Good morning investors,
The S&P 500 just reclaimed its 200-day moving average. That is the technical signal that matters most right now.
The index closed at 6,824.66 yesterday after gaining 0.6%. The Nasdaq ($QQQ ( ▼ 0.29% )) rose 0.8%. The Dow ($DIA ( ▼ 0.75% )) climbed 0.6% and crept into positive territory for 2026. All three major indexes are on pace for their best week since November, with the S&P ($SPY ( ▼ 0.47% )) up nearly 3.7%, the Dow gaining 3.6%, and the Nasdaq tracking for a 4.3% advance.
Oil prices surged early Thursday as the ceasefire's fragility became clearer, but markets reversed losses after Israeli Prime Minister Benjamin Netanyahu agreed to negotiate with Lebanon "as soon as possible." The VIX closed at its lowest level since the end of February and continues to hover well below its late March highs.
Opening Bell
This morning, futures are essentially flat as traders await March's CPI reading at 8:30 AM ET. Economists expect a substantial 0.9% month-over-month increase and a 3.3% year-over-year gain, reflecting the first wave of oil price pass-through since the conflict began.
The inflation data arriving this morning will be the first reading to capture the energy shock's impact on consumer prices. February's PCE, released yesterday, showed core inflation stuck at 3.0% for the third consecutive month, well above the Fed's 2% target. That data predated the war entirely.
March CPI will show what happens when oil surges 70% in five weeks. The expected 0.9% monthly increase would be the largest since the early pandemic period and will reinforce the Fed's cautious stance.
Traders now see the Fed holding rates steady through the end of 2026 according to the CME FedWatch tool. The war complicated an already difficult picture for the central bank, which was still waiting for tariff-related inflation to work through the economy when the Strait of Hormuz closed.
University of Michigan's preliminary April sentiment reading arrives later this morning, expected to show another decline to 52.0 from 53.3. Consumer confidence has been battered by gasoline prices above $4 per gallon and the daily barrage of war headlines.
The 200-Day Moving Average Matters
Let me explain why reclaiming the 200-day moving average is significant.
The last time the S&P 500 broke below the 200-day was in March 2025. The index lost the line, bounced back to test it from underneath, then sold off hard after Liberation Day on April 2. When the S&P later reclaimed that average, it tested it from above. Then it took off.
This bull market, which began at the October 2022 low, failed its first test of the 200-day in December 2022. But after a brief dip, the index climbed back above and soon began using it as rough support. Sometimes the market will briefly overshoot the average before the trend resumes, as we saw in late 2024. The S&P briefly probed below, then quickly popped back over it.
When a major trend change is taking shape, price action around the average can get messy, as it did at the start of the 2022 bear market. That kind of chop is still possible here. But with the S&P back above its 200-day, the burden shifts back to the bears unless this breakout fails.
The Valuation Case for Equities
Here is what the headlines are missing while everyone focuses on the ceasefire.
The S&P 500's forward P/E has compressed from 22 times at the start of the year to roughly 19.8 times now. That is actually below the 5-year average of 19.9 times. When was the last time you could say the S&P 500 was trading below its 5-year average forward multiple heading into a Q1 earnings season where consensus is calling for 13.2% earnings growth?
The market has priced in the war. It has not priced in the earnings.
The S&P 500 earnings yield just jumped to 5.14%. You are getting paid more to own equities right now than at almost any point since the Liberation Day lows last April. The forward four-quarter EPS estimate surged to $338.29 with the quarterly roll. Even during the bombing, earnings revisions for technology accelerated over the last four weeks. The earnings machine did not break.
The Case for Technology
FactSet data shows Information Technology has the highest number of companies issuing positive EPS guidance of any sector for Q1, with 33 companies guiding higher. Tech EPS estimates have been revised sharply upward since mid-February, even as the bombs were falling.
The IT sector is projected to maintain a 29% net profit margin in 2026. These are the widest margins in the history of the FactSet data series. Yet the Nasdaq has been dragged down with everything else on headline risk.
The entire AI capex cycle, roughly $600 to $700 billion from Microsoft, Alphabet, Amazon, and Meta, continues accelerating. But the stocks are trading as though demand destruction is around the corner. It is not.
Here is what the inflation hawks are missing: technology is inherently deflationary. Higher CPI readings from energy pass-through actually widen the relative advantage for asset-light, high-margin tech businesses. Microsoft does not care if oil is at $94 or $112. Its cost structure is dominated by R&D and cloud infrastructure that has already been capitalized. Meanwhile, the old economy is eating the energy cost directly in cost of goods sold.
Higher inflation is a headwind for the S&P 493 much more than for the Magnificent Seven. The market has not fully digested that bifurcation yet.
TSMC Confirms the Demand Story
Taiwan Semiconductor Manufacturing Company reported first-quarter revenue of 1.13 trillion new Taiwan dollars, approximately $35.6 billion. That represents a 35% year-over-year increase and exceeded analyst expectations. March alone saw a 45.2% year-over-year revenue surge.
The chip giant continues benefiting from sustained demand for advanced semiconductors from key customers like Apple and Nvidia, even as concerns persist about supply chain disruptions from the Middle East conflict.
TSMC manufactures chips for everything from consumer electronics to data centers and has been a major beneficiary of the hundreds of billions being poured into AI infrastructure. It is one of a very small number of companies that can manufacture the most cutting-edge chips. TSMC has also reportedly hiked prices for its most advanced chips, which is a significant factor behind the sales beat.
TSMC remains my favorite semiconductor play with AMD as second. The structural demand story for advanced chips has not changed despite the geopolitical volatility.
The Case for Small Caps
The Russell 2000 has held remarkably well through this crisis, outperforming the Nasdaq on multiple down days through March and early April. Here is why the structural case remains compelling.
First, the domestic revenue mix. About 80% of Russell 2000 revenue is generated domestically. These companies have almost zero direct exposure to Strait of Hormuz disruption, Middle Eastern supply chains, or the international revenue risk punishing multinationals. As the war winds down, the geopolitical discount that hit large-cap multinationals hardest should unwind faster in small caps that never deserved the discount.
Second, the floating rate story. Roughly 32% of Russell 2000 companies carry floating-rate debt versus just 6% in the S&P 500. The Fed has already cut six times since September 2024, and the market is pricing more eventually. Every cut flows directly through to the bottom line for a third of the small-cap universe.
Third, the earnings broadening. FactSet is projecting the "other 493" companies will grow earnings 12.5% in 2026 versus 9.4% last year. The earnings story is finally moving beyond the Magnificent Seven. Small caps are the purest expression of that broadening.
Fourth, the M&A and fiscal tailwinds. Corporate leverage is low and rising, buyback activity is accelerating, and M&A volumes are picking up. Small caps are historically the biggest beneficiaries of M&A cycles because they are the acquisition targets.
The Software Anxiety Returns
Just as AI hardware heats up, the software trade is in trouble again. The ceasefire allowed investors to return to their other anxieties, namely the potential disruption of software's reign.
Software names fell Thursday after Anthropic unveiled another head-turning update to its models and announced a cybersecurity partnership with major tech firms. Claude Mythos Preview is so powerful that Anthropic is making it available to only a few dozen companies to help secure their own software.
Cybersecurity names including Cloudflare, Okta, and CrowdStrike were among the tickers that lost ground. The move underscores how skittish Wall Street remains about AI's capacity to overtake entire swaths of the software world.
I continue to believe the cybersecurity selloff is overdone. The threat environment has intensified, not diminished. Nation-state attacks are accelerating. AI is expanding the attack surface faster than it is enabling defense. The companies best positioned to address that evolution, CrowdStrike and Palo Alto Networks, remain compelling despite the fear around AI disruption.
The Oil and Bond Markets Are Not All Clear
The equity rally is welcome and the breadth is encouraging. Cyclical leadership, small-cap outperformance, and international participation are all constructive signals for the economy.
But the bond and oil markets are telling us that the inflationary consequences of this crisis have likely not been fully unwound. Oil remains in the mid-$90s, still roughly 70% above where it started the year. The Strait of Hormuz remains effectively closed despite the ceasefire. Ship traffic has not normalized.
I believe that energy prices will continue to gradually move lower over the next three to six months. Growth will take a little bit of a hit short term in the economy, inflation will jump in the short term, but overall, that's still a very constructive environment for equities, particularly as we get into earnings season. I think earnings season will be another good one for stocks.
Historical Analog: 1990
The 1990 analog fits here. When Iraq invaded Kuwait nearly four decades ago, oil prices peaked the same day that the S&P 500 bottomed. The double-digit moves we have seen in oil this week, in both directions, historically mark turning points for equities.
That does not mean the volatility is over. Iran accused the US of violating the agreement Thursday, and oil prices remain unpredictable with the Strait still effectively closed. But the setup has shifted from "how bad does it get" to "the recovery trade."
Final Thought
You are buying technology at below-average multiples on accelerating earnings with the largest infrastructure capex cycle in American history behind it. You are buying small caps at the widest relative discount to large caps in years with six rate cuts already in the bank and more coming eventually. And you are doing it when sentiment is in the gutter and the ceasefire just gave the market a reason to look forward instead of backward.
The S&P 500 is back above its 200-day moving average. The forward P/E has compressed below the 5-year average. Earnings estimates are rising. The VIX is falling. And the worst of the geopolitical shock appears to be behind us.
I came into this year expecting a volatile year with a major pullback and a 10% gain by year end. We got the volatility and the pullback. Now comes the recovery.
Stay disciplined. The playbook continues working.
Have a great weekend watching the Masters. We will reconvene Monday with fresh CPI data to digest and hopefully more clarity on the ceasefire negotiations.
Best regards,
Dan Sheehan [email protected]
Subscribe: https://substack.com/@dansheehan3
This newsletter is for informational purposes only and should not be considered as investment advice. Please consult with your financial advisor about your specific situation.