Good Morning Investors,
Markets are back in balance, at least for now. Monday brought a brief calm after last week's whiplash: oil gave back its Friday spike, the VIX eased, and tech stabilized. This feels more like a truce than a resolution. The Fed still has a window to cut this year, but geopolitics and deficits are wild cards that could shut it fast.
Opening Bell
U.S. equity futures are modestly higher after Monday's relief rally. The S&P 500 rose 0.5 percent, the Nasdaq gained 0.9 percent, and the Dow inched up 0.2 percent. Oil slipped below 78 dollars after softer rhetoric from Tehran cooled escalation fears. Gold edged lower, Bitcoin held near 105 thousand, and the VIX dipped under 14.
Treasuries were mixed. The 10-year yield hovered around 4.25 percent as traders weighed softer inflation against widening deficits. The dollar eased slightly while the yen firmed.
Market Framework: This Is What Stability Looks Like, But It's Conditional
Markets are acting like they want to believe the best-case scenario: no major retaliation from Iran, inflation continues to moderate, and Powell delivers a rate cut in September. The question is whether that scenario can hold up to scrutiny.
Last week's data still supports the soft landing narrative. The Fed Funds futures curve now prices in 1.9 cuts by year-end, with a 72 percent chance of the first cut in September. The three-month annualized core CPI sits at 1.6 percent, comfortably below the Fed's target. Labor data is softening, and real yields are drifting lower.
But behind the soft landing optimism, a bigger question looms: can the U.S. fund it? May's $316 billion deficit wasn't a blip. The government is on track to run a $2.1 trillion deficit this year, without a recession or new stimulus. With interest costs now exceeding defense spending, markets may soon question the sustainability of low yields, especially if Treasury supply remains high.
My Fed View: The committee will hold steady on Wednesday, but Powell is likely to keep the door open for September. The data supports patience, but I still expect a 25 basis point cut in September as inflation moderates and labor markets continue to soften.
Corporate Framework: Tech Holds the Line, but Rotation Is Underway
Monday saw stabilization in semiconductors. Nvidia gained 1.2 percent, and AMD rose 0.9 percent. But the broader trend points to rotation. Oracle, Palantir, and Microsoft are showing strength, while hardware names are consolidating. The next phase of the AI trade looks increasingly platform-led.
Adobe followed last week's strong earnings with a 2.5 percent gain as analysts raised forecasts on GenAI productivity. Meta's investment in Scale AI is also sparking renewed interest in private AI infrastructure, particularly as enterprise adoption accelerates.
Tesla fell 1.7 percent after a Morgan Stanley downgrade citing valuation concerns and slower energy growth. However, the company confirmed new FSD partnerships in China, reinforcing its long-term autonomy roadmap despite geopolitical noise.
Technology Evolution: Chips, Cloud, and the AI Edge
We are seeing a divergence in AI monetization. The first wave was driven by GPUs and data center buildouts. The second is led by AI-native cloud platforms, inference optimization, and edge deployment.
Apple's WWDC follow-through remains a key watch. If on-device LLMs roll out broadly in iOS 19, it validates the investment case for M-series chips and creates upside potential for edge AI players including Qualcomm and Synaptics.
Watch for upside surprises in enterprise AI software adoption in upcoming earnings. This is where the next leg of growth may come from.
Economic Framework: Oil Volatility Is the Market’s Mood Ring
Friday’s spike to $80 and Monday’s drop to $77 show how reactive energy markets have become. But perspective is key. Brent crude averaged $83 in the first quarter, and we remain well below levels that would trigger concern at the Fed.
The bigger issue remains fiscal. U.S. debt servicing costs are now nearing $1.1 trillion annually, a budget line larger than Medicaid. If bond yields begin rising due to structural deficits, not inflation or growth, it introduces a new tightening channel the Fed does not control.
Markets have not fully priced this in, but bond vigilantes are beginning to circle.
Strategic Outlook: Calm Is a Setup, Not a Signal
We are in a constructive period, but it comes with caveats. Inflation is falling, but oil could reverse that. The Fed is dovish, but fiscal dynamics may limit its freedom. Markets look orderly, but breadth remains narrow and positioning stretched.
I still expect a 3 to 5 percent pullback before the next leg higher, ideally into July, once tariff clarity firms up. That would provide a healthier base for the second half, especially if Powell confirms action at Jackson Hole or in September.
Tactical Considerations
AI Evolution: Emphasize enterprise AI adoption, cloud migration, and edge inference over hardware-heavy exposure.
Geopolitical Hedges: Defense stocks remain a reasonable hedge if tensions flare again.
Fiscal Pressure: Consider reducing long-duration Treasury exposure and focus on quality credit in fixed income.
Final Thought
Markets have moved from hope to conditions. The Fed can cut. Earnings can grow. AI can scale. But everything depends on avoiding new shocks—fiscal, geopolitical, or commodity-based.
Those who followed the QQQ trade from early April are still up 20 to 25 percent. That cushion allows for tactical adjustments without abandoning the broader thesis.
My base case remains a moderate pullback triggered by either rising oil or a bond market hiccup. But these would be tests, not trend reversals. This bull market is sturdier than the last. It just happens to be crossing a geopolitical tightrope.
Please feel free to reach out to me on LinkedIn or by email if you would like help navigating this market environment or have any planning-related questions.
Dan Sheehan
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.