Good morning investors,
Markets reopen after the holiday weekend with the S&P 500 perched near 7,500 and peace deal optimism building. The tape closed strong heading into the break, and futures suggest we pick up where we left off.
Dow futures have jumped 234 points, or 0.5%. S&P 500 futures are up 0.7%. Nasdaq 100 futures have climbed 1.1%.
President Trump said Monday that negotiations with Iran are "proceeding nicely." That optimism is supporting risk assets this morning despite fresh military action overnight. U.S. Central Command conducted what it described as "self defense" strikes in southern Iran, targeting missile launch sites and Iranian boats attempting to place mines.
Oil prices are responding to the mixed signals. WTI has dropped 4% as traders anticipate a deal. Brent is trading around $98. The 10-year Treasury yield has fallen more than 6 basis points to 4.51%, catching up to declines seen in European sovereign bonds on Monday.
Eight Weeks and Counting
The S&P 500 climbed 0.9% last week to notch its eighth consecutive weekly gain, the longest winning streak since late 2023.
The Dow advanced 2.1% and set new records, with 51,000 now in sight for the first time. The Nasdaq rose 0.5%, its seventh positive week in the past eight.
Oil's 8.4% weekly decline, the worst since mid-April, provided significant relief. With crude trading well below the levels seen earlier this month, some of the inflation pressure that has haunted the tape is beginning to ease.
The Broadening You Want to See
Here is the data point that matters most heading into this week.
The equal-weight S&P 500 hit a new all-time high on Friday. The RSP is now trading 7% above its 200-day moving average (Per Phil Rosen), suggesting momentum is widening beyond just big tech.
Big tech continues to lead. That has not changed. But the participation is finally expanding. When the average stock is hitting records alongside the cap-weighted index, that is a healthier market structure than what we had in March and April.
The broadening does not mean I would rotate away from AI, it means the bull market has room to run because more names are participating in the advance.
The Framework Shift
I spent the holiday weekend putting down on paper what I actually believe about this market. I want to share the core thesis because I think it captures where we are better than anything else I could write.
The trade has moved from "buy AI stocks" to "buy what AI is forcing the economy to build."
That distinction is not semantic. It is structural. Buying AI stocks meant buying Nvidia, the hyperscalers, and a handful of software names. That trade worked and continues to work. But the new layer is different. The new layer is everything AI is forcing the rest of the economy to construct.
Power generation. High-voltage transmission. Substations, transformers, switchgear. Liquid cooling systems. Industrial automation. Data center shells. The skilled electrical labor required to build all of it.
That trade is no longer speculative. It is showing up in order books. AI-linked industrial names are reporting average order backlog growth of roughly 34% year over year. The historical norm for that group is 3 to 5%.
When backlogs at companies that have grown in single digits for decades suddenly accelerate to 34% growth, you are looking at a structural cycle, not a narrative cycle. Backlogs are signed orders with customer capital committed. They do not respond to Twitter momentum.
This is a capex cycle. Capex cycles run for years, not quarters.
Nvidia at $5 Trillion
I want to address the intellectual exhaustion that has settled around Nvidia. The stock has run. The market cap is staggering. Every dinner conversation circles back to the same skeptical refrain: at this point, is it not priced for perfection?
The most recent quarter showed $81.6 billion in revenue, up roughly 92% year over year. Q2 guidance came in at $91 billion, exceeding expectations by $4 to $5 billion. Jensen Huang called demand "parabolic." The board raised the buyback authorization by $80 billion on top of the $38.5 billion still remaining.
Now the valuation math. Nvidia is trading at roughly 18 times forward earnings against expected growth of approximately 83% over the next twelve months. On a PEG basis, Nvidia is now cheaper than what the market paid for ServiceNow, Salesforce, or Workday a decade ago at far lower growth rates.
At the current multiple against the current growth rate, Nvidia is almost value. I am being literal. If you screen for high-quality compounders trading below a PEG of 1, Nvidia appears alongside names that would never be spoken in the same sentence.
Investors are becoming numb to Nvidia's earnings. The bar for what counts as a "beat" has risen to a level that probably cannot be cleared in any single quarter. That is mathematically inevitable when consensus has been chasing actuals upward for two years. The stock can move sideways or drift lower on perfectly fine prints, and that is not a signal to sell. It is a signal that expectations have temporarily caught up to reality while the underlying business keeps compounding.
My directional view is that Nvidia goes to $250 over the next twelve to eighteen months, assuming the AI capex cycle continues its current trajectory.
The Margin Story
There is a second bull case running underneath the AI infrastructure story that deserves more attention.
AI is showing up in operating margins. Not just in the AI companies. In everyone else.
Companies that used to need 30 engineers to ship a product are doing it with 8. Companies that used to need 50-person customer service teams are running with a handful of supervisors backed by an AI tier. Companies that used to need 12 financial analysts to close a quarter are running with three plus a co-pilot.
These are not theoretical productivity gains anymore. They are showing up in headcount data, operating leverage, and quiet but persistent margin expansion across the S&P 500.
A lot of the earnings beats over the last several quarters are not really revenue stories. They are margin stories. Consensus forecasts are almost certainly too low because sell-side models still treat margin assumptions as broadly stable.
The market is pricing the AI revenue story. It is significantly underpricing the AI margin story.
The Rolling Bear Already Happened
This is the framing I keep returning to in conversations, and it is the most underappreciated lens for understanding where we actually are in the cycle.
We already had a rolling bear market this year. It happened. The tape rolled past it.
Software stocks entered bear market territory in early February, with the iShares Expanded Tech-Software ETF down roughly 27% from its September 2025 highs. The Mag 7 took its own beating. Microsoft was down almost 30% from its July 2025 peak. Nvidia off 19% from its October top. Through February and into March, this turned into a five-week rout.
I wrote through every day of it. In the last week of March, with short positioning at extremes not seen in roughly 15 years, I called the bottom. The thesis was that modern rolling bears reset positioning inside cycles without breaking the cycles themselves. The fundamentals had not changed. With the short side that stretched, the next move would be a sharp squeeze higher.
That is exactly what played out.
The lesson was that modern bear markets do not look like 2008 or 2000 for the most part. They are short, sharp, sector-specific, and resolved by capital rotation rather than capital destruction. The bear market in software in February was real. The bear market in Mag 7 in March was real. Both are already in the rearview mirror. The market did not break. It rotated, absorbed the reset, and resumed.
The AI infrastructure trade already absorbed its pain in Q1. The setup from here is structurally cleaner than at any point this year.
Iran: Progress With Caveats
The peace talks are advancing but obstacles remain.
Secretary of State Rubio said there were "good signs" that an agreement is in sight but warned any deal would be "unfeasible" if Iran pursues permanent control over shipping through the Strait of Hormuz. "No one in the world is in favor of a tolling system. It cannot happen."
Iran indicated the latest American proposal has "narrowed the gaps to some extent." The Islamic Revolutionary Guard Corps said it would retaliate against ceasefire violations after identifying U.S. drones and an F-35 entering Iranian airspace.
The consensus view assumes a détente will be formally reached within days. The real question is how much is already priced in. Even in a best-case scenario where a deal is announced this week, the physical supply chain does not normalize until late summer. Roughly 60 days for ships to reach port once they start moving, plus another 60 days through refining and distribution. That is a 120-day window before the inventory situation normalizes.
The stagflationary effects from elevated energy prices will persist for at least the next few quarters regardless of when an agreement is reached.
Global Markets Celebrate
South Korea's Kospi hit a fresh record overnight, touching 8,131 before closing at 8,047, up 2.55% on the session. Japan's Nikkei breached 65,000 for the first time during Monday's holiday-thinned trading before pulling back slightly on profit-taking.
The semiconductor complex in Asia is pricing in sustained AI demand. Samsung, SK Hynix, and Taiwan Semiconductor are all trading near highs. The memory shortage narrative is alive and well.
China's CSI 300 gained 0.53% but remains well below its recent peaks as the domestic economy continues to struggle.
This Week's Calendar
The shortened week brings several important data points.
Conference Board consumer confidence arrives this morning at 10 AM ET. After the University of Michigan's dismal sentiment reading on Friday, this will provide another lens on how households are feeling.
The Fed's preferred inflation gauge, the Personal Consumption Expenditures index, comes Thursday. Bank of America forecasts a 0.4% monthly increase and 3.8% year over year. Any upside surprise would validate concerns about inflation persistence.
On the earnings front, Marvell Technology reports Wednesday. The stock is up 120% year to date, making it one of the hottest semiconductor names outside of memory. Salesforce also reports Wednesday, providing a read on enterprise software demand.
Thursday brings Costco, Dell Technologies, Dollar Tree, Best Buy, and Gap for a snapshot of the consumer across income levels.
Final Thought
The market enters the last week of May from a position of strength. Eight consecutive weeks of gains. Records for both the S&P 500 and Dow. Broadening participation evidenced by the equal-weight index hitting new highs.
The fundamentals support the advance. Earnings are projected to grow 23% this year and 16% next year. Price-to-forward earnings has been modestly contracting even as the index rises because earnings growth is outpacing price appreciation.
The sentiment paradox persists. All-time highs without euphoria. Every 2 to 3% pullback triggers a sprint into bearish positioning. Sophisticated investors I talk to are still waiting for "the correction" to put capital to work. That is not the behavior of a top. That is the behavior of a market that does not yet believe in its own rally.
Tops are made when conviction is universal, when everyone has been forced into the trade by FOMO and skepticism has been wrung out. We are nowhere near that condition.
The pain trade remains up, not down.
Stay invested. Stay disciplined. The destination is constructive even if the path brings volatility.
Best regards,
Dan Sheehan [email protected]
Subscribe: https://substack.com/@dansheehan3
Market Pulse with Dan Sheehan is a personal market commentary newsletter and is independent from my employer. The content is provided for informational and educational purposes only and reflects my views as of the publication date, which may change without notice. Nothing contained herein should be construed as personalized investment, legal, tax, or financial advice, or as a recommendation to buy or sell any security. Any positions discussed represent my own views and may not be suitable for every reader's objectives, financial situation, or risk tolerance. Information is derived from publicly available sources believed to be reliable, but accuracy and completeness cannot be guaranteed. Readers should conduct their own research and consult their own professional advisers before making financial decisions.