-GDP-Magnificent 7 earthquake, the aftershocks arrive. April Nonfarm Payrolls this coming Friday anchors the week, with ISM Services on Tuesday testing the 70% of the economy that hasn't contracted. There is also another wave of important earnings reports, led by Palantir, AMD, Disney, Arm, and CoreWeave. Those reports will either extend the post-earnings rally or expose it as a dead cat bounce. This is the week where last week's narratives get confirmed or rejected.

This weekend, Berkshire Hathaway's Saturday Q1 report and annual meeting will be watched. Buffett's macro commentary, particularly on the $373 billion cash pile, equity market valuations, and tariff/geopolitical risk, will set Monday's tone. Palantir, after the close on Monday, is the first test: the AI government-contract bellwether, with EPS expected to roughly double year-over-year and DOGE-related contract exposure under the microscope.

Tuesday is the economic pivot. ISM Services for April is the week's first high-impact data point. As noted, the services sector represents 70% of GDP and has never contracted. After ISM Manufacturing flirted with the 50 threshold for months, a services downturn would signal that the slowdown is broadening beyond factories into the consumer economy. The Prices Paid subindex is the inflation read. AMD and Arista, after the close on Tuesday, are the AI infrastructure second derivatives. AMD's MI400 chip roadmap versus Nvidia's dominance, and Arista's networking revenue will act as a validation signal for hyperscaler capex.

On Wednesday, Disney, Uber, and CVS provide the consumer sector trifecta: discretionary spending (parks, rides) versus defensive spending (pharmacy, healthcare). Arm Holdings and AppLovin, after the close, are two of the highest-momentum AI names in the market. ARM's chip licensing royalties from AI architecture and APP's ad-tech AI platform are pure plays on the AI monetization thesis.

Thursday's Q1 Productivity preliminary estimate is quietly critical. If output per hour is rising while unit labor costs fall, the Fed has its deflationary signal. If the reverse, weak productivity with rising labor costs, the stagflation case hardens and rate cuts stay off the table. CoreWeave will be the first pure-play AI infrastructure company to report after the close. GPU fleet utilization data will be scrutinized as a real-time indicator of the capex cycle.

Friday's April Nonfarm Payrolls is the week's anchor and the first clean post-FOMC labor read. March rebounded after the -92,000 shock in February. The question is whether April holds the recovery or reveals it as a one-month aberration. The unemployment rate, wage growth, and, critically, revisions to prior months will determine whether the Fed's "patient" stance is justified or whether the labor market is deteriorating faster than the committee acknowledged. UMich preliminary May sentiment rounds out the morning, with the inflation expectations signal the Fed obsesses over.

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💰 The Warning From S&P Earnings Blowout

The numbers look fantastic. With more than 60% of the S&P 500 through Q1 results, blended S&P earnings growth is running at 15.1% year-over-year, on pace for the sixth straight quarter of double-digit gains. Net profit margins just hit 13.4%, the highest reading since FactSet started tracking the metric in 2009. Eighty-four percent of reporting companies have beaten EPS estimates, well above the five-year average of 78%. By the time the season closes, growth could push higher still.

Apple's Thursday print captured the dynamic perfectly: 17% revenue growth, record 49.3% gross margins, and June-quarter guidance of 14–17% against Street expectations near 9.5%. The largest stock in the index just handed analysts every reason to ratchet 2026 numbers higher, which is precisely the pattern of extrapolation this piece is about.

The problem I have is that this is exactly the kind of headline that makes me cautious.

Strong S&P earnings, in isolation, are not a buy signal. They're a description of what has already occurred, and markets discount what's coming next. History has a clear lesson about what tends to follow blowout earnings late in an economic cycle.

Going back to the 1920s, the periods of the fastest year-over-year earnings growth that preceded big stock gains were almost always recoveries from sharp recessions, when profits collapsed and then snapped back from a low base. Outside those specific setups, an inverse relationship emerges between trailing earnings growth and the next 12 months of equity returns.

The most rapid earnings growth outside recoveries clustered around July 1929. December 1973. March 2000. Late 2007. Every one of those moments felt like confirmation that the boom was real. Each one was followed by a meaningful drawdown. Now, this is not a forecast, but it is a pattern. With margins at 15-year highs and the index trading at a forward P/E above 21x, against a 10-year average of 19x, history may be starting to rhyme.

Estimates Have Run Too Hot, Too Fast

Here's where the rearview mirror becomes a forward problem. Analysts haven't just left their forecasts alone after a strong start. They've ratcheted them higher. Bottom-up consensus now calls for 2026 S&P Earnings growth of roughly 17%, with 2027 pinned in the mid-teens. For Q4 2026 specifically, the consensus is calling for 19.3% growth.

History says those forecasts almost never survive contact with reality. Going into 2000, the consensus forecast 15% S&P earnings growth, but the actual results came in below 4%. Going into 2008, the consensus was 16%. Earnings ultimately collapsed by more than 75% during the financial crisis. The crystal ball gets foggiest right when the consensus is most certain.

The bigger context becomes clear when you compare the current consensus path to the long-run norm. S&P 500 earnings have grown roughly 6.5% a year since 1950, almost exactly in line with nominal GDP, which is the only growth anchor that holds up in the long run. The 10-year trailing average sits around 8.4%. Today's 18.6% estimate for 2026 is more than double that long-run norm, and consensus expects the 2027 number to stay near 16%. The chart below frames the magnitude of what analysts are now asking the index to deliver.

"Analysts extrapolate good times forward, then revise down when reality intrudes. With margins already at the highest level in the dataset, the bar to deliver upside is enormous."

Oil, Inflation, And A Fed That Can't Cut

The bigger problem with the current S&P earnings outlook is what compresses those margins from here. The Strait of Hormuz disruption that began in late February remains effectively unresolved despite the April ceasefire, with tanker traffic still well below pre-war levels. Goldman Sachs just lifted its core PCE inflation forecast for year-end 2026 to 2.6% and headline PCE to 3.4%, adding roughly 35 basis points to core and 125 basis points to headline just from energy and Gulf-export passthrough. The Dallas Fed's framework goes further: a three-quarter closure of the Strait would add 110 basis points to Q4-over-Q4 headline inflation in 2026 and 30 basis points to core, with one-year inflation expectations rising 50 basis points into the third quarter.

That's the part the equity market hasn't priced. Fed funds futures already show zero cuts for the rest of 2026, with the target rate stuck at 3.50–3.75% and the first 25-basis-point cut not fully priced until December 2027. If oil stays elevated and inflation re-accelerates from here, the conversation pivots from "when do cuts resume" to "could the Fed actually have to hike again."

That brings us to the part of this story that almost nobody is talking about: the chairmanship transition itself.

Powell's term ends in May. That is not a future risk; that is happening this month. The market has been so focused on the cut-versus-hold debate that it has paid almost no attention to how Kevin Warsh will respond when the next inflation print lands. Unfortunately, Warsh inherits the most awkward set of conditions any Fed chair has faced in a generation: headline inflation potentially re-accelerating into the third quarter, equity markets at all-time highs with margins already at record levels, and a fiscal backdrop that gives the central bank zero room to accommodate a slowdown. There is no version of the next chair's first six months that goes quietly.

The deeper issue is the reaction function. Powell's framework is known. Traders have spent four years calibrating their models to how he weighs employment versus inflation, when he leans on financial conditions, and how he uses the dot plot. Warsh starts that calibration from zero. The first FOMC meeting under new leadership will be the highest-stakes communication event of the year, and the market historically struggles with reaction-function uncertainty.

The transition pattern itself is worth noting. Major leadership transitions at peak valuations have a checkered historical record. Welch to Immelt at GE. Gates to Ballmer at Microsoft. Greenspan to Bernanke in February 2006, just as the housing market was peaking. Apple's announcement Thursday of a Cook-to-Ternus CEO transition slots into the same pattern. Two of the most consequential leadership handovers in markets, at the largest stock in the index and the central bank that sets the global cost of capital, are happening within weeks of each other, with the index trading above 21x forward earnings on consensus estimates that history says are too high. That is not a forecast. It is a description of where we sit.

An index priced for 18% earnings growth, against a Fed reaction function nobody has calibrated yet, is a setup for disappointment from both directions. If Warsh signals continued restraint, equity multiples have to absorb a higher-for-longer message that is not in the price. If he signals premature accommodation, the inflation trade reignites, and the long end of the curve does the tightening for them. There is no clean path through the next six months.

What Could Break The S&P Earnings Story

Three things would do real damage to the consensus 2026 number.

• First, sustained oil prices above $90 starts pulling consumer discretionary spending into gasoline. That hits every margin assumption built into staples, retail, restaurants, and travel. The Energy sector benefits, which is why analysts now project 35%-plus growth in that bucket through Q1 2027, but Energy is roughly 4% of the index. Discretionary, Staples, and Industrials together are far larger.
• Second, if inflation re-accelerates, the Fed's hands stay tied through the back half of the year. Real rates remain restrictive longer than the curve assumes, and refinancing waves in commercial real estate and high-yield credit get harder, not easier. Earnings for financials and rate-sensitive segments come under pressure.
• Third, margins themselves don't have much room to expand. At 13.4%, the net profit margin is already the highest since FactSet started tracking in 2009. Analysts are calling for 14.6% in Q3 and Q4. Companies don't need a recession to miss those numbers. They just need wage growth to keep running ahead of pricing power, or input costs to rise faster than they can pass through. Both are now plausible.

Even with all of these factors, the markets remain near all-time highs, at least for now, as the bulls remain solidly in control. However, as is the nature of the market, reversals can come quickly, and control of the market can switch just as fast. Therefore, we need to be aware of the risks, think tactically, and take proactive steps in our portfolios as we head into summer.

Tactical Positioning Into A Mid-Term Election Summer

Mid-term election years carry a well-documented seasonal pattern. From May through October, the S&P 500 historically delivers its weakest returns of the four-year cycle, with deeper average drawdowns and more frequent corrections than non-election years.

Combine that pattern with stretched valuations, optimistic S&P earnings revisions, and an unresolved oil shock, and the asymmetry tilts hard toward defense. With that in mind, here are seven concrete actions to take heading into the seasonally weak window.

The headlines will keep cheering S&P earnings beats through May. However, after that, the focus returns to the economy, inflation, and Fed policy. By July, the question won't be whether earnings beat estimates. It'll be whether your portfolio survived the gap between consensus optimism and what the Fed actually has to do.

🖊️ From Lance’s Desk

This week's #MacroView blog examines the potential impact of robots in the economy, the policy measures to consider, and how to invest in it today.

Also Posted This Week:

• BDCs: Not All Yield Is Created Equal - RIA - by Michael Lebowitz
• Hormuz: Why Markets Are Shrugging Off The Oil Shock - RIA - by Lance Roberts

📹 Watch & Listen

In this week's video, we discuss the recent market consolidation and why a breakout is possible.

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📊 Market Statistics & Analysis

Weekly technical overview across key sectors, risk indicators, and market internals

💸 Market & Sector X-Ray: Market Cracks Support

Last week, we noted that: "With the market now rebalanced, we should see markets return to a more normal trading environment. Markets are getting overbought, so rebalance risk as needed." That remains the case this week, as the distribution of the market continues, trimming overbought sectors and adding to oversold areas.

📐 Technical Composite: 82.35 - Market Surge Approaching Overbought

As noted previously, the reflexive rally came hard, with the market posting its best performance since March 2022. We are approaching overbought levels, but not there yet. Use this rally to rebalance risk and exposures as needed

🤑 Fear/Greed Index: 76.11 – Pushing Extreme Greed

As we noted last week, the reflexive rally came with a vengeance, and investor sentiment and positioning went from"fear" to borderline "extreme greed" in a very short time frame. There is now decent momentum behind the market, but if you didn't like the recent selloff, this is a good time to rebalance risk and portfolio allocations.

🔁 Relative Sector Performance

It didn't take long, but the previous most "out of favor" sector, Technology, has reverted to the most overbought, while Communications and Healthcare are now the most out of favor. Given the fundamentals of these two sectors, I would expect a short-term reversion from Technology to Financials, Communications, and Healthcare if the market takes corrective action.

📊 MFBR Index (Money Flow/Breadth Ratio Indicator): 45% = Neutral/Bullish

NEW! MFBR Index: The Money Flow Breadth Ratio (MFBR) model is a rules-based equity allocation framework that uses weekly S&P 500 money flow data to generate buy, sell, and neutral signals. It is designed to systematically adjust portfolio equity exposure in response to the direction and persistence of institutional capital flows, aiming to reduce drawdowns while capturing the majority of market upside.

"As of May 1, 2026, with the S&P 500 at 7,230.12, the Money Flow Breadth Ratio (MFBR) stands at 50% and rising. This places the indicator in the 50-60% range, triggering an OVERRIDE - Flow Surge signal. The prior week's reading was 45%, a 10% decline from the preceding 4-weeks. The model currently recommends increasing equity exposure aggressively, targeting an equity weight of 100%. This reflects a FLOW-OVERLAY OVERRIDE: the trailing 4-week net dollar flow has swung sharply positive (>$300B) after a deeply negative prior 4 weeks, a historically strong contrarian buy signal.

Flow-overlay override is ACTIVE and locks full equity exposure for up to 4 weeks. The model's 25-year backtest shows this signal captures major post-correction rallies that breadth-only readings miss. This override is rare and time-limited (4-week lock). Monitor for signs of follow-through confirmation."

📊 Sector Model & Risk Ranges

As we noted last week, "The good news is that the market has recovered and the bulls are back in control. The bad news is that there are numerous extreme deviations from long-term weekly means. Basic Materials, Energy, Technology, Transportation, Small Caps, and Emerging Markets are all 10% or more above their long-term weekly means, which generally precede mean-reversions. Take profits and rebalance accordingly." That remains the case this week, as well.

Have a great week.

Lance Roberts, CIO, RIA Advisors

The post S&P Earnings Record May Be A Warning appeared first on RIA.

Robots are coming to the economy. It is inevitable, really, and there is nothing that will stop it. At some point in the not-so-distant future, robots will infiltrate every aspect of our lives, from office work and manufacturing to service work and trade skills, and even your home. Here are some numbers for you.

The real question I want to explore in today's post is what happens to the people who don't own the robots? Let's dig in.

I spent the past week reading through a detailed account of what’s happening inside Figure’s robotics facility in San Jose, and I want to be direct: the humanoid robots economy is no longer a thought experiment. Figure’s latest robot ran for 67 consecutive hours of fully autonomous work, kitchen tasks, package handling, and logistics, without a single error. That’s not a demo reel, that’s a product. When you factor in a projected lease cost of roughly $10 a day, it’s a product priced to replace the single largest input cost on every corporate income statement in America: human labor.

The optimists call what’s coming the “age of abundance.” Cheaper goods, freed-up time, robots building robots until supply constraints essentially disappear. That would be incredible, and you should not dismiss that vision. Furthermore, I think it’s directionally correct over a long enough horizon. But after 35 years of watching economic cycles play out, I’ve learned that the gap between a macro promise and the lived experience of actual households is where the real story lives.

In an upcoming article, we will dig deeper into the problems plaguing the K-shaped economy. However, that bifurcated structure, in which higher-income households ascend while lower-income ones stagnate, was already a structural feature of American life before a single humanoid robot touched a factory floor. Back to our question, does the arrival of humanoid robots at scale fix that problem? Or, does it make it dramatically worse? The answer, I believe, is both, in that order, and separated by a decade of potential pain.

The Technology Of Robots Is Not Waiting For A Policy Response

It’s worth taking the technology seriously before discussing the economics, because the economics are downstream of the hardware reality. Figure has replaced over 100,000 lines of handwritten control code with a single neural network — what they call Helix 2 — that controls the robot’s entire body in real time. The key shift is that neural networks learn from data rather than explicit instructions. Once a robot masters a task, that knowledge propagates instantly across the entire fleet. Humans don’t work that way. Robots do.

At $300 per month to lease, against a U.S. minimum wage that runs $15 to $20 per hour, a humanoid robot is already 50 times cheaper than the human it displaces, and it works around the clock without benefits, turnover, or OSHA violations. The corporate incentive to adopt is not subtle. JPMorgan’s own disclosures describe AI-driven efficiency gains of 40% to 50% in certain operations. Add a physical labor layer to that, and you have the most powerful deflationary force for corporate margins in modern history.

While shareholders of corporations with large labor forces will love the improvement in profit margins, workers will not. That asymmetry is not a flaw in the system; it’s a feature of who owns the system. And that ownership structure is the core issue this article is really about.

The K-Shaped Economy Was Already Broken

Here’s what makes the discussion of humanoid robots' economy so complicated: we’re not starting from a position of broad-based prosperity. The K-shaped economy is already a structural, not cyclical, feature of modern America. The Federal Reserve’s own data shows the top 1% of households hold nearly 32% of total net worth, while the bottom 50% collectively hold 2.5%. The portion of GDP flowing to workers as compensation just hit its lowest level in over 75 years of Bureau of Labor Statistics tracking. The middle class shrank from 61% of the population in 1971 to barely 51% in 2023.

Moody’s Analytics chief economist Mark Zandi described this not as a temporary anomaly but as “a structural, fundamental issue.” U.S. Bank’s economics team concluded in their 2026 report that income concentration now exceeds its pre-pandemic peak and sits at levels not seen in 60 years. These figures predate the meaningful deployment of humanoid robots. They reflect decades of technology-driven productivity gains that have flowed disproportionately to capital owners rather than to labor.

"The gains from technology have reliably accrued to capital. There is no structural reason to expect the arrival of humanoid robots to reverse that pattern — and strong structural reasons to expect it accelerates it." - US Bank

Fortune’s analysis earlier this year captured the consensus view among economists. That view is that while AI and robots may eventually close the inequality gap, productivity gains need to first reach low-skilled workers. That must come through real wage increases at the bottom of the distribution, before that convergence happens. That process won’t complete until well into the 2030s at the earliest. In the meantime, the wealth effect continues to push the two tracks of the K further apart.

Stanford’s Erik Brynjolfsson, director of the Stanford Digital Economy Lab, drew a blunt historical parallel: the Midwest auto communities hollowed out by trade and automation in the 1990s. But the coming displacement is potentially 10 to 100 times more disruptive — not because it’s faster, but because it spans both blue-collar and white-collar work simultaneously. Software engineers, call center workers, and administrative roles face AI-driven displacement. Factory workers, warehouse staff, and service workers are facing displacement by humanoid robots. There’s no obvious “up-the-ladder” escape hatch when both rungs are being removed at once.

We already discussed the structural challenge in our January 2026 piece on AI Productivity, Employment, and UBI. The IMF estimates that AI could significantly affect nearly 40% of jobs worldwide. But the distribution of risk is deeply unequal. Entry-level roles, historically the on-ramp for younger workers without established skills, are exactly the jobs being automated first.

"The pace of technological change means millions of Americans face an uncertain labor market. Young workers entering the workforce find fewer traditional hiring pathways and rising expectations around digital and AI‑related skills. Older workers frequently lack the time or resources to retrain in rapidly shifting skill environments. Across age groups, employers deploying AI experience reduced labor costs and increased productivity, which simultaneously puts pressure on wages and job security."

The problem already exists, and robots will likely only make things worse. For example, layoffs in 2025 ran more than 50% above the prior year, according to Challenger, Gray & Christmas. That displacement risk will grow further as robots enter the mainstream.

As we concluded in that previous article:

"The reality is stark. The economy may grow, but how the gains are distributed will determine whether everyday Americans thrive or struggle. Without structural policy interventions, technological displacement risks widening income inequality and weakening labor market attachment. The promise of more leisure, education, and family time from productivity gains remains theoretical. If workers lack stable incomes, employment opportunities, or bridging support, the rest won’t matter."

But, this is where the “cries for UBI” become most vocal.

The UBI Trap

When people confront this picture, the political reflex is predictable: send checks. Universal Basic Income has become the default policy proposal for managing automation-driven displacement, and it’s worth taking seriously, not because it works, but because understanding why it doesn’t tells you a great deal about what actually might.

We covered the evidence in detail in our earlier piece on UBI experiments. The real-world results were consistent: cash transfers increased short-term consumption and reduced reported stress. They did not raise employment. They did not meaningfully increase retraining, skill development, or entrepreneurship. The largest behavioral response was an uptick in what researchers categorized as “social and solo leisure activities.” Legendary investor Howard Marks framed the core problem plainly: financial support alone cannot replace the psychological and social benefits of employment. Work provides identity, structure, and purpose, not just income. A check replaces the wage. It replaces nothing else.

The structural flaw is deeper than behavioral. An economy cannot function on transfers alone. Production must precede consumption. When the government sends checks to households without a corresponding increase in productive output, the result is inflation, exactly what 2020–2022 demonstrated. Producers observe increased purchasing power and raise prices to capture it. The real value of the transfer evaporates. A national UBI program large enough to offset meaningful displacement would cost trillions annually, requiring higher taxes or debt expansion, each of which suppresses the private investment needed to create new roles.

While that all seems bad, there is a more optimistic possibility, and why I want to push back on the dystopian framing. First, I don’t think the outcome is predetermined. The Industrial Revolution created enormous displacement: artisans lost work to mechanized production, and whole trades disappeared. But it also produced a century of rising living standards for people who successfully transitioned into new economic roles. The difference between that transition going well and going badly was not a UBI check. It was access to new skills, new institutions, and new markets.

The economy of humanoid robots creates real demand for roles that robots genuinely cannot fill. Trades requiring tactile judgment in unpredictable environments, such as master electricians, structural engineers, and experienced surgeons, aren’t going anywhere quickly. Secondly, AI and robotics are capital-intensive industries themselves, generating sustained demand for maintenance technicians, fleet managers, training data specialists, and deployment engineers. These aren’t science-fiction roles, but the downstream jobs for the infrastructure being built right now.

Lastly, there’s one lever that doesn’t get discussed enough: ownership. The K-shaped economy is, at its core, a problem of capital ownership. The households that benefit from automation are the ones that own the companies deploying it. Expanding the share of Americans with meaningful exposure to productive capital, whether through 401(k) reforms, Employee Stock Ownership Plans, or accessible investment platforms, does more for long-term inequality than any transfer payment. If a displaced warehouse worker owns shares in the company whose humanoid robots replaced her, the economics look very different than if she doesn’t.

What This Means for Investors Right Now

From a portfolio standpoint, the humanoid robots economy creates some of the most asymmetric opportunities I’ve seen in my career. However, the risk distribution is equally asymmetric, and most retail investors are positioned to capture the downside more than the upside.

The companies building the enabling infrastructure, robotics manufacturers, neural network chip designers, industrial automation software, and energy infrastructure to power the compute are the obvious beneficiaries. But valuations in that space already reflect extraordinary expectations. Morgan Stanley’s Global Investment Committee assigns roughly a 50/50 probability to AI-related capital expenditures meeting investor expectations, noting that implementation timelines frequently slip and productivity gains tend to concentrate in a handful of large firms. That’s not a reason to avoid the sector. It is a reason to size positions carefully and not chase narratives at elevated multiples.

The overlooked angle is the deflationary pressure on companies that rely heavily on service labor. Hospitality, food service, residential services, and logistics firms currently trade at labor cost structures that will look dramatically different in five to seven years. For some, that’s a margin expansion story. For others, it’s a demand destruction story. A significant portion of their customer base works in exactly the jobs being displaced. The companies that survive the transition are the ones that both reduce labor costs and retain the purchasing power of their customer base. That’s a genuinely difficult needle to thread.

The investors who benefit most from the humanoid robots economy will be those who own the productive assets. Investing in equities, real estate, and capital-allocating businesses will far outpace depending solely on earned income. That pattern is not new. It’s the same dynamic that has driven the K-shaped divergence for the past 50 years. The robotics revolution amplifies it; it doesn’t invent it. Which means the single most important investment decision most Americans can make today has nothing to do with picking the right robotics stock. It’s making sure they own enough capital to participate in the upside that’s coming, whatever form it ultimately takes.

The age of abundance is coming. I genuinely believe that. But abundance distributed through ownership looks completely different from abundance distributed through government transfers. The first compounds. The second erodes. History has run this experiment repeatedly, and the result is not ambiguous. The question isn’t whether humanoid robots will transform the economy. They already are. The question is whether you’re positioned on the right side of the ledger when they do.

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Wednesday’s mega-cap tech earnings produced one of the cleaner real-time experiments we've seen this cycle. Four hyperscalers reported. All four beat on revenue and earnings. All four committed to massive AI infrastructure spending. Yet the market reactions were wildly divergent: Alphabet surged 10% higher, while Amazon rose 0.8%, Microsoft fell 3.9%, and Meta fell 8.6%. The market isn't punishing AI spending. It is demanding receipts that justify the magnitude of AI spending.

Alphabet earned its premium with proof. Q1 revenue grew 22% year-over-year, and Google Cloud accelerated to 63% growth, exceeding $20 billion for the first time. More importantly, Cloud backlog nearly doubled quarter-over-quarter to over $460 billion. That is the receipt that matters. Alphabet bumped 2026 capex to a $180-$190 billion range and flagged 2027 as significantly higher, and investors didn't blink. When the revenue line is showing up that fast, the AI spending number takes care of itself.

Amazon told a similar story on the fundamentals but received a cooler reaction. AWS reaccelerated to 28% growth, its fastest pace in 15 quarters, and management noted customer commitments already cover a substantial portion of the planned spend. The catch is the size of the bill: Q1 capex came in at roughly $43 billion, and Amazon is on track for a $200 billion full-year pace.

Microsoft and Meta are where the bifurcation is most pronounced. Microsoft beat across the board with Azure printing 40% in constant currency and AI annualized revenue hitting $37 billion. Yet management guided full-year capex to roughly $190 billion and warned capacity will remain "constrained" through 2026. The market is asking the right question: when does "constrained" stop being a bullish demand signal and start being a depreciation problem? Meta got the harshest verdict of the four, and we'll dig into why below.

What To Watch Today

Earnings

Economy

Market Trading Update

Yesterday, we discussed the most crowded trades in the market currently. However, we are now receiving many questions about the lingering effects of high oil prices amid the Iran crisis.

When we framed the oil shock through three scenarios in mid-March, Brent was retracing from its $119.50 panic high, and the burden of proof had shifted to the bulls. Six weeks later, two things have happened that I did not expect — and they tell most of the story heading into May.

First, the conflict has not been resolved. President Trump rejected Tehran's reopening proposal yesterday and reaffirmed the naval blockade until a nuclear agreement is reached. Brent printed $114 intraday Thursday — its highest since June 2022 — on reports that CENTCOM is briefing the White House on a new wave of strikes. Front-month settled at $118.03 yesterday, then opened today at $111.84 before sliding to roughly $110. The Strait remains effectively closed, and the IEA continues to call this an unprecedented supply shock.

Second, equities don't care. The S&P 500 remains at or near record levels, the VIX is at 18, and gold is above $4,600. The defensive rotation we discussed in March has been completely unwound. This is despite $110 Brent, an active naval blockade, and an index trading at 22× forward earnings near record highs. That is not a normal coincidence.

What explains it? Look at the futures curve. Front-month Brent is around $108–110, but the December 2026 contract is pricing roughly $80, and the back end falls into the $60s by late 2027. That is the steepest backwardation in modern oil history. The futures market is making a clean bet: this shock is severe but short-lived. Equities are trading the futures view that by year-end, oil normalizes and the earnings drag is contained. The cash market is trading reality: barrels can't get out of the Gulf today.

Pay attention to that slope. The market is not pricing oil at $90 in 2027; it is pricing it at roughly $70. That is either a generational good hedging opportunity for any business that buys energy, or a generational mistake that gets corrected violently. Below is the updated three-scenario framework. The structure from March holds; the probability weights and price targets have shifted to reflect the new reality.

Watch the back end of the curve. If Brent in December 2026 breaks above $90, the equity bid for oil-shock complacency disappears.

Trade accordingly.

Meta's Capex Bill Comes Without A Third-Party Cloud Business

Meta's headline numbers looked great. Revenue rose 33% to $56.31 billion, the fastest growth quarter since 2021. The problem was everything underneath. Meta lifted 2026 capex guidance to $125-$145 billion, up from $115-$135 billion just a quarter ago, and tagged 2027 spending as "significantly higher" still. Multi-year infrastructure commitments rose by $107 billion in the quarter alone. Adding to the skepticism, an $8 billion tax benefit flattered headline EPS by over $3, making the operating beat look far less impressive against an accelerating spend curve.

The deeper issue is that Meta is the only one of the four hyperscalers without a third-party cloud business to point to as proof of ROI. Alphabet has Google Cloud at 63% growth. Amazon has AWS at 28%. Microsoft has Azure at 40%. Meta has Reels and Instagram ads. Those are excellent businesses, but they are not infrastructure businesses, and the capex bill Zuckerberg is committing to is an infrastructure-business-sized bill. Investors are being asked to fund a hyperscaler buildout against an advertising payoff that, however strong, doesn't have a contracted backlog like Google's $460 billion to lean on.

The lesson is that the AI spending debate has matured. The market is no longer arguing about whether the capex is too large in aggregate. It is sorting which companies have shown the receipts and which haven't. Meta hasn't yet, and yesterday it paid the price.

New Thematic Model Alert

Let’s travel back in time to revisit one of the primary market narratives before the Iran conflict began in late February: the resurgence of international stocks amid a stretch of superior price performance outside the US, driven by a weakening USD index in 2025. The narrative became: “Investors are shedding US stocks in anticipation of a further weakening in the USD, driving a comeback in international stocks.” While we’ve disputed the arguments in favor of this narrative (and a continued USD weakening in general), we’ve received enough interest from clients and subscribers alike to launch an International Thematic Model.   

Our International Thematic Model takes a value-oriented approach to investing outside the US. The model allocates roughly 80% across 16 value-oriented stocks, with the remaining 20% split equally between two broad international indices, the iShares MSCI Developed Markets ETF (EFA) and the iShares MSCI Emerging Markets ETF (EEM).  The graphs below show that the new model diversifies exposure across both countries and industries.

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Presuming Kevin Warsh's nomination as Fed Chair is approved by the Senate, as is widely expected, yesterday's FOMC meeting was Jerome Powell's last as its Chair. However, he will stay on as a voting Governor. As he explains: Things that happened in the last 3 months left me no choice but to see them through at least that long." His personal forecasts and opinions on future monetary policy were less important than they were at prior meetings. But the FOMC meeting statement, which represents the views of the voting members, was very telling.

As seen at the end of the statement, in the graphic below, there were four dissenting votes, the most since 1992. Stephen Miran voted to cut rates by 0.25%, as he has in the last few meetings. More interestingly, three voters, Beth Hammack, Neel Kashkari, and Lori Logan, agreed with no change to the Fed Funds rate but dissented on the vote because they did not support what they viewed as an easing bias in the statement. They took offense at the following sentence:

The Committee is attentive to the risks to both sides of its dual mandate.

Given that the three dissenters have recently voiced inflationary concerns, their dissents represent a new hawkish bias toward potentially raising rates. With Powell lingering at the Fed and the three hawkish dissents, Warsh will have trouble forming a consensus to cut rates. To wit, the Fed Funds futures markets now price in a 88% chance the Fed doesn't change rates by the end of January 2027 and a slight 12% chance of a rate hike. Given the widely differing opinions of FOMC voting members, Fed meetings are likely to become less predictable, which may lead to more volatility in the stock and bond markets. That said, a resolution of the Iranian conflict and lower oil prices could bring a consensus back to the Fed.

What To Watch Today

Earnings

Economy

Market Trading Update

Yesterday, we discussed the preview of last night's earnings bonanza and Powell's last Fed meeting(noted above). Tonight, we will continue the earnings parade with Apple (AAPL), Ely Lilly (LLY), and Caterpillar (CAT), among many others. However, the most dangerous place in any market is wherever the crowd has agreed to stand. When positioning gets one-sided, the unwinds are violent and unforgiving. Silver’s collapse last fall is the cleanest recent example. The setup looked unstoppable, until it didn’t.

The April Bank of America Global Fund Manager Survey, drawn from 193 managers running $563 billion, gives us the cleanest read on where consensus has piled in. “Long oil” and “long global semiconductors” now share the top spot as the most crowded trades, each cited by 24% of respondents. “Long gold,” which dominated this list for most of 2025, has slipped to 15%. “Long Magnificent 7,” once the consensus trade with 54% of managers crowded into it back in December, has collapsed to just 9%.

That last shift is the real story under the surface. The trade everyone was selling each other on six months ago is barely on the radar today. Capital didn’t disappear. It rotated into oil and semiconductors, leaving big technology names in its wake.

The hedge fund positioning data confirms the rotation. Morgan Stanley's prime brokerage data shows that hedge funds have aggressively bought Energy over the last two weeks. Net exposure to the sector is at twelve-month highs, with funds the most overweight Energy relative to its Russell 3000 weight in any month over the past year. That reading sits in the 98th percentile.

Here’s the problem with all this. Oil is not gold, and gold is a passive store of value and a sentiment hedge. Furthermore, oil sits at the heart of the inflation and growth transmission channel and a 10% move in crude doesn’t wash out. It shows up in CPI prints, gasoline retail data, and earnings guidance for half the consumer-facing economy. Crowding into oil right as it becomes the consensus geopolitical hedge is the opposite of a hedge. It’s a leveraged macro bet wearing a defensive costume.

Semiconductors carry the same risk in a different jacket, and the moves of the past month make caution explicit. The Philadelphia Semiconductor Index (SOX) has logged 18 straight green sessions, the longest winning streak in its 32-year history. SOX is up roughly 38% in the past month and 148% over twelve months, hitting a record 10,564 on April 24th. The iShares Semiconductor ETF (SOXX) gained 27.7% in April, its largest monthly return since BlackRock launched the fund in July 2001.

The flow data confirms the chase. SOXX pulled in $2.05 billion in April alone, more than double its previous monthly record. The VanEck Semiconductor ETF (SMH) absorbed another $3.4 billion. Combined, the two funds raised $5.45 billion in a single month, a record for the category. Names below the megacap line have gone vertical: Astera Labs +79%, Marvell +53%, Intel +51%, all in April alone. The AI capex story is real. The earnings are there. But when retail sentiment for SOXX screens “extremely bullish” on every monitoring tool while Michael Burry quietly loads $330 puts on the same fund, the setup for a violent mean reversion is textbook. The trade is no longer asymmetric. It’s late.

So, where is the next trade? The most likely answer is the trade everyone just left. The Magnificent 7 still owns the earnings story. FactSet’s bottom-up estimates put 2026 Mag 7 earnings growth at 22.8%, compared with 12.1% for the other 493 names in the S&P 500. Forward quarters run even wider, with Mag 7 EPS growth accelerating from 14.9% in Q4 2025 to 19.7% by Q3 2026.

That fundamental gap is the gravitational pull. When only 9% of managers cite the group as crowded, when relative valuations have compressed against the broader index, and when the earnings engine still runs more than two times the rest of the market, the rotation back becomes a question of timing rather than direction. Money chases earnings growth eventually. The unwinds now building in oil and semiconductors will provide the cash. The earnings will pull it home. The crowd is rarely wrong about direction. It’s almost always wrong about timing.

Revisiting Hedges

The end date on the graph below is early April. We look back in time to show what the market looked like when we added hedges to our core portfolios. Going into the hedging decision, the S&P 500 had traded below its 200-day moving average for almost two weeks. Further, prior to adding the hedges, it had rallied back to the 200-day moving average. As the graph highlights, amid tariff concerns in April 2025, the market behaved similarly, with the price rejecting the 200-day moving average and falling sharply. Our concern was a similar rejection of the key moving average, followed by a replay of that event. Furthermore, amid the ongoing conflict in Iran, there were geopolitical concerns and oil-related economic risks to consider. A cease-fire was agreed upon days later, and the market zoomed to record highs. We removed the hedges right after the agreement was announced, when the S&P 500 was trading decently above its 200-day moving average.

Looking back at the hedge trades can be instructive.

• The hedges were relatively small, thus not nearly enough to shield our portfolios from losses or inhibit gains. We certainly had lots of room to sell or add more hedges if needed.
• Our concern was broad-based selling, or systematic risk, not losses due to the idiosyncratic, or company-specific risk of any of our holdings. Thus, the hedges allowed us to reduce risk on the margin and keep our portfolio intact.
• The hedges were not put on in anticipation of a full-blown bear market, but were intended to shield our portfolios from geopolitical volatility.
• We are better off that the hedges didn't work. Yes, we took a slight loss on the hedges, but our portfolios fully participated in the upside over the last few weeks.

BDCs: Not All Yield Is Created Equal

Gated funds, collateral fraud, and auto-sector defaults are giving investors in private credit funds and their stock-market equivalents, business development corporations (BDCs), a headache.

We have discussed the recent woes of private credit funds (HERE, HERE, HERE), yet we haven’t addressed BDCs. The similarities and differences between private credit funds and BDCs are important.  For instance, the bad press about the widespread gating of private credit funds. While BDCs own similar assets, they trade on a stock exchange. Thus, investors who want to sell don’t have to rely on a fund manager’s whim; they can sell their shares in seconds.

The poor sentiment toward private credit funds has dragged down many high-quality BDCs, as well as weaker ones. The chaos and bad press surrounding private credit funds are not reasons to avoid BDCs. In fact, we think it’s a reason to consider it.

READ MORE...

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The relationship between Microsoft and OpenAI has been a defining partnership in the blooming AI technology. But the partnership terms are changing, and what was once a solid relationship may be fracturing. On Monday morning, Microsoft shares quickly fell 5% as the Bloomberg headline “OpenAI Breaks Free From Exclusive AI Pact With Partner Microsoft” sent concern among Microsoft investors. Microsoft shares snapped back once the revised partnership agreement was fully disseminated.

Microsoft and OpenAI have mutually agreed to end Microsoft's exclusive rights to sell OpenAI’s models. Accordingly, OpenAI can source arrangements with Microsoft’s hyperscale competitors, such as Amazon and Meta. In exchange for giving up its monopoly on OpenAI products, Microsoft will no longer pay OpenAI a revenue share from the OpenAI products it sells. However, OpenAI will continue to abide by its revenue-sharing agreement with Microsoft until 2032, two years beyond the original agreement. OpenAI API products will remain exclusive to Microsoft's Azure platform, while non-API products can use any cloud vendor. Further, OpenAI has contracted to purchase an additional $250 billion of Microsoft Azure services.

The bottom line is that Microsoft retains significant protections, but OpenAI is gaining some freedom. Analyst Jason Ader of William Blair summarized the revised partnership terms as follows:

"By securing IP rights through 2032, Microsoft protects the foundation of its Copilot strategy and Azure OpenAI monetization — still, Azure will now have to compete for more of OpenAI's workloads going forward."

What To Watch Today

Earnings

Economy

Market Trading Update

Yesterday, we discussed the seasonality of May as we enter the year's seasonally weak period. However, that won't matter until next week.

Today brings a true gauntlet for markets. Microsoft, Amazon, Alphabet, and Meta all report after the close, and the FOMC delivers its policy decision midafternoon. Roughly 40% of the S&P 500's market cap hands over its outlook in a single window, and the Fed gets to set the tone for risk appetite right before the bell. As I wrote last week, when the calendar concentrates this much catalyst into one session, the asymmetry tilts against complacent positioning.

Expectations are not modest. Consensus has Microsoft posting another quarter of mid-teens revenue growth driven by Azure and Copilot monetization. Alphabet is expected to show search resilience and cloud margin expansion. Meta needs to justify its capex trajectory with continued ad-revenue strength, and Amazon must demonstrate AWS reacceleration alongside retail-margin discipline. The bar is particularly high because prices have risen so aggressively in recent weeks. The Magnificent names are trading well above their 50-day moving averages with stretched RSI readings, and several are extended more than 10% above trend.

Here is the problem. OpenAI's recent infrastructure announcement reframed the AI capex conversation overnight. Investors who had grown comfortable with the "AI builds itself in" narrative now face the prospect that hyperscaler capital intensity is rising again, not falling. Microsoft alone is likely to guide to capex above $100 billion next year. That is good news for Nvidia and the AI supply chain. It is more complicated for the hyperscalers themselves, where free cash flow conversion gets squeezed and return on capital math is pushed further into the future. The market has priced flawless execution and steadily rising AI revenue. Anything less rates a sell-the-news response, particularly given how stretched these stocks are heading in.

A few notes about earnings this evening:

• Meta's revenue bar towers over the rest at +31%, but EPS growth is only +4% — that gap is the capex story in one chart. The Street is funding the build-out, but every dollar is going into MTIA silicon and data centers, not the bottom line.
• Alphabet is the only name on the slate with negative EPS growth (-6%), despite the strongest revenue acceleration ex-Meta. Stock-based comp and cloud investment are the swing factors. A clean cloud number near the $18.4B consensus, with RPO accelerating overrides, trumps the EPS optic.
• Microsoft is the most balanced print — EPS and revenue growth roughly matched in the high teens — but the bar to clear is Azure constant-currency above 38%. Anything below 36% reopens the capacity-constraint debate the bulls have been leaning on.
• Amazon is the wildcard. The EPS growth of just +1.3% looks soft, but that is the AWS capex flowing through depreciation. The print lives or dies on AWS actually hitting the 25%+ growth handle.

The FOMC adds another layer. A hold is fully priced. The risk lies in the press conference. If Powell pushes back on the easing path the curve has built in, equities will absorb that hit before they ever see the earnings tape. If he validates further cuts, dollar-sensitive names rip, but the hyperscaler reaction function is still tied to capex guidance and forward AI commentary, not the funds rate.

I am not adding risk into this print. Trim into strength on names trading well above trend, raise a little cash, and let the reports clear before reaching for exposure. Discipline beats conviction when four mega-caps and the Fed share a single afternoon.

OpenAI Doubts Raise Concerns For Oracle Investors

An article published on Tuesday by the Wall Street Journal reports that there are headwinds to OpenAI's once-invincible growth story. Although a private company, OpenAI missed its internal goal of reaching one billion weekly active users by year-end and fell short of its ChatGPT revenue target as it is dealing with larger-than-expected subscriber cancellation rates. This comes on top of a report from earlier this year that also showed they missed multiple monthly revenue targets. CFO Sarah Friar has reportedly raised concerns that the company may be unable to fund its future computing contracts if revenue growth fails to keep pace with its internal goals. That is concerning for its clients, especially given that they just raised over $122 billion in a funding round.

The impact of OpenAI's shortfalls is pressuring companies like Oracle. Oracle provides two core products to OpenAI. It is the primary builder and operator of Stargate data centers that train and run OpenAI's models. Second, Oracle provides cloud computing services directly to OpenAI. More simply, Oracle builds the buildings, fills them with chips, powers them, and charges OpenAI to use them. Accordingly, investors in companies like Oracle are voicing concern over concerns at OpenAI.

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Gated funds, collateral fraud, and auto-sector defaults are giving investors in private credit funds and their stock-market equivalents, business development corporations (BDCs), a headache.

We have discussed the recent woes of private credit funds (HERE, HERE, HERE), yet we haven't addressed BDCs. The similarities and differences between private credit funds and BDCs are important.  For instance, the bad press about the widespread gating of private credit funds. While BDCs own similar assets, they trade on a stock exchange. Thus, investors who want to sell don’t have to rely on a fund manager's whim; they can sell their shares in seconds.

The poor sentiment toward private credit funds has dragged down many high-quality BDCs, as well as weaker ones. The chaos and bad press surrounding private credit funds are not reasons to avoid BDCs. In fact, we think it’s a reason to consider it.

What Is a BDC?

Congress passed the Small Business Investment Incentive Act of 1980 to provide capital to small- and mid-sized private businesses that lacked access to public credit and equity markets. Per Congressional records, BDCs:

Encourage the mobilization of capital for new, small and medium-sized and independent businesses.

BDCs, like private credit funds, are professionally managed portfolios of private loans, but unlike private credit funds, they trade on a stock exchange. Some BDCs also hold equity in the companies they lend to.

The BDC structure is similar to that of Real Estate Investment Trusts (REITs) in that BDCs must distribute at least 90% of their taxable income to shareholders. This partially explains why they tend to have above-average dividend yields.  

Liquidity

As we led this article, liquidity is a key difference between a BDC and a private credit fund. The headlines about private credit fund investors being unable to redeem their investments stem from a liquidity mismatch. The funds made loans for three or more years, but promised investors they could get their money back quarterly. When redemption requests exceed the fund's liquidity, the fund must limit, or gate, redemptions.  BDC investors don't face that problem. Shares are never redeemed, just traded from one investor to another.

However, there is a cost for liquidity. BDC investors face price volatility. Because the stock price trades daily while the underlying portfolio’s value (NAV) is released only quarterly, BDCs' stock prices are highly sensitive to positive or negative sentiment and NAV forecasts.

Private credit fund investors only see their price (NAV) change quarterly; the volatility is hidden, not absent. BDC investors see volatility in real time, which is uncomfortable, but it also creates opportunities.

The graph below, courtesy of VanEck, shows that the return profiles of BDCs and Private Credit Funds are similar, albeit BDCs exhibit more volatility. Again, the volatility you don’t see in private credit can be more problematic than the volatility you see with BDCs.

Net Asset Value (NAV)

When evaluating a BDC, the most important consideration is the NAV per share. NAV/share represents the estimated fair value of all loans and equity investments in the portfolio, minus liabilities, divided by the number of shares outstanding. It's like the price-to-book ratio valuation.

When a BDC trades at a discount to its NAV, the market is effectively worried about one of two things:

•  It doesn't trust the stated NAV 
•  It believes the portfolio’s value has deteriorated from the last reported NAV.

When a BDC trades at a premium to NAV, it may be because investors think the real NAV has appreciated since it was last reported. Or investors are paying up for something they believe is worth more than the sum of its parts. This may include a manager with a proven track record of consistent NAV growth, conservative underwriting standards, cost advantages, and structural advantages that competitors lack.

Currently, the private credit selloff has pushed many BDCs to meaningful discounts. Some may be warranted if their NAVs have fallen; others may not. Determining which requires understanding the contents of the BDC portfolios and how they are managed.

Internal Or External Management

An important differentiator of BDCs is whether the portfolio manager is internal or external.

The vast majority of BDCs are externally managed. In these cases, an outside firm manages the portfolio and charges fees to the funds.  Typically, this includes an annual management fee of around 1.50% of total assets, plus an incentive bonus of roughly 15-20% of income above a hurdle rate. Those fees are paid before an investor receives a dime of dividends.

The payment structure creates a so-called principal-agent problem. Shareholders want the manager to maximize risk-adjusted returns. However, the manager is paid the most when they maximize assets under management. Those two objectives are not the same. Managers are incentivized to deploy capital even when the best opportunities aren't available. They can compromise on credit quality, reach for yield in riskier loans, and leverage the portfolio to make marginal loans look attractive.

Internally managed BDCs avoid fees and the principal-agent problem. Internal portfolio managers' interests closely align with those of shareholders because they are the same entity. The cost advantage of not paying fees compounds over time, and the incentive structure rewards making good loans rather than making more loans.

Internally managed BDCs are rare, which is one reason the best performing ones may trade at a premium to their NAV.

Portfolio Composition

When evaluating a BDC, the industry breakdown of its loan book is an important assessment. That is especially true today, when estimates suggest that BDCs and private credit funds have made over a quarter of their loans to software companies.  

Recurring-revenue Software as a Service (SaaS) models were among the favorites of direct lenders when interest rates were low. Those companies with strong income statements are now being squeezed by higher borrowing costs and AI disruption narratives that have called business models into question. When software valuations fall, the collateral underpinning those loans shrinks.

BDCs that lend to businesses in industries such as construction, healthcare, food services, and manufacturing carry materially less of the specific risk that is weighing heavily on software companies today.

Capital Structure

Beyond industry exposure, investors should understand capital structure positioning. BDCs make first lien and subordinated loans. First-lien debt is secured by assets and paid to first-lien holders before other creditors in the event of a default. Second-lien and subordinated debt are paid after all first lien obligations have been met. In a weakening credit environment, the position in the capital structure can make a huge difference in how much principal is returned.

PIK Income

Another consideration is Payment-in-Kind (PIK) income as a percentage of total income. PIK stands for payment-in-kind. This structure allows a borrower who can't pay cash interest to issue more debt to cover the shortfall. A rising PIK-to-total income ratio is an early warning sign that a BDC’s borrowers are struggling.

Leverage and Dividend Coverage

BDCs are permitted to leverage up to 2:1 debt-to-equity. Most are managed at a 1:1 to 1.5:1 ratio. Higher leverage increases both income and losses. Leverage makes the BDC look more attractive in calm markets and riskier when credit conditions tighten.

Many investors focus on the dividend yields but not the dividend coverage.  The coverage, or how much they earn relative to the dividend, is critical to assessing the probability that the BDC can make current dividend payments going forward. A coverage ratio above 100% means the BDC earns more than it distributes. Below 100% indicates the shortfall is being funded by the return of capital, meaning investors are gradually receiving their own money back.

Analyzing Two BDCs

To further your knowledge of BDCs, we thought it would be helpful to conduct a quick analysis of two BDCs and illustrate some of the factors we look at in BDC investments. In this example, we compare internally and externally managed BDCs.

As a disclaimer, our clients own both BDCs discussed below.

Blackstone Secured Lending Fund (BXSL)- Per Blackstone:

Launched in 2018, BXSL is a business development company focused on first lien senior secured opportunities that offer structural protection. As part of Blackstone Credit & Insurance, BXSL benefits from the scale, deep relationships, market insights, and operational expertise of one of the world’s leading credit platforms.

 Main Street Capital (MAIN)- Per Main ST Capital Corporation:

Main Street is a principal investment firm that primarily provides customized long-term debt and equity capital solutions to lower middle market companies and debt capital to private companies owned by or in the process of being acquired by a private equity fund. Main Street's portfolio investments are typically made to support management buyouts, recapitalizations, growth financings, refinancings and acquisitions of companies that operate in diverse industry sectors.

The following table shares a few of the factors we use to assess BDCs.

• NAV: BXSL trades at a discount while MAIN trades at a significant premium. That largely explains the difference in dividend yields between the two.
• Net Interest Income (NII): Both stocks should be able to sufficiently maintain their dividends for the time being.
• Non-Accrual: This measures the percentage of loan balances for which borrowers have stopped making interest or principal payments, typically for 90 days or more. Both BDCs have extremely low non-accrual rates.
• Net Debt/Equity: BSXL has a ratio of 1.22x, implying that the fund is funding its loans with $1.22 of debt for every $1.00 of equity. This equates to a capital structure that is 55% debt and 45% equity. Conversely, MAIN uses less leverage, with a capital structure of 47% debt and 53% equity.
• First Lien and Software Exposure: Both help us measure the credit quality of the underlying loans.

BXSL has slightly better credit quality but uses external management. MAIN has a great track record and internal management, but a lower yield due to its high premium to its NAV.

Summary

BDCs are not private credit funds. That distinction is easy to overlook when headlines lump the two together. Yet that is what makes BDCs an interesting investment option.

Negative sentiment toward private credit has pushed many BDCs to discounts that don't fully reflect the quality of the underlying portfolios. However, not every BDC that is trading at a discount to NAV is an opportunity. Some are cheap for good reasons, such as heavy software exposure, external managers with misaligned incentives, rising PIK ratios, thin dividend coverage, and high leverage.  Other BDCs have been caught in the same downdraft despite strong credit quality, conservative leverage, and disciplined underwriting.

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The Philadelphia Semiconductor Index (SOX) is on an incredible 18-day winning streak. Over this period, starting on March 31st, the SOX index has risen by 44%. This marks the longest winning streak in the index's 32-year history. Moreover, it is now up 150% year over year, exceeding its 100% year-over-year gain during the dot-com boom. The Tweet of the day shows it is now the most extended versus its 200-day moving average since 2000. So what's driving the incredible gains? The catalyst seems to be a combination of geopolitics, followed by yet another investor chase into a theme.

Throughout March, the U.S.-Iran conflict drove crude oil prices above $100 per barrel, leading to broadly weaker stocks, with an emphasis on the technology sector. At the end of the month, the market reversed course, forming a bottom. The burgeoning rally was boosted on April 7th by the two-week ceasefire. At the same large-cap growth and technology stocks started to lead the market higher. Oil prices stabilized and fell, risk assets rallied, and semiconductors, one of the most oversold sub-sectors, snapped back the hardest.

The SOX rebound has been turbocharged by investors chasing the AI theme. Fundamentals do support some strength in the rally. To wit, global semiconductor spending is projected to hit $1.3 trillion in 2026, a 64% year-over-year increase. However, the rally has driven the index and many underlying stocks to extremely overbought levels. A pullback, or at a minimum a consolidation, is likely at this point. Below, we share the gains since April 1 of the top ten SOX holdings.

What To Watch Today

Earnings

Economy

Market Trading Update

Yesterday, we reviewed the technical backdrop as we enter the last trading week of April. Notably, we are closing April with the S&P 500 carving out a sharp recovery from the conflict-driven correction lows, and traders are already asking the obvious question: "Is it time to sell in May and go away?" After watching the index push back into short-term overbought territory on the daily RSI, that question deserves a straight answer rather than the usual seasonal cliche.

The data is clearer than most realize. Since 1950, May has averaged a return of roughly 0.2% for the S&P 500, essentially flat. That's not the headline. The headline is what comes after. The May-through-October stretch has historically delivered an average gain near 1.7%, while the November-through-April period averages closer to 7%. The seasonal pattern isn't superstition. It's a real performance gap that has persisted across 7 decades of market data. However, as you will note in the chart below, it is the August and September weakness that spoils the summer fun, as May, June, and July tend to post positive returns, especially July.

This year, the calendar matters more than usual. 2026 is a midterm election year, and midterm cycles carry their own seasonal fingerprint that overlays cleanly on the May weakness. Since 1950, the second and third quarters of midterm years have produced the worst stretch of the entire four-year presidential cycle. Average peak-to-trough drawdowns in this window range from 15% to 17%, with the cycle low typically forming in late September or October, followed by a sharp Q4 reversal. The year after a midterm has averaged a gain of more than 30%, which is exactly why patient traders treat midterm summer weakness as a setup, not a catastrophe.

Stack the two patterns together, a "Sell in May" period entering with the market already overbought, layered over a midterm year that historically chops sideways-to-down through autumn, and the right posture isn't panic. It's preparation. Trim positions where you have outsized gains. Raise stop levels on existing longs. Build a small cash reserve so you have ammunition when prices do come in. Watch the 50-day and 200-day moving averages carefully. They'll tell you whether any pullback is corrective or something more concerning.

The seasonal headwinds are real, the midterm overlay sharpens them, and the market is overbought as we enter the worst six months of the year. None of that means dump everything. It means tightening the screws, keeping some powder dry, and respecting the pattern that has made September and October among the best buying opportunities of every four-year cycle.

Chipmakers Are Driving The Market

The graph below shows the sharp ascent in the SOX index ETF (SOXX) over the last 18 days. Given the rise and significant contribution of semiconductor stocks to the technology sector, the sector is now very overbought. The second graphic, courtesy of SimpleVisor, shows that technology is the only sector overbought relative to the S&P 500. The other sectors have all lagged in the recent market rally. The third graphic, from the "coming soon" new version of SimpleVisor, highlights the gross outperformance compared to almost all sectors over the last week.

As we note in the opening section, semiconductors are extremely overbought, and the broader technology sector is very overbought. Such outperformance relative to more value-oriented stocks prompted a change in our Factor Rotation model last week. The model now favors value over growth stocks.

Hormuz: Why Markets Are Shrugging Off The Oil Shock

As of this writing, the Strait of Hormuz remains effectively closed since February 28. Roughly 20% of the world’s seaborne oil stopped moving through the chokepoint. The International Energy Agency described the event as “the largest supply disruption in the history of the global oil market.” Gulf producers shut in nearly 9 million barrels a day of production. U.S. gasoline at the pump jumped from $2.98 to over $4.00.

Every historical template for this kind of shock, 1973, 1979, 1990, pointed to a stagflationary body blow that breaks markets. After 30 years of watching cycles play out, I’ve learned that when the tape refuses to confirm a catastrophe narrative, it’s usually seeing something the headlines miss. That’s exactly what is happening with the Strait of Hormuz. Brent peaked near $120 and now sits around $96, well below the $132 the Dallas Fed modeled for a closure lasting three quarters. The S&P 500 is grinding higher. China, which takes roughly a third of its crude through the waterway, hasn’t buckled.

So the question isn’t why the catastrophists were wrong. It’s what they missed, and where the real risks now sit.

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On Thursday, the executives at Service Now (NOW) and IBM learned an important lesson the hard way as their stocks fell by 18% and nearly 10%, respectively. The stark message from Wall Street is that forward sales and earnings guidance now take precedence over recent financial results.

IBM beat earnings expectations across the board. However, they didn't change their forward guidance for the year. Its CFO, Jim Kavanaugh, noted, "I don't think we've ever raised guidance in a first quarter." Despite good earnings, the market wasn't happy because they didn't provide a first-quarter outlook, as is typical for the company.

The NOW situation was a little different from IBM's. They withheld earnings guidance specifically because of the situation in Iran. Per an interview on CNBC, its CFO, Gina Mastantuono, said she "took a little bit of incremental conservatism because of the ongoing conflict in the Middle East and its potential impact on deal timing." The market didn't like the company's conservative posture.

As we share below, both companies' stocks were trading poorly before earnings. Investors wanted more than good earnings reports; based on the strong negative reaction, they wanted guidance on how AI is impacting the companies. The simple lesson, especially for technology stocks, is that silence on guidance is bearish.

What To Watch Today

Earnings

Economy

Market Trading Update

The S&P 500 closed Friday at a fresh all-time high of 7,165, up 0.80% on the session and extending the index’s remarkable run off the March lows. The week, however, was anything but smooth. Thursday’s session delivered a gut-check: reports of air defense systems activating over Tehran sent WTI past $106, and the S&P dropped 0.41% as the oil-volatility transmission mechanism briefly reasserted itself. Friday’s recovery came on Intel’s blowout earnings (+21%), Trump’s three-week extension of the Israel-Lebanon ceasefire, and crude pulling back to $94. The VIX settled at 18.92, below our 20 thresholds, but Thursday’s spike was a reminder of how quickly that can change.

The technical picture remains unambiguously bullish across all time frames. Investing.com shows 12 of 12 moving average signals at “Strong Buy.” The 14-day RSI is near 70, indicating an overbought condition. The MACD, a measure of momentum, is on a "buy signal" and rising. The index is trading above the 50-DMA (~6,790) and above the 200-DMA (~6,705), both of which are rising. Breadth has held with roughly 52% of constituents above their 50-DMA, but needs to strengthen if the rally is going to continue.

The tension in this tape lies between technical strength and fundamental fragility. As noted below, the Michigan consumer sentiment printed its lowest reading on record. Furthermore, the Iran peace talks have stalled, with Thursday’s Tehran episode a stark reminder that the geopolitical risk premium hasn’t fully unwound. Oil’s $94 price represents the kind of volatility that whipsaws systematic strategies and undermines the VIX’s descent. The Fed remains on hold at 3.5–3.75% with markets pricing no cuts in 2026. At BofA’s target zone of 7,168–7,206, now just 0.4–1.0% overhead, the index is approaching a natural ceiling where profit-taking is likely.

For now, the market continues to climb a wall of worry, and the technicals say respect the trend. RSI is elevated but not grossly overbought, and while breadth is improving, all moving averages remain green. Our March 200-DMA analysis continues to play out textbook. But Thursday’s reversal on the Tehran headlines was a shot across the bow; this market remains one oil headline away from a 2–3% air pocket. The pullback we flagged last week hasn’t materialized so far, which is making the setup increasingly stretched. New money should wait for a retest of 7,000 or the 50-DMA (~6,979). Stay long but trail stops and take partial profits into BofA’s 7,168–7,206 target. Trade accordingly.

The Week Ahead

After a couple of weeks of limited economic data, investors will start to get a picture of how inflation is reacting to higher oil prices. On Thursday, the PCE prices index for March is expected to show +0.3% growth excluding food and energy. The headline number is expected to rise by 0.6%. Despite Friday being the first Friday of the month, the BLS employment data will not be released until May 8th. The Fed may provide further guidance on inflation as the FOMC meets on Wednesday. No changes to rates are expected, but we may get some more information on why they reduced QE from $40 billion to $25 billion a month.

As we share below, courtesy of SensaMarket, there will be plenty of important earnings reports due this week. Thursday could be a volatile day as Google, Microsoft, Amazon, and Meta all report after the market closes on Wednesday.

Government Debt: Not What The Doom Crowd Thinks It Is

Every few years, someone discovers that the United States government owes a very large amount of dollars and concludes that Rome is about to fall. A recent piece in RealClearMarkets by Nash, Thomas, Lang, and Rastin does exactly this. They rely on the Roman Empire’s collapse and the Weimar Republic’s hyperinflation as cautionary parallels to America’s $39 trillion in federal government debt.

The argument is tidy, emotionally satisfying, but wrong in several important ways. Crucially, government debt is not what the doom crowd thinks it is, and the historical comparisons they love most have almost nothing in common with the American fiscal situation today.

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As of this writing, the Strait of Hormuz remains effectively closed since February 28. Roughly 20% of the world's seaborne oil stopped moving through the chokepoint. The International Energy Agency described the event as "the largest supply disruption in the history of the global oil market." Gulf producers shut in nearly 9 million barrels a day of production. U.S. gasoline at the pump jumped from $2.98 to over $4.00.

Every historical template for this kind of shock, 1973, 1979, 1990, pointed to a stagflationary body blow that breaks markets. After 30 years of watching cycles play out, I've learned that when the tape refuses to confirm a catastrophe narrative, it's usually seeing something the headlines miss. That's exactly what is happening with the Strait of Hormuz. Brent peaked near $120 and now sits around $96, well below the $132 the Dallas Fed modeled for a closure lasting three quarters. The S&P 500 is grinding higher. China, which takes roughly a third of its crude through the waterway, hasn't buckled.

So the question isn't why the catastrophists were wrong. It's what they missed, and where the real risks now sit.

Why The Headline Was Worse Than The Reality

The "20% of global oil closed" framing was always misleading. In reality, the reduction in impact came primarily from four forces, and the primary source documents each.

First, Middle Eastern producers rerouted crude around the strait. Rystad Energy's Tom Liles estimates that 5 to 6 million barrels a day can flow through Saudi and UAE pipelines terminating at the Red Sea and the Gulf of Oman. That's roughly a third of the region's normal seaborne exports, redirected within weeks. By late March, Iran had also granted transit rights to tankers flagged by China, Russia, India, Iraq, and Pakistan. In other words, Iran's move to close the Strait of Hormuz served as a rationing mechanism rather than a closure.

Secondly, the strategic reserves finally worked as designed. The IEA coordinated a 400-million-barrel release, the largest in its history. The U.S. SPR alone is putting 1.4 million barrels a day on the water. Bernstein's research team captured the ceiling on that policy response in a single line:

That's correct, and that's also enough. Buying time was the entire job while pipeline workarounds scaled and demand destruction started to bite.

Third, China came into the crisis loaded. EIA data show Chinese commercial oil inventories near 1 billion barrels heading into February 2026, plus another 360 million barrels of state reserve. That's several months of imports on hand. Combined with Iran's selective transit allowance, Beijing was never going to let this break its economy.

Finally, and most importantly, the United States has dramatically changed structurally since the 1970s. Domestic crude production exceeds 13 million barrels a day, which insulates the US against foreign shocks, as we saw during the Arab Embargo. Furthermore, LNG exports averaged nearly 18 billion cubic feet per day in March, according to the EIA's April Short-Term Energy Outlook. Less than 10% of the U.S. crude supply transits the Strait of Hormuz. In a global supply shock, America is the marginal supplier, not the marginal victim.

Notably, the Dallas Fed's worst-case scenario for a closure confines the damage to a single quarter, estimating a 2.9 percentage point annualized hit to global real GDP. We're tracking closer to the base case, which assumed rerouting, reserves, and demand response would absorb most of the damage. So far, they have.

The Real Risk Sits On The Other Side

Here's where I think consensus is mispricing the setup. If the catastrophist case on oil was wrong going in, the bullish case on oil from $96 is probably wrong going out.

When the Strait of Hormuz fully reopens, three things hit at once.

1. Gulf producers restart roughly 9 million barrels a day of shut-in capacity, matching the EIA's April forecast.
2. Tankers parked in regional storage release their cargoes, and
3. U.S. shale, recapitalized at $95 crude, keeps pumping at peak rates.

This is a textbook oversupply setup.

The only genuine offset is SPR rebuilding. More than 30 IEA countries drew down reserves and will spend the back half of 2026 refilling them. Kpler's commodity analysts recently noted that "the back end of the curve is widely viewed as undervalued," with Brent for late 2026 delivery priced around $74, versus their fair-value estimate of around $85.

I agree with the direction but not the magnitude. Restocking demand is real, but it spreads over quarters while supply returns over weeks. That asymmetry is the dislocation risk. My base case is that Brent retraces toward the low $70s within 90 days of a durable ceasefire. However, there is a decent risk of an overshoot toward $60 if demand destruction from $4+ gasoline lingers. That's not a prediction of a crude collapse, but rather a prediction that the pain won't be symmetrical. The upside from here is modest. The downside scenario is sharp.

The Market Has Already Pivoted To Earnings

I really think the market already knows all of this, the supply shock has been metabolized, and earnings are now driving the tape. And in this case, the bulls have the data.

FactSet's April 17 Earnings Insight shows 88% of reporting S&P 500 companies have beaten first-quarter EPS estimates, well above the 10-year average of 76%. Aggregate earnings are coming in 10.8% above estimates, versus the historical 7.1%. Analysts now project 18% full year 2026 earnings growth. Barclays' Venu Krishna lifted his 2026 EPS estimate to $321 from $305. FactSet's 2026 net margin forecast sits at 13.9%, the highest on record. Goldman Sachs framed the dynamic in a January note, arguing that earnings growth, not multiple expansion, would do "the heavy lifting" for index returns.

Furthermore, as shown, analysts are not only hiking earnings projections for 2026, but 2027 as well with those upward revisions heavily outpacing historical norms.

That's a legitimately constructive backdrop. Stocks do follow earnings over time, and the Q1 beat rate is signaling real operating resilience. The market isn't bid higher on hope. It's bid higher on delivered numbers.

Two caveats, though.

First, forward earnings estimates almost always rise until they don't. Rising forward EPS is the default state of every expansion, not a unique bullish signal. What matters is when revisions roll over, and they roll over with a lag. Goldman's Ben Snider recently noted that a narrow slice of revisions, concentrated in names like Exxon Mobil and Micron Technology, has done most of the work behind the S&P 500's record highs. The median index constituent has seen little upward revision. That's a rally leaning on a few winners, not a broad upgrade.

Furthermore, the forward 12-month P/E sits at 20.9, above the 5-year average of 19.9 and the 10-year average of 18.9. At those multiples, a clean beat earns a muted reaction. A guidance cut gets punished hard. The real test isn't Q1 numbers. It's Q2 guidance. If retail, travel, and discretionary names start trimming outlooks once the $4+ gasoline hits flows through consumer wallets, forward estimates finally break their uptrend.

Until that happens, the path of least resistance is still higher.

How To Position From Here

I realize that many readers will not agree with me. That's okay, and as always, it takes two opinions to make a market, and both think they are right. However, after 30 years of navigating portfolios through shocks like this one, here are some suggestions to consider, given the Strait of Hormuz setup and stretched equity valuations.

Don't chase the oil rally. Crude is trading geopolitics, not fundamentals. The reward profile on long crude from $96 is skewed against you. Therefore, if you own energy producers up 40%, take the win and don't get greedy. Furthermore, don't add to them at this juncture.

Own energy infrastructure, not barrels. Midstream operators and LNG exporters have less exposure to commodity prices and benefit from a world that now prioritizes energy security over cost. Those cash flows don't collapse at $70 Brent.

Respect the equity message without stretching for it. At 20.9x forward earnings, the S&P 500 isn't priced for accidents. Trim your biggest winners back toward target weights. Adding to the strength here is paying a tax.

Hold duration. Treasuries have priced in resilient growth. If oil retraces hard and demand destruction lingers, the Fed gets cover to ease. The belly of the curve rallies. That's a natural hedge against the oversupply scenario described above.

Keep cash. Equities, oil, and credit are all pricing a clean exit from the conflict. If that exit slips, either through a broken ceasefire or through oversupply hitting before restocking ramps, dry powder becomes the most valuable asset in the book.

Bottom line: The market isn't wrong to be calm about the Strait of Hormuz, and it isn't wrong to be bid on earnings. But the risk has rotated. It's moved from a spike in oil to a collapse in oil, and from geopolitics to the equity multiple. Both sides of that trade need managing, not ignoring, because the tape is calm.

Sources

1. Wikipedia, "2026 Strait of Hormuz crisis" (IEA characterization of supply disruption; Iran selective transit policy).
2. PBS NewsHour, "Oil prices spike again following latest standoff in the Strait of Hormuz," April 2026 (AAA retail gasoline pricing).
3. Trading Economics / Fortune, Brent crude spot pricing, April 21, 2026.
4. Federal Reserve Bank of Dallas, "What the closure of the Strait of Hormuz means for the global economy," March 20, 2026.
5. CNBC, "The biggest release of emergency oil stockpiles in history was announced," March 14, 2026 (Rystad Energy and Bernstein commentary).
6. U.S. Energy Information Administration, "China, the United States, and Japan hold most strategic oil inventories in 2025," April 2026.
7. U.S. Energy Information Administration, April 2026 Short-Term Energy Outlook.
8. Kpler, "Iran war and the Strait of Hormuz: oil market implications six weeks in," April 7, 2026.
9. FactSet Earnings Insight, April 17, 2026.
10. FinancialContent / TheStreet, "Barclays and FactSet Upgrade 2026 S&P 500 EPS Forecasts," April 2026 (Venu Krishna commentary).
11. TheStreet, "Goldman Sachs sends strong message on S&P 500 earnings outlook," January 9, 2026.
12. Prism News, "Goldman says narrow earnings revisions are driving S&P 500 record highs," April 2026 (Ben Snider commentary).

The post Hormuz: Why Markets Are Shrugging Off The Oil Shock appeared first on RIA.

🔎 At a Glance

• The Dollar's Funeral Keeps Getting Rescheduled
• Market Brief & Technical Review
• From Lance's Desk: Government Debt: Not What The Doom Crowd Thinks It Is - RIA
• Market stats, screens, and risk indicators

🏛️ Market Brief - Market Consolidates Recent Gains

Last week, we noted that after the sharpest rally since May 2025, a correction was likely. Notably, those corrections come in two forms: a price pullback or a sideways consolidation. We got the latter. The S&P 500 churned between roughly 7,080 and 7,140 for most of the week. But Friday, did make a push to all-time highs. That kind of tight, high-level consolidation following an explosive move is technically constructive. Historically, it suggests the market is digesting gains rather than distributing them.

The week's dominant drama was, again, Iran, but with a different texture than in prior weeks. The original two-week ceasefire was set to expire Tuesday, and markets sold off Monday as the U.S. Navy seized an Iranian container ship in the Gulf of Oman and Iran's Revolutionary Guard fired on a tanker inside the Strait. Oil surged back above $97, and the S&P fell 0.63%. Then, on Tuesday evening, Trump extended the ceasefire indefinitely. He cited Iran's government as "seriously fractured" and awaiting a unified Iranian proposal. Markets bounced on Wednesday, oil retreated back toward $88-$92, and the VIX slid below 19. On Thursday, the markets pulled back again, but on Friday, they rallied. It's enough volatility to make trading difficult.

The other institutional event of the week was Kevin Warsh's confirmation hearing before the Senate Banking Committee for Fed Chair. Warsh told senators he would be "strictly independent" and would not allow Trump to influence rate decisions, a reassuring signal. Mohamed El-Erian assessed his testimony as "very well balanced." He suggested that Warsh would err on the side of cutting rates earlier if the dual mandate warranted it. Markets took comfort. The 10-year Treasury yield held near 4.30%, and rate hike odds have retreated meaningfully.

Earnings are doing the heavier lifting. With 86 S&P 500 companies reporting, Q1 earnings are running 26.1% above year-ago levels, with revenue growth of 10.3%. That is a substantial beat rate that is rewriting the macro narrative. GE Vernova surged 13.75% after a stunning quarter that included a $13 billion sequential backlog increase. It also pulled forward its $200 billion backlog target to 2027 from 2028, and raised full-year guidance across every key metric. Boeing climbed more than 5% on a smaller-than-expected quarterly loss and improving delivery data. Citigroup reported net income up 42% and Markets revenue above $7 billion. Tesla beat on margins and cash flow, with the stock absorbing the results constructively.

Most importantly, the earnings revision cycle is turning favorable precisely when it is most needed. S&P 500 EPS estimates for 2026 have risen 4% since late January, according to Goldman Sachs. Furthermore, the sectors enjoying the most upward revision pressure include Energy, Technology, Basic Materials, and Utilities. That positive revision momentum is providing a fundamental counterweight to geopolitical risk. Notably, it is one of the most underappreciated dynamics keeping institutional buyers engaged above 7,000.

Heading into next week, the market needs one of two things to break out of consolidation: either a substantive development in U.S.-Iran negotiations that credibly reopens the Strait of Hormuz, or continued earnings beats that push full-year EPS estimates high enough to justify current valuations. The forward P/E has retraced to roughly 20.4x, above the 10-year average of 18.9x but well below the 22x peak from December. That's not cheap, but it's defensible if earnings continue growing at double-digit rates. Patience remains a position, but the bull case is more durable today than it appeared six weeks ago.

📈Technical Backdrop - Pullback Likely

The S&P 500 closed Friday at a fresh all-time high of 7,165, up 0.80% on the session and extending the index’s remarkable run off the March lows. The week, however, was anything but smooth. Thursday’s session delivered a gut-check: reports of air defense systems activating over Tehran sent WTI past $106, and the S&P dropped 0.41% as the oil-volatility transmission mechanism briefly reasserted itself. Friday’s recovery came on Intel’s blowout earnings (+21%), Trump’s three-week extension of the Israel-Lebanon ceasefire, and crude pulling back to $94. The VIX settled at 18.92, below our 20 thresholds, but Thursday’s spike was a reminder of how quickly that can change.

The technical picture remains unambiguously bullish across all time frames. Investing.com shows 12 of 12 moving average signals at “Strong Buy.” The 14-day RSI is near 70, indicating an overbought condition. The MACD, a measure of momentum, is on a "buy signal" and rising. The index is trading above the 50-DMA (~6,790) and above the 200-DMA (~6,705), both of which are rising. Breadth has held with roughly 52% of constituents above their 50-DMA, but needs to strengthen if the rally is going to continue.

The tension in this tape lies between technical strength and fundamental fragility. As noted below, the Michigan consumer sentiment printed its lowest reading on record. Furthermore, the Iran peace talks have stalled, with Thursday’s Tehran episode a stark reminder that the geopolitical risk premium hasn’t fully unwound. Oil’s $94 price represents the kind of volatility that whipsaws systematic strategies and undermines the VIX’s descent. The Fed remains on hold at 3.5–3.75% with markets pricing no cuts in 2026. At BofA’s target zone of 7,168–7,206, now just 0.4–1.0% overhead, the index is approaching a natural ceiling where profit-taking is likely.

For now, the market continues to climb a wall of worry, and the technicals say respect the trend. RSI is elevated but not grossly overbought, and while breadth is improving, all moving averages remain green. Our March 200-DMA analysis continues to play out textbook. But Thursday’s reversal on the Tehran headlines was a shot across the bow; this market remains one oil headline away from a 2–3% air pocket. The pullback we flagged last week hasn’t materialized so far, which is making the setup increasingly stretched. New money should wait for a retest of 7,000 or the 50-DMA (~6,979). Stay long but trail stops and take partial profits into BofA’s 7,168–7,206 target. Trade accordingly.

🔑 Key Catalysts Next Week

This is the most consequential week of the year. The FOMC decision, the Q1 GDP advance estimate, and earnings from five Magnificent 7 names: Meta, Microsoft, Alphabet, Amazon, and Apple. It all lands in a five-day window that will determine the market's direction for the summer. Nothing else comes close.

The FOMC meeting Monday–Tuesday is the first catalyst. The rate decision itself is a foregone conclusion, a hold at 3.50–3.75%, but this is a statement-only meeting with no Summary of Economic Projections or dot plot, which makes the language and Powell's press conference carry outsized weight. The key question is: Does the committee acknowledge that the labor market is deteriorating faster than expected, or does it lean into the inflation-first framing that dominated the March meeting? If Powell uses the word "patient" with respect to cuts, markets read that as "no action until at least September." If he signals that the balance of risks has shifted toward employment, rate-cut expectations reprice immediately. This may be Powell's final press conference as Chair before his term expires May 23, making every word a potential legacy statement, with Warsh waiting in the wings.

Tuesday is a collision day unlike anything we've seen this cycle. Consumer Confidence at 10:00 AM, which has been deteriorating sharply, with the Expectations component flirting with the sub-80 recession threshold. That number drops just four hours before the FOMC decision at 2:00 PM, followed by Powell's presser at 2:30 PM. Then, post-market is Meta's (META) Q1 earnings after the close. Meta's report is the first read on whether digital advertising spend held up through the March oil shock and tariff escalation, and the $115–135 billion capex guidance for 2026 remains the single largest AI infrastructure commitment in the world.

However, Wednesday is the mega-cap technology "trifecta." Microsoft (MSFT), Alphabet (GOOG), and Amazon (AMZN) all report after the close. Microsoft's fiscal Q3 may be the most important tech earnings event of the year. Azure cloud growth guided at 37–38% in constant currency is the AI infrastructure monetization proof point, and Copilot adoption data will tell us whether enterprise AI spend is translating into revenue or stalling at the pilot stage. The stock is down over 8% year-to-date and trading at the cheapest forward multiple since 2017. Alphabet's Google Cloud (which grew 48% last quarter) and Amazon's AWS (24% growth, $200 billion in 2026 capex guidance) round out the cloud trilogy. If all three miss on cloud growth, the AI capex cycle narrative cracks; if not, the rally continues.

Thursday is Q1 GDP at 8:30 AM. Q4 was revised down to just 0.5% annualized. The Atlanta Fed's GDPNow sits at 1.2%, while the New York Fed's Nowcast is at 2.3%, a historically wide spread that reflects genuine uncertainty about whether the economy is decelerating or stalling. A sub-1% print would ignite recession fears and put immediate pressure on the Fed to cut rates, regardless of where inflation sits. Apple (AAPL) reports after the close on Thursday and caps the Mag-7 wave, with iPhone 17 cycle data, China tariff exposure, and the Tim Cook-to-John Ternus CEO transition all in play.

Here is what to watch. The Fed will tell us what it thinks, GDP will tell us what happened, and the Magnificent-7 will tell us whether the growth premium that justifies their collective $14 trillion market cap. Any two of these could move markets 3%+ in a session. All three in the same week is a vol event. Hedge accordingly.

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💰 The Dollar's Funeral Nobody Attended

Open any finance corner of social media this week, and you will be hit with some version of the same obituary. ZeroHedge declared in December that the dollar's death in 2026 is now a mainstream talking point, citing a WIRED piece arguing that this is the year "dollar dilution" truly accelerates. A widely circulated Dollar Collapse post this month warned that foreign demand for Treasuries is fading and that the greenback is losing its safe-haven status "in a generation." WatcherGuru ran a headline last fall declaring rapid de-dollarization is happening right now, while YouTube personalities brandish century-long purchasing-power charts preaching gold and Bitcoin as salvation. The story writes itself: investors positioning capital today need to decide how much survives contact with the data.

To be fair, there is enough truth in the narrative to keep it alive. The DXY has retraced roughly 10% from its early-2025 peak near 103.5. The IMF's COFER data shows the dollar's share of global FX reserves has slipped from 73% in 2001 to around 58% today. Central banks purchased 863 tonnes of gold in 2025 — cooler than 2024's 1,092-tonne haul, but still the fourth-largest annual reserve build on record, roughly double the 2010–2021 average of 473 tonnes, and the 15th consecutive year of net official buying. BRICS+ now includes Iran, Egypt, Ethiopia, the UAE, Saudi Arabia, and Indonesia, representing nearly half the world's population. China has trimmed its headline Treasury holdings by more than 27% since 2022, and the bloc is actively building non-SWIFT payment infrastructure through BRICS Pay and CIPS.

Assemble those data points in the right order, and you can construct an apocalyptic narrative that plays extremely well in a three-minute video. The problem is that the dollar the narrative describes is not the dollar the flows describe. As is so often the case in markets, what "everybody knows" is precisely what is already priced in, and frequently wrong.

The Dollar's Tape Disagrees

Start with the dollar itself. As of Tuesday, when I started writing this analysis, the DXY sits at roughly 98, essentially flat over the trailing 12 months and still well above its longer-term historical averages. For context, the index traded below 80 for most of 2011 through 2014. A dollar "near 100" is simply not consistent with the word "collapse."

More importantly, look at what foreign investors are actually doing with their dollars. According to the latest Treasury International Capital (TIC) data, foreigners purchased a net $101 billion of long-term U.S. securities in February, following November's blockbuster $222 billion print. Across the last five reporting months, net foreign inflows into long-term U.S. stocks and bonds totaled roughly $488 billion, a pace that rivals the post-COVID liquidity surge. If the world were truly abandoning the dollar, somebody forgot to tell the world's money managers.

The BIS tells the same story from a different angle. The 2025 Triennial Central Bank Survey found that the US dollar accounted for 89.2% of all foreign exchange transactions in April 2025, up from 88.4% in 2022, across $9.6 trillion of daily turnover. The renminbi's share climbed to 8.5%, a meaningful progress, but still a fraction of the dollar's transactional footprint. Reserve share is drifting lower; actual dollar usage is not.

The China "Dumping" Illusion

If one chart carries the de-dollarization narrative more than any other, it is the headline decline in China's reported U.S. Treasury holdings. Those holdings in "US Custody" declined from roughly $1.2 trillion at peak to about $683 billion today. That looks like a 50% purge, and it gets rolled out as Exhibit A in every "dollar is dying" thread. Pay attention to the highlight of "US Custody."

As we detailed in our two recent pieces, "Is China Really Dumping US Treasuries?" (February 23) and "The Dollar's Plumbing: Conspiracy Vs. Data" (March 20), that chart is genuinely misleading. The Treasury's own TIC FAQ flags the problem: holdings are reported by the location of custody, not by who bears the economic risk. China has been quietly migrating that custody, not liquidating it.

The evidence is in the data for two very small countries. As of November 2025, Belgium reported $481 billion in Treasury holdings and Luxembourg $425 billion, enormous totals for nations not remotely building reserves at that scale. Belgium is home to Euroclear; Luxembourg hosts Clearstream, and both countries are global settlement hubs. Over the period, China's reported holdings fell by roughly $600 billion, Belgium's rose by roughly $500 billion. Over the last twelve months, the UK, Belgium, and Japan were each net Treasury buyers of more than $115 billion, with Belgium's holdings up 26%, the largest percentage gain among major holders.

As noted in that article:

“This is not a conspiracy. It is plumbing. One of the primary reasons that China uses Belgium for custodial purposes, besides avoiding geopolitical risk, is that the Euroclear Bank is based there and sits at the center of cross-border settlement and collateral mobility. Clearstream’s international depository is based in Luxembourg and serves the same global institutional client base. When a central bank or a state institution wants to hold a large Treasury portfolio with flexible settlement and collateral options, these hubs help address operational challenges.”

If we adjust China's reported Treasuries to account for the custody migration to Euroclear and Clearstream, the total barely changes from its 2011 level. Meanwhile, total foreign holdings of U.S. Treasuries hit a record $9.4 trillion in November 2025. This is post-2022-sanctions risk management, not de-dollarization, and the dollar exposure is staying put. The plumbing changed. The balance did not.

The truly meaningful story is not about the dollar. It’s about who holds the debt and where they custody it.

Follow the Earnings, Follow the Flows

Why are foreigners still buying? The recent A16Z charts that are making the rounds this week tell you everything you need to know. Consensus earnings growth for the U.S. IT sector has been steadily revised higher all year, from 30.9% at the start of January to 37.1% in late February and 43.4% as of April. Info Tech is now expected to grow earnings more than 2x faster than the S&P 500 in 2026 (40% vs. 18%), with only Energy and Materials meaningfully outpacing the broader index.

This is the most important lesson to learn: Capital follows returns. Europe's 2026 earnings growth runs in the mid-teens, while Japan is meaningfully lower, and Emerging markets approach U.S. IT growth rates but carry convertibility, governance, and geopolitical risks that most fiduciary capital will not underwrite at scale. Global pension funds, sovereign wealth vehicles, and private wealth allocators with fresh savings to deploy effectively have no choice but to route capital back into U.S. equities and the Treasuries that fund the dollar leg of those allocations. That is the mechanical underbelly of the AI capital cycle, and it is still early.

What to Recognize About the Dollar

The "dollar is dying" narrative does what every bear narrative does at cyclical inflection points: it trades a kernel of truth for a wholesale conclusion. Yes, the dollar has weakened, and the reserve share has drifted lower. Yes, central banks are buying gold, and China has rearranged its custody footprint. None of those observations is wrong. However, the leap from observation to apocalypse is exactly the leap investors need to consider very carefully before piling into.

The data simply does not cooperate with the "Dollar's funeral" narrative. With net foreign inflows into U.S. stocks and bonds running near post-COVID highs, and total foreign holdings of U.S. Treasuries just setting a record of $9.4 trillion. The collapse narrative simply has no real support.

There are four things that matter more than headline-dollar print.

• First, central bank gold buying is not "leaving the dollar." Gold is priced in U.S. dollars, benchmarked to the LBMA and COMEX benchmarks, and converted back to U.S. dollars whenever it is mobilized for intervention, collateral, or settlement. Like Treasuries, agencies, or equities, gold on a central bank balance sheet is a dollar-linked reserve asset. Buying gold reduces exposure to U.S. Treasuries as a security type, but it does not reduce exposure to the dollar as the world's unit of account. It is a portfolio rebalancing decision, not a currency defection.
• Second, reserve share and transactional usage are not the same thing. Central banks can diversify into gold, euros, and yuan without meaningfully changing day-to-day dollar demand. One drifts slowly over decades; the other is set by trade invoicing and capital markets plumbing, and the dollar dominates both by wide margins.
• Third, there is no viable alternative. The yuan is hamstrung by capital controls and limited convertibility. The euro lacks a unified fiscal backstop. Gold has no yield and no settlement rails. And BRICS itself is not politically unified: India signed a trade deal with the U.S. in February and halted Russian oil purchases weeks later.
• Fourth, cyclical decline and structural decline are not the same thing. The dollar is in a cyclical downtrend that fits comfortably inside its roughly 7-to-10-year regimes. That is a trading pattern, not a funeral.

So what should investors actually focus on? Not whether the dollar survives, the flows have already answered that question. Instead, focus on the variables that genuinely move portfolios:

1. The earnings differential between U.S. and international equities,
2. Notably, the AI capital cycle, which will pull global savings back toward U.S. assets,
3. The Fed's policy path, and
4. The cost of hedging dollar exposure relative to its realized volatility.

Those are the inputs that change returns. Whether the dollar prints 96 or 102 next quarter will not meaningfully alter the investment case for a diversified, dollar-denominated portfolio. However, the dollar is not collapsing or being replaced; it is simply being repriced. There is a very large difference between the two, and that difference is where investor attention belongs.

Narratives make headlines. Flows make markets. Right now, the flows are still pointing home — and the AI cycle means they likely will for some time.

🖊️ From Lance’s Desk

This week's #MacroView blog examines the myth that the US is headed for a fall like that of the Weimar Republic or Rome.

Also Posted This Week:

• GFC 2.0 Or False Alarm Part 2 - RIA - by Michael Lebowitz
• Market Lesson: Why Panic Is A Costly Mistake - RIA - by Lance Roberts

📹 Watch & Listen

In this week's video, we discuss the recent market surge and why a correction or consolidation is likely.

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📊 Market Statistics & Analysis

Weekly technical overview across key sectors, risk indicators, and market internals

💸 Market & Sector X-Ray: Market Cracks Support

Previously, we noted that: "With every other sector extremely oversold, the logical setup now is for that rotation out of energy into other areas of the market to begin as soon as clarity on Iran emerges." As shown in the upper-right box, that is what happened over the past few weeks, as the entire premium in the energy sector reversed and technology surged. With the market now rebalanced, we should see markets return to a more normal trading environment. Markets are getting overbought, so rebalance risk as needed.

📐 Technical Composite: 80.67 - Market Surge Approaching Overbought

As noted previously, the reflexive rally came hard, with the market posting its best performance since March 2022. We are approaching overbought levels, but not there yet. Use this rally to rebalance risk and exposures as needed.

🤑 Fear/Greed Index: 74.56 – Investors Go All In

As we noted last week, the reflexive rally came with a vengeance, and investor sentiment and positioning went from"fear" to borderline "extreme greed" in a very short time frame. There is now decent momentum behind the market, but if you didn't like the recent selloff, this is a good time to rebalance risk and portfolio allocations.

🔁 Relative Sector Performance

It didn't take long, but the previous most "out of favor" sector, Technology, has reverted to the most overbought, while Financials and Healthcare are now the most out of favor. Given the fundamentals of these two sectors, I would expect a short-term reversion from Technology to Financials and Healthcare if the market takes corrective action.

📊 MFBR Index (Money Flow/Breadth Ratio Indicator): 45% = Neutral/Bullish

NEW! MFBR Index: The Money Flow Breadth Ratio (MFBR) model is a rules-based equity allocation framework that uses weekly S&P 500 money flow data to generate buy, sell, and neutral signals. It is designed to systematically adjust portfolio equity exposure in response to the direction and persistence of institutional capital flows, aiming to reduce drawdowns while capturing the majority of market upside.

"As of April 24, 2026, with the S&P 500 at 7,165, the Money Flow Breadth Ratio (MFBR) stands at 45% and rising. This places the indicator in neutral territory (40-50%), triggering a NEUTRAL signal. The prior week's reading was 45%, representing a 0% change over the trailing four weeks. The increase in the MFBR suggests both money flows and breadth are improving, maintain current equity exposures, and rebalance risks as needed."

📊 Sector Model & Risk Ranges

As we noted previously, "The sectors that were most beaten up were aggressively bid. This is why we regularly recommend rebalancing when sector performance becomes too bifurcated." The good news is that the market has recovered and the bulls are back in control. The bad news is that there are numerous extreme deviations from long-term weekly means. Basic Materials, Technology, Transportation, Small Caps, Emerging Markets, and Gold are 10% or more above their long-term weekly means, which generally precede mean-reversions. Take profits and rebalance accordingly.

Have a great week.

Lance Roberts, CIO, RIA Advisors

The post The Dollar’s Funeral Keeps Getting Rescheduled appeared first on RIA.

Having just hit record highs following an historically impressive 13-day winning streak, stocks are susceptible to a pullback or, at a minimum, consolidation. Beyond the direction over the next week or two, the bigger question is what comes after that. The answer to the question will present itself over time. However, in the meantime, we can focus on breadth to help get a step on the market.

Regarding breadth, consider that despite the S&P 500 being at a record high, only 65% of stocks are above their 20-day moving averages, 54% above their 50-day moving averages, and 60% above their 200-day moving averages. The graph below, courtesy of Charles Schwab, shows that a large majority of stocks, broken down by sector, are below recent monthly, quarterly, or 52-week highs. Even in the leading sectors, like technology, only 58% of the underlying stocks are at a 4-week high. Interestingly, despite oil trading in the mid-$90s, none of the energy sector stocks are trading at a recent high. The broad breadth takeaway is that a few stocks are leading the market higher, while many others are not keeping up.

We would like to see breadth improve to increase our confidence that the market will continue to move higher over the next few months. When a good majority of stocks across many sectors rise together, it reflects genuine, widespread bullish conviction and real money flowing into equities. A narrow rally, as we have thus far, is often driven by momentum chasing and sector-specific themes. That kind of demand is weak and can reverse more easily.

What To Watch Today

Earnings

Economy

Market Trading Update

Yesterday, we discussed why the market continues to look past the Strait of Hormuz closure and the temporary rise in oil prices. That conversation leads into today's discussion about Energy stocks, which have largely erased the gains from a month ago amid the Iran crisis. Is there a buying opportunity for Energy, and if so, for how long?

Brent crude touched $105, and WTI pushed past $96 yesterday as the U.S. naval blockade seized ships and Iran attacked vessels in the Strait. You'd expect the energy sector to celebrate, but it really hasn't. The Energy Select Sector SPDR (XLE) topped out in late March near $63, sold off roughly 13 percent, and is now stalling near $56 while crude grinds higher. That disconnect tells you more about how equity markets are pricing this conflict than any headline will.

Equity investors are treating this crude spike as an event, not a cycle. We saw the same behavior in March when oil ripped higher and XLE barely flinched. Investors have decided the geopolitical premium is transient, and they're refusing to pay integrated majors for barrels they don't believe will last. Exxon and Chevron, which together make up 40 percent of XLE, haven't been repriced to $100 crude because the forward curve is already deeply backwardated.

Here's the setup most investors won't see coming. When the Strait reopens, and history says that's a question of weeks rather than years, the supply curve shifts fast. Roughly 13 million barrels per day of production are currently sidelined. Add Iran's blockaded 1.3 million bpd, replenished floating storage, OPEC+ spare capacity, and a 2026 baseline already projected for a 2 million bpd surplus. Those barrels don't disappear. They just wait.

So is this a trade or a longer-term hold? For me, it's a trade. The conditions that support a secular bid in energy, sustained demand growth, chronic capex underinvestment, and structural tightness, aren't in place. What we have is a war premium layered on top of a structurally oversupplied market.

If you're underweight energy, scale into XLE on pullbacks toward the $52 to $53 support shelf. Keep the position tactical, 3 to 5%, not a core holding. For a sharper beta to the headline, favor independent E&P names through XOP and oilfield services through OIH, where operating leverage to crude is meaningfully higher than the majors. Set a hard stop below the 200-DMA. Take profits into the late March high near $63. Scale out aggressively on any diplomatic breakthrough. Most importantly: Do not round-trip the trade.

Trade the war premium, don't marry it. When the Strait reopens, the supply overhang returns, and late buyers will be left holding the bag as energy equities give back the geopolitical bid they only half embraced on the way up.

Treasury Buybacks: Money Printing Or Prudent Cash Management?

We were forwarded the tweet below and asked, "Why is the Treasury printing money?"

The quick answer is they are not printing money. The $15 billion in buybacks consisted entirely of securities maturing within a year. The money to buy the securities will come from the excess cash they are holding. The excess cash is from prior issued debt securities and tax revenue. What they are really doing is shifting their future cash flows. They are likely spreading future principal payments over time and avoiding large, chunky payments. This cash management exercise results in no money printing or changes to their outstanding debt. It's just a smart way for the Treasury to handle its enormous cash inflows and outflows.

Car Crash

Wednesday's Commentary, Car is Racing Higher, we led with a discussion of the stunning price surge in CAR shares. To wit, in about one month, the stock peaked near $800 per share, up from slightly under $100. The primary rationale for the sharp increase was a short squeeze, as we explained. While we didn't know how much higher the squeeze could carry CAR, we were confident it wouldn't end well. Accordingly, we stated:

While CAR can certainly go higher, the move is not sustainable. The reason is quite simply that CAR’s fundamentals are horrendous.

Little did we know that CAR would crash as quickly as it did, as shown below. After peaking on Wednesday morning, the stock fell precipitously. Hours after the downward spiral started, the company announced it was moving its earnings data up by two weeks. Given that the company is in an earnings blackout, they were unable to issue new shares at the higher prices. Thus, by moving up the earnings data, they could sell shares earlier. It may not have mattered, as the market figured out why the earnings date was changing and started selling aggressively to get ahead of the share dilution. This is yet another meme stock/short squeeze that worked fabulously until it didn't!

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The post Breadth Is Lacking: Is The Rally Sustainable? appeared first on RIA.

Every few years, someone discovers that the United States government owes a very large amount of dollars and concludes that Rome is about to fall. A recent piece in RealClearMarkets by Nash, Thomas, Lang, and Rastin does exactly this. They rely on the Roman Empire’s collapse and the Weimar Republic’s hyperinflation as cautionary parallels to America’s $39 trillion in federal government debt.

The argument is tidy, emotionally satisfying, but wrong in several important ways. Crucially, government debt is not what the doom crowd thinks it is, and the historical comparisons they love most have almost nothing in common with the American fiscal situation today.

The Accounting Identity No One Mentions

Here’s where I want to start, because this is the point that almost every government debt analysis, including the article we’re responding to, completely ignores. Government debt doesn’t disappear into a void. By definition, if the Government borrows capital from someone, that capital must flow somewhere. That “somewhere” is the private sector balance sheet.

Economist Wynne Godley formalized this relationship in what’s now called the sectoral balances identity. Strip away the academic language, and it’s straightforward: in a closed economy, one sector’s deficit is another sector’s surplus. Every dollar the federal government spends in excess of what it collects in taxes is a dollar that shows up as net financial wealth in the private or foreign sectors. The accounting identity is not a theory. It’s an arithmetic fact, like a double-entry ledger that must balance.

As we discussed in “Money Supply Growth, A Thesis With A Fatal Flaw,” this understanding is crucially important. Debt and deficits are not inherently destructive. They fund spending that becomes income for households and businesses, supporting economic activity. In fact, deficits often stabilize the economy during recessions, providing the private sector with liquidity and helping repair balance sheets.

We see this in real time. The federal government ran a deficit of roughly $1.8 trillion in fiscal year 2024. That same $1.8 trillion, minus what flowed to foreign holders of Treasury securities, landed on the balance sheets of American households, corporations, and pension funds as net financial assets. U.S. Treasuries are not a liability to “future taxpayers” in some abstract existential sense. They’re a financial asset held right now by American savers, retirement accounts, banks, and insurance companies.

We can see these “sectoral balances” visually.

Look at that relationship carefully. Every time the government deficit widened, as during the 2001 recession, 2008 crisis, and 2020 pandemic, the private sector surplus expanded by a nearly equal amount. That inverse correlation is not a coincidence; it’s the identity at work. When policymakers forced the government toward surplus in the late 1990s, the private sector was driven into deficit. That private debt binge was a primary driver of the 2008 financial crisis.

This also brings us another major flaw in the “perpetual purveyors of doom” ongoing thesis. The article worries about “debt per taxpayer” exceeding $350,000. That metric means nothing without the corresponding asset side. Every dollar of that figure is simultaneously an asset on someone’s balance sheet. Abolish the national debt tomorrow, and you’d simultaneously abolish $28 trillion in financial assets held by savers, pension funds, and the Federal Reserve.

Now, that would be a financial crisis.

The Balance Sheet Everyone Ignores

Consider a household analogy before we look at the numbers. A professional earning $100,000 a year carries a $300,000 mortgage. By the logic of the RealClearMarkets piece, that person is deeply insolvent, as the debt is three times annual income. But no banker in America would call that household bankrupt. Why? Because the mortgage is backed by an asset. If you assume this individual put 20% down when they bought the house, the home is worth somewhere near $360,000. With the person's income steady and likely growing, the monthly debt service is well within reach. The debt-to-income ratio, stripped of context, tells you almost nothing. What matters is the asset on the other side of the ledger, the reliability of the income stream, and the capacity to service the obligation. The U.S. federal government is no different.

The problem with the "doom crowd" constant screeching over debt levels is that, like the article, it treats U.S. government debt as a liability with no corresponding asset. That’s not even true on the official books, let alone in any economically meaningful sense.

The FY 2024 Financial Report of the United States Government reports $5.7 trillion in balance sheet assets, cash, loans receivable, property and equipment, against $45.5 trillion in total liabilities, yielding a negative net position. While critics quickly seize on that figure, they should at least take the time to read the footnotes. The balance sheet explicitly excludes what Treasury calls “stewardship assets," such as:

• 640 million acres of federally owned land,
• the mineral and spectrum rights attached to that land,
• the nation’s entire public infrastructure stock,
• national parks,
• military installations,
• and, most importantly, the sovereign power to tax the world’s largest economy.

Estimates of federal land value alone run from $1.8 trillion to over $5 trillion, depending on methodology. None of that appears on the official balance sheet. More important than any specific asset is the tax base. The federal government collects roughly 17 to 18 percent of GDP in annual tax receipts, which is about $5.1 trillion drawn from a $30 trillion economy. Total federal debt stood at $37.6 trillion at the end of fiscal year 2025. With that in mind, the better analogy is not "debt versus income," but it’s the relationship between a growing asset base, a reliable revenue stream, and the carrying cost of the debt. On that measure, the U.S. looks leveraged, not insolvent.

Context is crucial, and something that eludes the "purveyors of doom." While they are busy penning articles about the demise of the U.S., they never discuss Japan, which does NOT have the luxury of being the world's reserve currency.

Just something to consider as we discuss the "elephant in the room."

Why Rome And Weimar Are The Wrong Analogs

Rome and Weimar are where the doom narratives break down. I want to be very specific, as vague historical analogies get repeated so often that they acquire a false credibility. There are key differences between the Roman Republic, Weimar, and the United States.

Let's start with Rome. Its currency crisis was a physical one, as the denarius was a silver coin. When the empire needed more money, emperors literally reduced the silver content of the coin. This is actual "debasement," the process of reducing the underlying commodity that backs a currency. By the reign of Gallienus (253–268 AD), the antoninianus, the coin that had replaced the denarius as Rome's workhorse currency, had been stripped from roughly 50% silver under Septimius Severus to under 5%, sometimes as low as 2.5%, over a span of roughly two generations. Given that there was no means to "create" currency, the constraint was metallurgical, not monetary. The destruction of purchasing power was direct and immediate, as every coin in circulation was affected simultaneously.

In today's world, currencies are "fiat," meaning they are backed only by the "full faith and credit of the issuer." Therefore, you cannot "debase" the US Dollar in the Roman sense, as it has no physical commodity backing. The purchasing power of a fiat currency is reduced only by inflation over time or by a loss of confidence in the issuer's ability to honor the currency. This is why the Weimar example is so misunderstood.

Germany's hyperinflation of the early 1920s was not caused solely by deficits in marks. Its roots ran deeper. The German government had financed World War I almost entirely through borrowing, accumulating 156 billion marks in war debts by 1918. Reparations of 132 billion gold marks, effectively a foreign-currency obligation, were then imposed. Germany had to earn dollars and gold through exports to pay France and Britain. When that proved impossible, the Reichsbank printed marks to purchase foreign exchange on open markets. The more marks they printed, the more the exchange rate collapsed, prompting further printing. The final trigger came in January 1923, when France and Belgium occupied the Ruhr industrial region after Germany fell behind on reparations payments. The German government financed workers' passive resistance through unlimited money printing, and the currency disintegrated within months.

Today, the United States owes not a single dollar denominated in any foreign currency. Every bond, bill, and note is payable in dollars, a currency the Federal Reserve can supply without limit. That doesn’t mean inflation is impossible or even unlikely at current deficit trajectories. It means the mechanism of collapse that destroyed Rome and Weimar simply doesn’t exist in the American monetary system. The risk for the U.S. isn’t default; a government that issues its own currency doesn’t accidentally run out of it. The risk is inflation, and those are two very different problems requiring very different responses.

What You Should Actually Pay Attention To

None of this means deficits are costless. Net interest payments hit $1.2 trillion in fiscal year 2025. That is roughly 4% of GDP and the second-largest line item in the federal budget, behind only Social Security. That is real fiscal drag, and it is accelerating. More crucially, the actual risk is not default but disinflation, as debt diverts revenue from productive investments into debt service. As we discussed at length in "The Deficit Problem."

"Excess “debt” has a zero-to-negative multiplier effect, as Economists Jones and De Rugy showed in a study by the Mercatus Center at George Mason University.

The multiplier looks at the return in economic output when the government spends a dollar. If the multiplier is above one, it means that government spending draws in the private sector and generates more private consumer spending, private investment, and exports to foreign countries. (Inflationary) If the multiplier is below one, the government spending crowds out the private sector, hence reducing it all. (Deflationary)

'The evidence suggests that government purchases probably reduce the size of the private sector as they increase the size of the government sector. On net, incomes grow, but privately produced incomes shrink.

Lastly, I do agree with Nash, Thomas, Lang, and Rastin: the current deficit trajectory isn’t sustainable indefinitely, and policymakers have delayed hard conversations about entitlement reform for decades. That’s genuine. However, the framing matters. Frame government debt as a Roman-style collapse and you reach for austerity prescriptions that, as Greece painfully demonstrated, can deepen the very weakness you’re trying to cure.

SOURCES & REFERENCES

• Godley, W. (2005). “Some Unpleasant American Arithmetic.” Levy Economics Institute Policy Note. Annandale-on-Hudson, NY.
• U.S. Office of Management and Budget / Congressional Budget Office (2024). Monthly Budget Review: FY 2024 Summary. Washington, D.C.
• Godley, W. & Lavoie, M. (2007). Monetary Economics: An Integrated Approach to Credit, Money, Income, Production, and Wealth. Palgrave Macmillan.
• U.S. Department of the Treasury, Bureau of the Fiscal Service (2024). Financial Report of the United States Government, Fiscal Year 2024. fiscal.treasury.gov.
• Congressional Budget Office (2022). The Federal Government’s Ownership of Land and Mineral Rights. Washington, D.C.: CBO.
• Reed, L.W. (1988). “The Fall of Rome and Modern Parallels.” In When We Are Free (Foreword by Milton Friedman). Northwood University Press.
• Ferguson, A. (1975). When Money Dies: The Nightmare of the Weimar Hyperinflation. William Kimber. See also Eichengreen, B. (1992). Golden Fetters. Oxford University Press.

The post Government Debt: Not What The Doom Crowd Thinks It Is appeared first on RIA.

On Tuesday, Kevin Warsh appeared before the Senate for his nomination hearing for the Fed Chair. The biggest takeaway is Warsh's desire to "reform" the Fed. Based on his appearance, reform seems to cover the following three areas:

• Public Communications: Warsh stated clearly that he doesn't believe in forward guidance. This seems to be a stark departure from prior Fed members, who presumed that the more the markets knew what the Fed was thinking, the less likely policy actions would shock the markets. Taking a step back from forward guidance could result in stock and bond market volatility, as investors are less clear about the future path of interest rates.
• Economic Models: Warsh is not comfortable with the Fed's current inflation models. He seems to advocate a trimmed-mean inflation reading. Trimmed mean models strip out the outliers with the intention of filtering out one-off price swings that can distort inflation readings. As we share in the graphic below, the trimmed mean is less volatile. At 2.33%, it is also running about half a percentage point below the headline PCE price index.
• Fed Balance Sheet: He has advocated against QE since the GFC, despite voting for it as a Fed member during the crisis.

Regarding current monetary policy, Warsh believes inflation is lower than official indicators state. We have noted this as well with the Truflation data. He acknowledges that while the inflation path is trending lower, "there's more work to do." Further, while he may be open to cutting rates slightly, he came off as hawkish as he wants to reduce the Fed's balance sheet. To wit, consider the following quote:

QE is reverse Robin Hood. It’s policy that steals from the poor, to give to the rich.

What To Watch Today

Earnings

Economy

Market Trading Update

Yesterday, we discussed the dollar and why a stronger market will likely continue to track foreign inflows into US markets. However, this raises another question I received during our live Q&A session on the RealInvestmentShow yesterday.

"Why is the market ignoring the risk arising from the shuttering of the Strait of Hormuz?"

It's a good question, and honestly one that I have repeatedly considered over the last month as the events in Iran unfolded. Here is my best guess as to why the "doomsayer" case has been wrong, at least so far.

• First, "closed" was always a headline, not a fact. Saudi Arabia and the UAE rerouted 5 to 6 million barrels a day through pipelines terminating at the Red Sea and the Gulf of Oman. By late March, Iran had selectively reopened the strait to tankers flagged by China, Russia, India, Iraq, and Pakistan. The chokepoint wasn't sealed. It was rationed.
• Second, strategic reserves actually functioned for once. The IEA coordinated a 400-million-barrel release, the largest in its history, with the U.S. SPR alone putting 1.4 million barrels a day on the water. That doesn't replace lost volume, but it blunts speculative panic while physical workarounds take hold.
• Third, China was the biggest tail risk and China came in loaded. Commercial inventories sat near one billion barrels heading into the crisis, with another 360 million barrels of state reserve behind that. Iran granting Chinese tankers transit removed the rest of the downside. Beijing was never going to let this crack its economy, and it hasn't.
• Fourth, the U.S. is structurally insulated. We produce more than 13 million barrels a day, we're the world's largest LNG exporter at 18 billion cubic feet daily, and less than 10% of our crude runs through Hormuz. In a global shock, the U.S. becomes the marginal supplier, not the marginal victim.

Now to the harder question. If the U.S. supply is offsetting the crisis, does that set up an oversupply collapse when the strait reopens? Here's where I think the back end of the curve is mispriced. When Hormuz fully reopens, three things hit the market at once. Gulf producers restart roughly 9 million barrels a day of shut-in capacity. Tankers jammed up in the regional storage unload. U.S. shale, recapitalized by $95 crude, keeps pumping. That's a textbook glut setup.

The offset is SPR rebuilding. Thirty-plus IEA countries have drained strategic stockpiles, and they'll spend the back half of 2026 refilling. That creates real physical demand. Kpler already argues late-2026 Brent at $74 is undervalued. But the window between reopening and restocking acceleration could get violent. I'd expect a move back into the low $70s within 90 days of a durable ceasefire, with overshoot risk toward $60 if demand destruction lingers.

Here is the thing: I think the markets have already priced in all this.

If the supply shock really has been buffered, the market has already done the math and moved on. That's what price action is telling us. The S&P 500 has pushed through Hormuz headlines the same way it pushed through tariffs, Fed succession noise, and March's banking tremors. At some point, markets stop pricing risks they've already metabolized.

What replaces geopolitics as the driver? Earnings. And here the data is unambiguously bullish. With 10% of the S&P 500 reporting for Q1, 88% have beaten EPS estimates, well above the 10-year average of 76%. The aggregate beat sits at 10.8%, versus a historical 7.1%. Analysts have revised full-year 2026 earnings growth to 18%. Forward 12-month EPS has pushed the bottom-up index target to roughly $7,350, up 13% from the May 14 low. The estimated 2026 net margin of 13.9% would be the highest on record.

Do I buy the whole bullish read? Mostly, with a caveat. Stocks do follow earnings over time, and the earnings trajectory here is genuinely strong. But forward estimates almost always rise until they don't. That's the normal pattern, not a signal. The forward 12-month P/E is 20.9, above both the 5-year (19.9) and 10-year (18.9) averages. At those multiples, a clean beat earns a muted reaction, and any Q2 guidance that embeds the $4+ gasoline hit to the consumer gets punished hard. The market is right to pivot. It's also walking a thinner ledge than the headlines suggest.

Bottom line: The market isn't wrong to be calm about Hormuz, and it isn't wrong to be bid up on earnings. The risk isn't on the geopolitical side anymore. It's whether forward EPS estimates hold when Q2 guides land, and whether the back end of the oil curve dislocates before SPR restocking can absorb the returning Gulf supply. Both are the other side of the same trade.

GE Vernova Continues To Beat Expectations

GE Vernova (GEV) stock opened nearly 10% higher after the company handily beat earnings expectations, posting EPS of $2.06, almost 10% above estimates. Revenues beat as well, and forward guidance was increased from already optimistic levels. Importantly, their order backlog grew to $163 billion, representing about four times their current quarterly revenue. GEV stock has risen by nearly 200% over the last year due to its growth surge.

GEV is a primary beneficiary of the AI boom, as it makes the equipment that generates, transmits, and stores electricity, such as gas and wind turbines, as well as grid infrastructure. The quest for power for the massive expansion of data centers is driving outsized demand for its products. The following quote sums up GEV's unique positioning with the AI boom nicely:

“The companies that sell the physical infrastructure for AI data centers are seeing demand faster than they can raise capacity”

GFC 2.0 Or False Alarm: Part Two

The graph below, courtesy of Preqin and the Daily Shot, shows the steady growth of private credit funds since the GFC. The “Dry Powder” category represents committed capital for investment that has not yet been deployed. For what it is worth, that amount is almost identical to the amount of subprime mortgages at their peak. The total global private credit market, including all other lenders, is estimated at around $3.4 trillion.

After the GFC, regulators forced banks to hold more capital and to retreat from riskier lending. As a result, an alternative credit ecosystem grew to replace banks. Private credit funds, business development companies (BDCs), and specialty finance vehicles have filled the gap.

Unlike the various subprime mortgage securities and derivatives, which were largely owned by institutional investors, retail investors have gotten involved in private credit funds. They were tempted with high yields and monthly or quarterly redemption windows.

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In Part One, we explored how leverage and derivatives turned subprime mortgages into a crisis that nearly brought down the global financial system. With a better understanding of the derivatives and leverage that led to the Global Financial Crisis (GFC), we now explore private credit, a small “niche” financial sector, such as subprime mortgages, which some are calling the next match to light a financial bonfire.

Private Credit Loan Growth

The graph below, courtesy of Preqin and the Daily Shot, shows the steady growth of private credit funds since the GFC. The “Dry Powder” category represents committed capital for investment that has not yet been deployed. For what it is worth, that amount is almost identical to the amount of subprime mortgages at their peak. The total global private credit market, including all other lenders, is estimated at around $3.4 trillion.

After the GFC, regulators forced banks to hold more capital and to retreat from riskier lending. As a result, an alternative credit ecosystem grew to replace banks. Private credit funds, business development companies (BDCs), and specialty finance vehicles have filled the gap.

Unlike the various subprime mortgage securities and derivatives, which were largely owned by institutional investors, retail investors have gotten involved in private credit funds. They were tempted with high yields and monthly or quarterly redemption windows.

The private credit tremors started with the bankruptcies in the auto sector — Tricolor and First Brands. Then Market Financial Solutions faced allegations of "serious irregularities," including concerns that it was double-pledging collateral. As broad credit and fraud concerns rose, the private credit fund, Blue Owl, was forced to gate withdrawals from a retail credit vehicle in early 2026. Ares Strategic Income Fund, with $10.7 billion under management, followed, capping redemptions at 5% versus withdrawal requests of nearly 12%. Apollo marked down assets in one of its BDCs and cut the payout. The list goes on, and as it grows, so does the level of fear.

Private Credits Structural Flaw

While defaults and collateral pledging irregularities are problematic, the headlines about gated funds seem to be the primary drivers of negative sentiment. Currently, losses and defaults in the underlying loans are not a big problem. Instead, many inexperienced retail investors own the funds and want their money back, but the funds are not in a position to return it promptly. 

The fundamental problem in private credit is a mismatch. Private credit funds lend money over four- to five-year periods. But to attract investors, many funds offer investors quarterly or even monthly redemption windows.

When redemptions spike, a fund cannot get its money back from those it lent to. Its only options are to limit investor redemptions or sell the loans in the market, which has few ready buyers for such illiquid paper. Such forced selling drives prices down, which weighs on the fund’s net asset value (NAV) and triggers further redemption requests. Accordingly, more funds are forced to limit withdrawals, leading to worsening sentiment. And in circular fashion, the problem worsens. 

Compounding the problem is that over 25% of private credit loans are to software companies. As the software sector gets assaulted by damaging AI narratives, its credit investors get nervous and demand their money back.

This Isn’t Subprime

Private credit today is a fancy term for direct lending. The fund makes a loan, holds it on its balance sheet, and bears the loss if it defaults. There are no synthetic CDOs replicating that exposure, like with subprime mortgages. There are no insurance companies writing unhedged protection on private credit indices. Yes, many funds use leverage, as do some investors, but the degree of leverage pales in comparison to what occurred in the mid-2000s. Moreover, the derivative structure that turned the manageable subprime-loss problem into a global catastrophe does not exist in private credit in a comparable form.

The risk today is macroeconomic in nature. If the negative sentiment surrounding private credit alters the investing and lending behavior of investors, banks, and other direct lenders, liquidity will be squeezed, and credit creation will weaken. Less lending and at higher interest rates can manifest as economic weakness, as it flows downstream to consumers and small and mid-sized businesses.  To wit, Fed President Stephen Miran recently stated:

I am concerned by the private credit impact on broad credit growth.

Credit Stress Travels: From Private Credit to Banks

While post-GFC, banks may have retreated from direct and riskier lending, they remain involved. It is estimated that US banks have direct exposure to private credit funds of $300 billion through the leverage they provide. As shown below, courtesy of Bank Earnings, the largest banks account for over half of that exposure.

As we share below, bank loans to non-depository financial institutions are approaching $2 trillion and have grown at a quickened pace since 2025.  To wit, JPMorgan and Fifth Third Bank disclosed losses tied to the aforementioned auto-sector bankruptcies. Private credit fund struggles don’t accrue solely to investors; they also appear on the balance sheets of the banks that provided the leverage to build them. However, the exposure to private credit pales in comparison to subprime mortgages.

Summary

This is not a redux of the GFC! The subprime crisis was much more deeply embedded in the core banking system. Private credit, for all its growth, remains a $3-4 trillion market within a global financial system measured in the hundreds of trillions. Default rates, while rising, remain low and manageable. Gated funds are a feature of the investment and not a cause for panic.

Due to faulty marketing targeting inexperienced retail investors, private credit problems are making headlines. With the headlines, broader financial system confidence and sentiment are in play. If private credit concerns spread, liquidity in the traditional and shadow banking systems could tighten, leading to reduced investment, tougher credit conditions, and resulting in subdued economic activity. But a 2008 repeat, shaking the financial system to its core, is highly unlikely.

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Our title above about Avis Budget Group (CAR) shares is a gross understatement. Since March 20^th, CAR has risen nearly 500%, as we share below.  While there are, and were, some favorable tailwinds driving the upward trend, such as rising used-car prices and elevated rental-car usage during the TSA-related problems, the most glaring factor is a massive short squeeze on its stock.  

With 54% of the float sold short as of the latest reporting period, which ended late March, CAR was the most heavily shorted Russell 1000 stock. As we have seen play out with meme stocks like GameStop and AMC, such a high ratio of short sales makes CAR shares prime for a squeeze. As CAR initially rose, some short sellers were forced to cover their positions by buying shares, thereby accelerating the rally. Moreover, as the stock continued higher, more longs entered the market, further exacerbating the situation. And at the same time, some short traders added to their short position, providing even more upside fodder.  

While CAR can certainly go higher, the move is not sustainable. The reason is quite simply that CAR's fundamentals are horrendous. CAR entered 2026 with over $25 billion in debt, a near-$1 billion net loss, flat-to-declining sales, and just over $500 million in cash.

The risk for short sellers: In late March, Avis launched an offering to sell up to 5 million shares directly into the market. The higher price provided CAR a rare opportunity to chip away at its massive debt load. Don’t be surprised when they issue more dilutive shares now that the stock is multiples of where it was in late March.

What To Watch Today

Earnings

Economy

• No major releases today

Market Trading Update

Yesterday, we discussed that, on a weekly chart, the recent decline was much like what we have seen in prior correction periods. Two notable points were that 1) such rallies don't retrace to lows, and 2) denote a completion process of the previous correction cycle and the return to the bullish trend. More importantly, we are in the midst of an earnings cycle that continues to signal stronger earnings growth ahead. This brings us to an important discussion.

Social media has been awash with dramatic proclamations that "the dollar is dying" and "nobody wants the USD." The narrative has become so pervasive that it risks hardening into a consensus. However, a quick glance at the chart tells a more nuanced story. While the Dollar Index (DXY) has drifted lower over the past two years, it remains near 98 today, essentially flat over the trailing 12 months and still well above its long-term historical averages. That is hardly the collapse being advertised.

More importantly, the flow of foreign capital into U.S. assets has not merely held steady; it has accelerated. According to the latest Treasury International Capital (TIC) data, foreign residents purchased a net $101 billion of long-term U.S. securities in February alone, following November's blockbuster $222 billion print. Over the last five reporting months, foreigners have added roughly $488 billion to U.S. long-term stocks and bonds, a pace that rivals the post-COVID liquidity surge and flatly contradicts the "capital flight" story.

The why behind those flows becomes obvious when we examine earnings. Consensus expectations for the U.S. IT sector have ratcheted higher throughout 2026, with earnings growth now projected at 43.4%, up from 30.9% at the start of the year. Emerging markets follow at 38.9%, while the U.S. total is pegged at 18.7%. More telling still, Info Tech earnings are expected to grow more than 2x faster than the S&P 500 as a whole (40% vs. 18%), with only Energy and Materials meaningfully outpacing the index.

Global capital allocators face a stark choice: accept mid-single-digit growth across Europe and much of the developed world, or own the companies actually building the AI infrastructure layer. That is not really a choice.

As long as U.S. earnings growth remains this differentiated, driven overwhelmingly by the AI capital cycle, foreign flows should continue to underpin both the dollar and U.S. equity valuations, regardless of the "dollar is dying" chorus on social media. Investors should position accordingly. 

Narratives make headlines; flows make markets. Trade accordingly.

Construction Labor Holds Up

Construction jobs, like construction spending, tend to be highly cyclical, changing with the pace of economic activity. While the economy has held up reasonably well, residential and non-residential construction spending has been flat, as we share below. Yet, the number of employees working in the construction industry has been steadily rising.

We believe this anomaly is largely due to construction spending in data centers. The second graph shows that data center construction spending has grown from $3 billion in 2016 to $47 billion today. Moreover, spending on data centers has overtaken that spent on offices.

Inflationary Anxiety Boosts Retail Sales

Retail sales, excluding auto and gas prices, rose by 0.6%. While that was slightly below expectations for a 0.8% gain, it was a strong pace. Consider that the data was collected in mid-March, when consumer sentiment was very low, and oil prices were soaring. It appears that the boost in sales may be partly due to front-running. Higher oil prices and related goods are creating some anxiety among consumers, and it's likely that quite a few have bought items they might have bought later to avoid higher prices. This is similar to the tariff front-running we saw in early 2025. While it boosts sales in the present, it has a dampening effect on future sales.

Per the Conference Board Consumer Sentiment Index:

Unsurprisingly, given the Iran war oil shock, consumers’ average and median 12-month inflation expectations surged in March to levels last seen in August 2025, when US consumers awaited more tariff announcements from the US federal government.

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Since the start of the year, the Philadelphia Semiconductor Sector Index (SOXX) is up 33% compared with the broader market, which is up only 4%. The primary rationale for the significant outperformance appears to be the insatiable demand for AI and a shift in its usage. Unlike the past couple of years, in which Nvidia and its GPU production for the development of large language models (LLMs) led the AI chip market, CPU usage is gaining ground as AI agentic models become more popular. Accordingly, CPU producers like Intel and AMD are now playing catch-up to Nvidia, the primary GPU producer. The graphic below shows that agentic AI is equally reliant on CPU and GPU chips, unlike the GPU-centric development of LLMs.

While Nvidia may lose some market share as CPU usage grows relative to GPU usage, there is another facet to consider that favors Nvidia. Profit margins on GPUs are almost double that of CPUs.  For example, Nvidia has a profit margin of about 75%, while Intel and AMD are in the low- to mid-40 % range. There are two primary reasons for the distinct advantage as follows:

• Inelastic AI demand — Hyperscalers like Microsoft, Google, Meta, and Amazon are willing to pay premium prices for GPU chips because the alternative (delayed AI deployment) is costlier.
• Monopoly pricing — NVIDIA controls ~80–90% of AI GPU supply, giving it enormous pricing power.

CPUs are much more of a commodity than GPUs. As such, they face much more intense competition, which compresses margins. There are also ARM-based alternatives that offer further competition. So while CPU usage will increase relative to GPUs, profit margins will likely further compress for CPU makers, while remaining abnormally high for Nvidia.

What To Watch Today

Earnings

Economy

Market Trading Update

Friday's tape told you everything you need to know about narrative-driven markets. The S&P 500 sprinted another 1.2% to fresh all-time highs above 7,100, crude crumbled 12% to $83, and the 10-year yield eased seven basis points to 4.24%. As noted yesterday, the catalyst was a single headline from Iran's foreign minister declaring the Strait of Hormuz "completely open" — a statement that, within hours, proved to be more wishful thinking than policy. As such, after 11 consecutive advances, the market pulled back yesterday, as expected.

With momentum and relative strength significantly reversed on a weekly basis, the market surge looks much like we have seen at previous bottoms. What is notable is that in every previous case, once the momentum indicator returned to a buy signal, the prior correction phase was complete. That appears to be the case this time.

However, that sharp an advance is "properly primed for a pull back." The technical tailwinds that powered this leg higher, such as large macro short-covering and systematic CTA demand, are coming to an end. Prime brokerage data tells the story. Overall book gross leverage sits at 310%, the 92nd percentile over one year and a near-record 98th percentile over five. Net leverage is more moderate at 75%, but fundamental long/short funds just posted their best three-week run since COVID, up 8.2% month-to-date and 7.1% on the year. In other words, the shorts have covered, the underweights have chased, and the engine driving this rally is likely to pause.

As such, use the current rally to rebalance portfolios, stop chasing the index, start hedging the tape, and look where no one else is looking. More importantly, raise cash levels to provide you an opportunity to add to equities further on any pullback to recent support.

Technology Leads As Breadth Deteriorates

A 13% rally in 13 days is quite the feat. Within the sharp rally, there is also a sharp divergence in returns. Hands down, technology led the market higher, while many other sectors relatively languished. As we show in the SimpleVisor analysis below, over the last three weeks, technology stocks (XLK) have moved from the bottom left, indicating oversold conditions on both an absolute and a relative basis, to overbought on both. At the same time, two of the more recently favored sectors, staples (XLP) and utilities (XLU), have moved lower. Their absolute scores haven't changed much, but their relative scores have fallen quite a bit.

The market was in a topping pattern of sorts from November until a few weeks ago. During that period, lower-beta sectors led the way, while technology and communications faltered. The recent rally, as we noted, is being led by the sectors that powered the market before November. This again raises the question of whether the recent outperformance of technology and other large-cap growth stocks signals that the upward trend is back on track, or a brief respite before value and low beta take over and prices consolidate or even decline.

Market Lesson: Why Panic Is A Costly Mistake

The stock market selloff between February 28 and April 14 produced one of the more instructive market lessons in recent memory. It isn’t because of what the market did, but because of what investors did in response. By April 2nd, the AAII Sentiment Survey showed bearish sentiment at 51.4%, the highest reading in years, well above the historical average of 31%. Put option volume surged, and the financial media ran daily coverage of worst-case oil scenarios, recession projections, and S&P 500 targets as low as 3,800.

However, when you have that combination of bearishness, as we discussed in 5-Consecutive Weekly Declines, markets tend to perform better.

What was surprising was that the S&P 500 recovered completely in two weeks and is now setting all-time highs.

That sequence is not a reason to relax, but it is a valuable market lesson. It is also a good reason to examine what happened to investors who panicked, why the pattern repeats with such regularity, and, most importantly, what a well-constructed portfolio actually looks like when the next stock market selloff arrives. Because it will arrive. The only uncertainty is the catalyst.

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As shown in the graph below, the University of Michigan's consumer sentiment gauges tells us that consumer confidence is now the worst its been since the survey began in 1952. Despite the confidence gauges being lower than during peak Covid shutdown, the GFC, and the 1970s oil crisis/inflation outbreak, the economy (GDP) and the employment situation have held up much better than one might expect.  Unemployment sits below 4.5%, GDP continues to expand, albeit at 0.5% last quarter, and equity markets are at record highs despite the Iran conflict and $90 oil.

The concern, however, is forward-looking. Sentiment doesn't just measure how people feel; at times it can shape how they spend. Recent data suggests the poor confidence feeling is slowly impacting consumerism. Real personal consumption expenditures, the broadest measure of what consumers buy, have quietly decelerated from roughly 3.5% year-over-year growth in early 2024 to under 2.5%. That's not recessionary-like spending, but it's a meaningful decline. Moreover, we are witnessing weakness concentrated in the categories most sensitive to confidence: discretionary retail, autos, and housing-adjacent spending like furniture and appliances.

The transmission lag is critical in predicting economic activity over the next few quarters. Historically, poor sentiment readings take three to six months to fully flow through into hard spending data. Which means the poor Michigan confidence survey is still only partially priced into the consumption data now being released. There may be more to come.  

What To Watch Today

Earnings

Economy

• No economic reports to be released

Market Trading Update

The S&P 500 closed Friday at a new all-time high of 7,125, extending 1.8% beyond January’s prior peak and capping a 13.1% rally from the March low in under three weeks. This is one of the sharpest V-shaped recoveries in the post-GFC era. The Nasdaq posted its 13th consecutive gain (its longest winning streak since 2009), the Russell 2000 hit a new all-time high, with 75% of its constituents advancing Friday, and the VIX collapsed from 31 to 17. Oil pulled back below $90 before closing at $94, with ships beginning to transit the Strait of Hormuz. This is exactly the durable-bottom signal we identified weeks ago: a rapid recovery above the 200-day moving average, improving breadth, and oil declining with the VIX below 20.

However, is this just a short-covering rally or the resumption of the bullish trend? The answer is that this is most likely the resumption of the bullish trend.

Two weeks ago, just 27.6% of S&P 500 constituents traded above their 50-DMA (12th percentile). That number has surged to roughly 71%, well above the 50% confirmation threshold we set as the dividing line between a reflexive bounce and a genuine trend reversal. The Russell 2000’s move to all-time highs is the single most bullish breadth signal: small caps confirm this is not merely a Mag 7 short-squeeze. JPMorgan’s flow data shows retail participation rising from the 10th to the 55th percentile. When breadth and flows confirm the move, the rally has a structural foundation that pure short-covering does not.

None of this means you should chase here. After a 13% move in three weeks, the market is stretched on every short-term measure. The RSI is pushing overbought above 70, price is extended 7% above the 200-DMA, and the Nasdaq’s 13-day streak has historically preceded 2–5% pullbacks within two weeks. Retail’s return is a yellow flag of sentiment as the “easy money” phase is behind us. On a pullback, the 7,000 level, January’s former all-time high, becomes first support under the classic “old resistance becomes new support” principle. Below that, the 6,870–6,950 zone (February’s consolidation range) should attract strong buying. The 200-DMA (~6,683) remains the line in the sand. A healthy 2–3% pullback to the 7,000–6,950 zone is the spot to add exposure, not up here at fresh highs.

This rally is the real thing, but treat it with caution. Reversals can be swift, particularly if the narrative supporting the rally fails. For now, stay long, stay patient, and let the market come to you.

Trade accordingly.

The Week Ahead

Retail Sales for March will be the key economic data point this week. This figure will be interesting as it will be the first piece of hard economic data released from the government since the Iran conflict started. Expectations are that the number will be +0.4%, down from +0.6% last month.

Earnings will kick into full speed this week as we share below. Pay attention to any forward guidance these companies may issue in regards to consumer spending trends.

BLS Jobs Report: Is There A Better Measure?

“March’s 178,000 BLS jobs report came in nearly three times Wall Street’s 60,000 estimate. Markets celebrated. Almost nobody mentioned the entire beat traced back to doctors returning from a strike and weather rebounds. That’s not strength. That’s noise — and it’s a pattern we can no longer afford to ignore.“

Every time we see the BLS jobs report released, there are always problems with it. Over the years, I’ve come to accept that most government statistics are imperfect. Regardless, they are what markets pay attention to. However, it is increasingly clear that the BLS Jobs report over the last three years has been problematic. That report lands on the first Friday of every month and sends equity futures swinging before markets open. The problem is that the report has become so distorted by sampling failures, model-based imputations, and seasonal adjustments layered on top of more seasonal adjustments that the monthly print often tells us almost nothing reliable about the actual state of employment.

I realize that is a serious claim that borders on heresy, but let me back it up with the data. I want to show you what I believe is a simpler, more honest alternative. One that filters out the noise and reveals the employment trend that matters to investors and policymakers alike.

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The Iran shock erased 18% from valuations and fully recovered in two weeks. Investors who panicked missed it all. Here's what the market lesson is about: risk management, behavior, and what to do with your portfolio right now.

The stock market selloff between February 28 and April 14 produced one of the more instructive market lessons in recent memory. It isn't because of what the market did, but because of what investors did in response. By April 2nd, the AAII Sentiment Survey showed bearish sentiment at 51.4%, the highest reading in years, well above the historical average of 31%. Put option volume surged, and the financial media ran daily coverage of worst-case oil scenarios, recession projections, and S&P 500 targets as low as 3,800.

However, when you have that combination of bearishness, as we discussed in 5-Consecutive Weekly Declines, markets tend to perform better.

What was surprising was that the S&P 500 recovered completely in two weeks and is now setting all-time highs.

That sequence is not a reason to relax, but it is a valuable market lesson. It is also a good reason to examine what happened to investors who panicked, why the pattern repeats with such regularity, and, most importantly, what a well-constructed portfolio actually looks like when the next stock market selloff arrives. Because it will arrive. The only uncertainty is the catalyst.

The Drill & The Failure

Every major market shock is a test, a market lesson to be learned from. Not a test of whether your thesis was right, or whether you picked the right stocks. A test of whether your portfolio was built to hold under pressure, and whether your instincts are an asset or a liability when it counts.

The Iran conflict delivered a real economic shock. U.S. and Israeli forces struck Iran's nuclear facilities. Tehran retaliated against Gulf energy infrastructure and the Strait of Hormuz, the narrow waterway through which roughly 20% of the world's oil supply flows daily, ground to a halt. Brent crude surged from $61 at year-end to over $114 a barrel, and that spike raised inflation expectations, hammered small caps, and sent Asian equity markets into a tailspin as energy costs threatened to consume the profit margins underpinning the region's AI and manufacturing boom.

Then, at what seemed to be the darkest moment, the market repriced all of that in two weeks. Valuations declined roughly 18% as investors adjusted for the expected impact of higher oil prices on earnings and consumer spending. That repricing was rational, but the panic layered on top of it was not. In the middle of the selloff, predictions of a structural bear market were everywhere, but none of them materialized.

That pattern of maximum fear at the exact moment prices are lowest, followed by regret as they recover, is a market lesson that repeats itself regularly. The investors who liquidated near the recent lows, as sentiment turned negative, locked in losses. But two weeks later, they face an even more difficult decision: do I reenter at prices 10% higher than the ones I sold at? Most don't. That gap between market returns and the average investor's actual earnings is the most expensive line item in the typical portfolio.

What Risk Is, And Isn't

The word "risk" gets used so loosely in financial media that it has lost most of its meaning. A falling stock price isn't the definition of "risk." Neither is a scary headline. Volatility isn't risk either; it's the price of admission for participating in markets over time.

As I've said previously, if you aren't willing to watch your portfolio decline 10% to 15% without doing something rash, you aren't really an investor; you are a speculator who happens to be holding stocks.

Risk, defined precisely, is the probability of a permanent impairment of capital. Not temporary losses, or a 10% drawdown that reverses in two weeks. Risk is the permanent impairment of capital, resulting in significantly diminished future outcomes. The distinction is enormous, separating investors who compound wealth over decades from those who don't.

When the S&P 500 dropped during the Iran shock, the vast majority of that decline reflected a temporary repricing of earnings expectations under elevated oil prices. The underlying companies, their cash flows, their competitive advantages, and their earnings power didn't change materially. The price changed, but the value didn't. Investors who sold during that repricing didn't escape risk; they converted a temporary paper loss into a realized one and then forfeited the recovery.

The market lesson is in the chart. Fear peaked at the moment prices were most attractive. By the time the market had recovered and all-time highs were being printed, fear had nearly returned to historical norms. The investors who acted on that peak in fear did exactly the wrong thing at exactly the wrong moment. The investors who recognized it as a contrarian signal, or who simply had the discipline to do nothing, participated in the full recovery.

The Behavior Gap: The Most Expensive Cost

Dalbar Inc. has published an annual study for over 30 years, measuring the difference between the return delivered by the stock market and the return actually earned by the average equity investor. The gap, which Dalbar calls the "behavior gap," has consistently shown that the average investor earns two to three percentage points less per year than the indices they're invested in. That shortfall isn't explained by fees or bad stock selection. It's explained entirely by timing decisions: buying after rallies and selling during selloffs.

Over 30 years, a two-percentage-point annual shortfall compounds into a staggering wealth gap. A $500,000 portfolio growing at 8% a year becomes roughly $5 million. The same portfolio growing at 6%, because the investor panicked during selloffs and missed recoveries, becomes roughly $2.9 million. That $2.1 million gap is the price of panic. And the investor who sold near the April 2nd sentiment extreme has already paid a portion of it.

After every major market shock, the "this time is different" argument gains traction. The Iran conflict gave that argument real support. It was a genuine exogenous shock with measurable economic consequences, not a technical correction or manufactured volatility. But the historical record on recovery from sharp, shock-driven selloffs is remarkably consistent, and favors the patient investor over the reactive one.

Since 1950, there have been 20 instances in which the S&P 500 rose more than 10% in a 10-day period, the kind of snapback recovery we saw in April. Over the following 12 months, the index was higher in 17 of those 20 cases, with an average gain of 19%. Nasdaq win streaks of comparable magnitude resolved higher 100% of the time over 12 months, with average gains near 26%. Those numbers don't guarantee another selloff isn't coming. That means the investors best positioned to capture those forward returns are the ones who stayed disciplined through the downturn. They rebalanced into weakness, and held enough cash to redeploy rather than liquidate.

Consider 2022. The Fed's tightening cycle produced a 9-month bear market that erased ~25% from the S&P 500. The investors who sold in October 2022, when sentiment was just as dark as it was in early April 2026, missed a recovery that added nearly 60% over the next two years. The pattern repeats because human psychology repeats. The catalyst changes. The behavior doesn't.

Build a Shock-Resistant Portfolio

Building a portfolio that survives market selloffs without requiring heroic decision-making isn't complicated. It's only unpopular because it involves accepting modest underperformance during the easy, low-volatility periods in exchange for not being the person who liquidates at the bottom during the hard ones.

The UBS analysis of the Iran shock made a point worth internalizing. The assets that acted as refuges during 2025's tariff-driven selloff, such as gold, the Japanese yen, and Treasuries, provided meaningfully less protection this year. The assets that performed well in 2026, particularly the trade-weighted dollar, did little to offset losses during last year's episode. In other words, building a portfolio to hedge against the last crisis is a losing strategy. The next one will look different.

The more durable approach focuses not on predicting which hedge will work, but on maintaining portfolio construction that allows you to hold through volatility without being forced to sell. That means genuine diversification across asset classes and geographies. It means a real cash buffer that functions as optionality. It also means rebalancing mechanically rather than emotionally, adding exposure when prices are low and trimming when they've run ahead of value.

The Iran conflict reframed a question many investors had avoided asking: Were they genuinely diversified? Investors with heavy commodity-linked exposure looked prescient during the decline. But that quickly fell out of favor as megacap technology stocks took center stage during the recovery. Having diversification means you had positions that performed during both the decline and the rally. Concentrated, one-sided portfolios rarely perform well over the long term.

Here are seven portfolio actions to think about today.

The six weeks between late February and mid-April gave every investor a real-world market lesson. That lesson was in both portfolio construction and behavioral discipline. It wasn't about Iran, oil prices, or the Strait of Hormuz. The lesson was whether your portfolio was built to withstand a genuine shock. And whether you know the difference between a temporary price decline and a permanent impairment of value.

Those who held, rebalanced, and redeployed cash came out ahead. Those who sold near the lows are now deciding what to do with prices ~10% higher. Most won't. That's the behavior gap in real time, and it compounds across every market cycle over an investing lifetime.

After 30 years of watching this pattern repeat, I can tell you with confidence that no amount of market forecasting substitutes for a sound process. The S&P 500 is trading at roughly 20 times forward earnings, the ten-year Treasury yield is near 4.3%, and the geopolitical situation is improving, or at least markets are pricing it that way. What comes next is unknowable. What you do with your portfolio in the meantime is entirely within your control.

That's always been the real market lesson. The Iran shock just delivered it again, free of charge and clearly labeled.

What you do with it is up to you.

The post Market Lesson: Why Panic Is A Costly Mistake appeared first on RIA.

🔎 At a Glance

• Short Covering Rally Or Is The Bull Market Back
• Market Brief & Technical Review
• From Lance's Desk: BLS Jobs Report Is Broken. Is There A Better Measure? - RIA
• Market stats, screens, and risk indicators

🏛️ Market Brief - Stocks Surge On Opening Of Strait

The market didn't just recover this week. It made new history.

Monday opened with the S&P 500 erasing all losses since the Iran war began. The market rose 1% to its highest close since late February. Driving that rally were reports that Iran had reached out to the Trump administration despite a U.S. naval blockade of the Strait of Hormuz. The buying accelerated from there. By Wednesday, both the S&P 500 and the Nasdaq Composite closed at fresh all-time highs. With investors pricing in an increasingly credible path to a permanent peace deal, the bulls regained control.

The week's dominant technical story was institutional mechanics, not just sentiment. Commodity trading advisors, systematic trend-followers that had aggressively shorted into the March 29 lows, reversed violently. Those managers purchased an estimated $86 billion in equities last week alone. According to positioning data, CTAs have an additional $70 billion of programmatic buying to deploy over the next five sessions. That is not discretionary optimism. It is forced covering and momentum-chasing at scale. It also provides a meaningful mechanical tailwind into next week, even if geopolitics stalls.

Earnings added fundamental credibility to the move. JPMorgan Chase beat on every line, $5.94 EPS vs. the $5.45 estimate, on revenue of $50.54 billion. However, CEO Jamie Dimon tempered the celebration by cutting net interest income guidance and warning of an "increasingly complex set of risks." Citigroup and BlackRock also topped estimates, but Goldman Sachs disappointed on FICC revenue despite record equities trading. That sent Goldman's stock down nearly 2%, while Wells Fargo fell more than 5% on a weak print. Outside of banking, Netflix beat on revenue and earnings. That wasn't good enough, as guidance fell short of expectations. So far, 80% of S&P 500 reporters have topped EPS estimates by an average of 15.7%. That is a strong beat rate, and consistent with FactSet's call for a sixth consecutive quarter of double-digit earnings growth.

Friday's session provided the week's most consequential development. Axios reported that the U.S. and Iran are negotiating a three-page memorandum of understanding. That framework would release $20 billion in frozen Iranian funds. In exchange, Tehran surrenders its enriched uranium stockpile and agrees to a moratorium on nuclear enrichment. Hours later, Iran's foreign minister posted on X that the Strait of Hormuz was open. That news sent WTI crude plunging by more than 11%.

Most crucially, the inflation math is changing in real time. A durable Hormuz reopening removes the primary driver of stagflation risk that has pressured markets since late February. If the MOU holds and tanker traffic normalizes, the March CPI will be the last truly ugly energy-driven print. If oil prices decline to more productive ranges, the Fed's path back to rate cuts reopens. With earnings tracking ahead of estimates, CTAs still buying, and geopolitical risk fading, the bull case is more constructive than it has been in months. The key risk remains deal fragility; a single violation or rhetorical escalation could unwind fast what took weeks to build.

In other words, it is not the time to remove risk management entirely.

📈Technical Backdrop - Pullback Likely

The S&P 500 closed Friday at a new all-time high of 7,125. That is 13.1% rally from the March low in under three weeks. This is one of the sharpest V-shaped recoveries in the post-GFC era. The Nasdaq posted its 13th consecutive gain (its longest winning streak since 2009). Inside the market, internals were strong. The VIX collapsed from 31 to 17. Oil pulled back below $90 before closing at $94, with ships beginning to transit the Strait of Hormuz. This is exactly the durable-bottom signal we identified weeks ago. A rapid recovery above the 200-day moving average, improving breadth, and oil declining with the VIX below 20.

However, is this just a short-covering rally or the resumption of the bullish trend? The answer is that this is most likely the resumption of the bullish trend.

Two weeks ago, just 27.6% of S&P 500 constituents traded above their 50-DMA (12th percentile). That number has surged to roughly 71%, well above the 50% confirmation threshold. That was the dividing line between a reflexive bounce and a genuine trend reversal. The Russell 2000’s move to all-time highs is the single most bullish breadth signal. Small caps confirm this is not merely a Mag 7 short-squeeze. Lastly, JPMorgan’s flow data shows retail participation rising from the 10th to the 55th percentile. When breadth and flows confirm the move, the rally has a structural foundation that pure short-covering does not.

None of this means you should chase here. After a 13% move in three weeks, the market is stretched on every short-term measure. The RSI is pushing overbought above 70. Furthermore, the price is extended 7% above the 200-DMA, and the Nasdaq’s 13-day streak has historically preceded 2–5% pullbacks within two weeks. Retail’s return is a yellow flag of sentiment as the “easy money” phase is behind us. Any pullback to the 7,000 level will become the first support under the classic “old resistance becomes new support” principle. Below that, the 6,870–6,950 zone (February’s consolidation range) should attract strong buying. The 200-DMA (~6,683) remains the line in the sand. A healthy 2–3% pullback to the 7,000–6,950 zone is the spot to add exposure. Not up here at fresh highs.

This rally is the real thing, but treat it with caution. Reversals can be swift, particularly if the narrative supporting the rally fails. For now, stay long, stay patient, and let the market come to you.

Trade accordingly.

🔑 Key Catalysts Next Week

The calendar pivots from bank earnings to the consumer and Big Tech, with March Retail Sales, Tesla, and the final pre-FOMC sentiment read all compressed into five sessions. The April 27–28 FOMC meeting looms, with the Fed in its quiet period. That means every data point this week will be interpreted through the lens of what it means for rate policy under new Chair Kevin Warsh (assuming confirmation by then) or lame-duck Powell.

Tuesday's March Retail Sales is the week's economic anchor and the first consumer spending report to fully capture the oil price spike at the pump and the tariff pass-through into goods prices. February's report was already soft. If the control group, which feeds directly into the GDP nowcast, contracts, the slowdown narrative hardens further heading into the FOMC. Pending Home Sales will also tell us whether buyers are pulling back as mortgage rates reverse higher. UnitedHealth reports that morning as well, and with the healthcare cost trend approaching 11% and Medicare Advantage pressure weighing on the managed care sector, a read on both healthcare inflation and corporate margins will be important.

Wednesday is the marquee earnings day. Tesla after the close is the event: Q1 deliveries already missed expectations, margins are under pressure, and the street is trying to price a company that's spending aggressively on AI and robotaxi infrastructure while the core auto business decelerates. Musk's macro commentary will move futures. IBM (IBM) reports the same evening that the AI enterprise revenue trajectory is critical following February's 13% single-day plunge amid fears of disruption from Anthropic. ServiceNow (NOW) is also the SaaS bellwether, with its "Now Assist" agentic AI product now past $600 million in ACV. Philip Morris (PM) that morning tests consumer pricing power with $500 million in guided tariff headwinds.

Friday closes with a one-two punch: Durable Goods Orders for the capex demand signal, and the final UMich Consumer Sentiment reading for April. The inflation expectations embedded in UMich are the last data point the Fed will see before convening. A spike in five-year expectations above 3% would all but guarantee a hawkish hold, while a decline would crack the door for dovish language.

In a nutshell, Retail Sales will tell us if the consumer is breaking. Tesla will tell us whether the growth premium is justified, and UMich will signal the Fed's next move. All with the FOMC one week away. Position defensively into Wednesday's close.

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💰 Short Covering Rally?

▶ WEEK CLOSE:  S&P 500 7,126.06 (+1.2%)  |  Nasdaq 13-Day Win Streak (longest since 1992)  |  Russell 2000 New ATH  |  Brent Crude -9.1%  |  VIX 17.42

What began as a short-covering rally on April 7th has spent the last two weeks proving the bears wrong. Friday’s close at 7,126, the first finish above 7,100 in the index’s history, up 13.1% from the March lows, arrived alongside one of the most consequential single-session catalysts of the year. Iran declared the Strait of Hormuz “completely open.” Brent crude collapsed 9.1%. The Russell 2000 logged a new all-time high. The short-covering rally that skeptics said would exhaust itself in days has now run for three weeks and taken every major index to record territory.

The question every investor is asking right now isn’t whether to believe in the rally. The price action is undeniable, but the question is what kind of rally this actually is, and what investors who missed the initial short-covering rally should do about it.

The answer, as of Friday’s close, has shifted meaningfully. This no longer looks like a purely mechanical short-covering rally. The data is starting to point to something more durable. Here’s why that distinction matters, and what it means for your portfolio.

As we discussed in the #DailyMarketCommentary this past week, the recent price action felt like a release valve being pulled. Goldman’s prime brokerage flows guru, Lee Coppersmith, described a clear pivot toward risk-on, noting that sentiment has shifted toward FOMO among investors who dumped positions amid peak AI disruption fears and rising Middle East tensions.

That pivot makes sense from a mechanics standpoint. Short exposure across U.S. macro products, index futures, and ETFs had climbed to the 93rd percentile over the past five years, with hedge fund gross exposure near an all-time high of 307%. When the Iran ceasefire headlines crossed, that positioning became a coiled spring. Shorts covered, hedges unwound, and global equities were net bought for the first time in eight weeks, with Goldman’s Equity Fundamental Long/Short Performance Estimate rising 4.01%, the best weekly reading since February 2021.

That’s the good news, and we’ve seen this movie before. The build-up of stress in the market gets investors overly bearish, and then “hope” arrives, relieving the pressure. The “hope” causes a rush to gain positioning, short positions unwind sharply, and the headline indices surge.

The trap, however, is confusing the “market squeeze” with a new bull leg higher. Understanding which dynamic is actually driving this market right now is the most important analytical question any investor can ask.

A Review

The S&P 500 peaked at 7,002 on January 27th and spent the next eight weeks coming apart at the seams. The trigger wasn’t an earnings collapse or a credit event. It was a geopolitical shock that repriced three variables simultaneously: oil, inflation expectations, and the Federal Reserve’s flexibility.

When U.S. forces launched Operation Epic Fury in late February, Brent crude surged from roughly $72 per barrel toward a peak of $119–$120 by mid-March. The stagflation trade that the market had been dismissing suddenly had a fundamental basis. JPMorgan cut its year-end price target. Recession probability estimates at the major banks rose from 25% toward 50%. Five consecutive weekly losses followed, with the index falling 7.5% from the January peak to lows near 6,300 by late March. Short interest built to multi-year highs as institutional investors layered on hedges through ETFs. The market was coiled.

What followed was initially a textbook short-covering rally. The ceasefire on April 7th lit the fuse. Trump’s April 13th comment that Iran wants to ‘work a deal’ accelerated it. And Friday’s Strait of Hormuz announcement — combined with oil’s single biggest drop of 2026 — may have completed the transition from short-covering rally to genuine bull market resumption.

The initial move off the lows was textbook, short-covering rally mechanics. Short interest at multi-year highs, extreme bearish sentiment, and oversold technicals created the conditions. All that was needed was a catalyst, and Trump’s April 13th comment that Iran wants to "work a deal" provided exactly that. Now, we have all three pillars in place to determine, potentially, what happens next.

• Pillar One: The short-covering rally ignites.  According to AInvest analysis, total S&P 500 component short interest was at elevated levels as the index traded near its lows, creating a concentrated pool of traders who must eventually buy back shares. When the ceasefire news broke on April 7th, the buying cascade began. What followed was a short-covering rally that sent the Nasdaq to its best multi-session run on record. The velocity was characteristic of forced covering rather than fresh conviction buying, which is precisely why the bears initially dismissed it.
• Pillar Two: Geopolitical de-escalation extends the move.  A pure short-covering rally typically exhausts itself within a few sessions once the most exposed shorts are covered. What extended this one was sustained improvement in the Iran narrative. Ships began clearing the Strait of Hormuz blockade. The Islamabad negotiations shifted tone from bellicose to cautiously optimistic. Vice President Vance noted the "diplomatic off-ramp is wider than it was a month ago." That war premium embedded in equity valuations began to dissolve, giving the short-covering rally a fundamental tailwind.
• Pillar Three: Earnings season anchors the move.  Goldman Sachs posted EPS of $17.55 against expectations of $16.47. Morgan Stanley beat with $3.43 versus a forecast of $3.02. JPMorgan cleared the bar on nearly every metric. The financials sector handed the market a fundamental anchor at exactly the moment it needed one. As TheStreet contributor James ‘Rev Shark’ DePorre observed: "Investors are betting on the long-term strength of the U.S. economy, with AI as the primary driver. The Iran situation is being treated as a temporary distraction."

So, who is likely right: the bulls or the bears?

Short-Covering Rally or Something More?

Every investor right now is trying to answer that question.

If there is a single dataset that most clearly distinguishes a short-covering rally from a genuine bull-market resumption, it’s sector rotation. Short-covering rallies tend to be narrow; they lift the most-shorted names while leaving cyclical and economically sensitive sectors behind. Genuine recoveries broaden. The sector data from the wartime selloff (February 27 to March 30) compared to the recovery (April 7 to April 17) tells a very clear story.

Breadth has also improved sharply, but there is certainly more room to broaden.

However, that rotation is exactly what you want to see following a geopolitical shock. Energy, the wartime beneficiary, has given back its gains. Technology has led the recovery. Consumer discretionary has followed, with Friday’s cruise sector surge (Royal Caribbean, Norwegian, Carnival all up 9%+) signaling consumers are betting on normalcy. Industrials and financials have contributed. And the Russell 2000 has outperformed the S&P 500 by a margin that argues for something well beyond a short-covering rally. That’s five of eleven sectors posting meaningful gains with genuine fundamental drivers behind each.

Another important factor right now is earnings. As we noted earlier this week, Goldman Sachs is maintaining its year-end S&P 500 target of 7,600. That target is premised on $309 per share in 2026 earnings and 12% growth, which they describe as "a fundamental floor." In their view, this is more supportive of a bull market.

"The bull market is maturing, not ending. With 12% earnings growth acting as a safety net, the transition offers a more sustainable path."

On the other hand, we must also consider the bears’ argument. The argument that this is "just a short-covering rally" with no staying power may be true, but it gets harder to sustain when you study the historical record for geopolitical shocks of comparable magnitude. Across more than 20 major events since World War II, the pattern is consistent: markets recover faster than most investors expect, and the investors who stay disciplined through the short-covering rally phase and into the recovery tend to come out ahead.

The current episode has already outpaced the average recovery time of under 60 days, completing its round-trip to new highs in just 21 days. The speed is notable, comparable to the post-Iraq War recovery of 2003, which went on to produce a 33.7% 12-month return. The COVID comparison (148 days to recover, then +43.6% over six months) is also instructive. What initially looked like a mechanical short-covering rally in April 2020 turned out to be the opening act of one of the most powerful bull markets of the modern era. The key distinction in all these cases is what's happening beneath the surface, and in 2026, that’s increasingly constructive.

The weight of evidence has shifted. At the start of this week, our scorecard was roughly balanced — three confirmed bull signals against three legitimate bear concerns. As of Friday’s close, the bull case has added three material confirmations: Russell 2000 at a new ATH (breadth), oil’s single-session collapse (geopolitical resolution), and sector rotation into cyclicals (genuine buying, not short-covering alone). The bear case retains one critical point: RSI at 72.3 argues for near-term patience on new entries, not a reversal of the trend.

The verdict: This is no longer a short-covering rally. It was one when it started. It isn’t one anymore. The transition from a mechanical short-covering rally to a fundamental bull market resumption typically happens when:

• The shorts have been largely covered,
• Breadth expands,
• Sector rotation confirms the recovery is economic rather than positioning-driven, and
• A fundamental catalyst removes the original trigger for the selloff.

As of Friday, all four conditions have been met.

What To Do If You Missed The Rally

This is the most emotionally loaded question in the room. If you have been listening to the "Perpetual Purveyors Of Doom," you watched a short-covering rally turn into an 11% surge and a new all-time high, and now you’re wondering whether to chase it. The instinct is understandable. The discipline required to resist the "negative commentary" is what separates good investors from the rest.

Here’s what history consistently shows: most breakouts that begin as a short-covering rally, and then sustain above key moving averages, offer a secondary entry point within 4 to 6 weeks of the initial move. Markets rarely transition from correction lows to sustained new highs in a straight line. The more common path involves:

• An initial surge (the short-covering rally phase),
• A consolidation or shallow retest of former resistance, and
• Then a continuation move. That retest is your entry.

Therefore, as shown below, depending on how you are currently invested, you can take actions to navigate whatever comes next.

The macro backdrop hasn’t been cleared of all risk, as oil remains above $90 per barrel, inflation is sticky, and the Fed has no near-term rate cuts in the pipeline. The ceasefire is fragile, and the Islamabad negotiations haven’t yet produced a signature. Any deterioration on those fronts is a reason to reduce exposure, not add to it.

What we are watching most closely over the next two to three weeks isn’t the price level, it’s the breadth confirmation. We want to see the percentage of S&P 500 stocks above their 200-day moving average cross back above 60%, then 70%. We want to see volume improve on up-days and dry up on pullbacks. And we want to see earnings season deliver results that justify the multiple, not just the sentiment reset that a short-covering rally provides.

BOTTOM LINE:  The S&P 500’s return to all-time highs is technically significant, but significance and sustainability are not the same thing. Yes, a short-covering rally lit the fuse, but the sustained move above the 200-day moving average, the improving VIX, and the early earnings beats suggest something more durable may be taking shape. History is clear that markets recover from geopolitical shocks faster than almost anyone expects. The investors who come out ahead aren’t the ones who chase; they’re the ones who use pullbacks to build positions in quality names, maintain discipline on stops, and resist the urge to mistake speed for safety. The next two to three weeks of earnings will tell us whether this is a new leg higher or the best exit ramp before a retest.

Trade accordingly.

🖊️ From Lance’s Desk

This week's #MacroView blog examines the BLS employment report, its flaws, and a potential solution to improve its readings.

Also Posted This Week:

• Will Private Credit Cause The Next Financial Crisis? - RIA - by Michael Lebowitz
• S&P 500 Outlook: The 8.2% Rally & What Comes Next. - RIA - by Lance Roberts

📹 Watch & Listen

In this week's video, we discuss the market as it breaks out to new highs in one of the sharpest rallies this century.

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📊 Market Statistics & Analysis

Weekly technical overview across key sectors, risk indicators, and market internals

💸 Market & Sector X-Ray: Market Cracks Support

Previously, we noted that: "With every other sector extremely oversold, the logical setup now is for that rotation out of energy into other areas of the market to begin as soon as clarity on Iran emerges." As shown in the upper-right box, that is what happened over the past two weeks, as the entire premium in the energy sector reversed and technology surged. With the market now rebalanced, we should see a broader advance next week. Markets are getting overbought, so rebalance risk as needed.

📐 Technical Composite: 79.77 - Market Surge Approaching Overbought

As noted previously, "The odds of a reflexive rally are increasing. We are currently at levels we haven't seen since 2022." That reflexive rally came hard, with the market posting its best performance since March 2022. We are approaching overbought levels, so use this rally to rebalance risk and exposures as needed.

🤑 Fear/Greed Index: 74.37 – Investors Go All In

As we noted two weeks ago, "While not at 'fear levels' yet, the selloff has been rather sharp, so a reflexive rally." The reflexive rally came with a vengeance over the last two weeks, and investor sentiment and positioning went from "fear" to borderline "extreme greed" in just that time. There is now decent momentum behind the market, but if you didn't like the recent selloff, this is a good time to rebalance risk and portfolio allocations.

🔁 Relative Sector Performance

In our last update, we stated: "Given the divergence between Energy and the rest of the market, profit-taking in Energy seems prudent." This past week, energy sold off sharply while Technology staged a massive rally. Currently, Technology and Transportation are very overbought. Take profits and rebalance risk accordingly.

📊 MFBR Index (Money Flow/Breadth Ratio Indicator): 45% = Neutral/Bullish

NEW! MFBR Index: The Money Flow Breadth Ratio (MFBR) model is a rules-based equity allocation framework that uses weekly S&P 500 money flow data to generate buy, sell, and neutral signals. It is designed to systematically adjust portfolio equity exposure in response to the direction and persistence of institutional capital flows, aiming to reduce drawdowns while capturing the majority of market upside.

"As of April 17, 2026, with the S&P 500 at 7,126.06, the Money Flow Breadth Ratio (MFBR) stands at 45% and rising. This places the indicator in neutral territory (40-50%), triggering a NEUTRAL signal. The prior week's reading was 40%, representing a 5% decline over the trailing four weeks. The increase in the MFBR suggests both money flows and breadth are improving, maintain current equity exposures, and rebalance risks as needed."

📊 Sector Model & Risk Ranges

What a difference two weeks can make. The sectors that were most aggressively extended, as we warned, reversed. The sectors that were most beaten up were aggressively bid. This is why we regularly recommend rebalancing when sector performance becomes too bifurcated. The good news is that the market has recovered and the bulls are back in control. The bad news is that there are an increasing number of bearish crossovers, which typically signal rougher times ahead. With most sectors and markets well outside their respective ranges, take profits and rebalance risk, a pullback is increasingly likely over the next two weeks.

Have a great week.

Lance Roberts, CIO, RIA Advisors

The post Short Covering Rally Or Is The Bull Market Back? appeared first on RIA.

Allbirds, the sustainable sneaker company, has recently fallen on hard times, with revenue down by more than 50% from its peak. To help right the ship, Allbirds is rebranding itself as NewBird AI. Allbirds closed all of its U.S. stores and sold its intellectual property for $39 million. They are also raising $50 million in the effort to morph into an AI computing infrastructure company. It's unclear how $50 million will help them, given that they are going up against companies with trillion-dollar market caps spending hundreds of billions on AI, but its share price, which rose 700% on Wednesday, argues otherwise

In rebranding, Allbirds to NewBird AI, its executives are taking a page straight from the crypto playbook — and before that, the dotcom playbook:

Struggling company - hot narrative - rebrand company – stock price surges.

Remember in 2017 when Long Island Iced Tea became Long Blockchain? The original template was envisioned during the 1998 dotcom boom. For example, Books-A-Million, a regional bookstore chain, announced that it had updated its website, and its stock went from $3 to $47. It did not launch a new business or even pivot to e-commerce. Two weeks later, the stock gave up most of the gains. The underlying business was irrelevant to speculative investors. The words "internet" and “website” drove investors into a frenzy.  Today, the word "AI" is magic. It suspends disbelief and sends retail investors into a speculative frenzy despite the lack of evidence that a name change and new direction will materially impact the bottom line.

What To Watch Today

Earnings

Economy

Market Trading Update

Yesterday, we noted the S&P 500 had printed a new all-time high, erasing every point of the Iran-war selloff in just over two weeks, while the Nasdaq extended its winning streak to 11 consecutive sessions, the longest in the index's history. The question now isn't whether the rally was real. It's what historically happens after a move this extreme.

The statistics are hard to ignore. As 3Fourteen Research noted this morning, the S&P 500's 9.8% gain over the last 10 trading days ranks in the 99.7th percentile of all 10-day rolling returns since 1950. Only 20 comparable episodes exist in 76 years of data.

The forward numbers are unambiguously bullish: the average next-12-month return is +19%, with 17 of 20 instances positive. The Nasdaq tells a similar story. Consecutive-session streaks of this magnitude have produced a positive index 12 months later 100% of the time, with an average gain of +26%.

Bottom line: moves this violent to the upside are not tops. They are almost always the early innings of something larger. The mathematical reason is simple. Markets that surge with this kind of force are breaking out of oversold conditions against a backdrop of heavy short interest and defensive positioning. That combination takes time to unwind as underinvested managers chase performance and short books get progressively covered into strength.

That said, a 99.7th-percentile move does not immunize the market against a near-term pullback. History is clear that the path to those +19% and +26% average returns is rarely a straight line. In the 20 prior instances, the majority produced at least one 3-5% drawdown within the subsequent three months before resuming higher. The first pullback off this kind of extreme is usually a buying opportunity, not a topping signal.

The technical picture supports that framing. The 50-DMA never crossed below the 200-DMA during the March selloff. The VIX has collapsed below 20. Breadth is expanding, with the percentage of S&P 500 constituents above their 50-DMA now recovering through 65%. These are not the internals of a market at exhaustion. They are the internals of a market that has just repaired its damage and is starting to trend again.

Near-term, we are watching for the first meaningful dip as the signal to add, not reduce, exposure. A pullback to the 20-DMA would represent roughly a 3% retracement from yesterday's close and align with prior post-breakout consolidations. For now, any retest of prior resistance-turned-support would be an even more attractive entry. We continue to maintain exposure on confirmed strength while keeping stop levels intact beneath the 50-DMA.

The data says don't fade this rally. It also says don't chase it here. Let the market give you the dip, then act.

Is Large Cap Growth Back In Vogue?

The first graphic below, from the soon-to-be-released SimpleVisor AI, shows the stark outperformance of large-cap growth stocks over value stocks over the last five days. Further, it shows the technology sector is up nearly 10% over this period, while the former market leaders, staples, and utilities were down, despite the market surge. To help assess whether the value-over-growth trade is dead or just taking a rest, we share some longer-term perspectives in the second graphic.

The graph shows the price ratio between the Vanguard large-cap value ETF and the Vanguard mega-cap growth ETF. The trend over the last 15 years has been lower, ie, growth has greatly outperformed value. To the bottom right, we see the nearly 20% outperformance of value over growth, which started in November. The recent outperformance of growth over value has erased about a third of the move. Will the current experience be like the temporary value outperformance during the Liberation Day events, or could it be more sustainable, as we saw in 2022? Before considering our questions, it's worth noting that the real value sector is technology and mega-cap growth, as shown in the third graph.

Poor Breadth

The graphic below, courtesy of Jason Goepfert, shows that when the S&P 500 hits a record high, as it just did, and less than 5% of its stocks are at 52-week highs, the average returns tend to be slightly below average. Moreover, there have been more negative return events when this condition was met than positive. Bear in mind that the bear markets of 1929 and 2000 drag down the results. This raises the question of whether the recent rally is a dead cat bounce with poor breadth or a continuation of the bullish trend existing before the Iranian conflict.

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