Market Pulse with Dan Sheehan

Good Morning Investors,

Markets are breathing easier, for now.

President Trump's early morning declaration that a ceasefire between Israel and Iran is "now in effect" has shifted the narrative from crisis to containment. That sentiment is driving a global rally in equities and a sharp unwind in oil prices, which tumbled more than 3% overnight. But make no mistake, the market's quick pivot back to risk-on mode is as much about muscle memory as it is about macro clarity.

The speed of this reversal underscores a critical market dynamic: investors have been conditioned by two years of crisis resilience to buy dips rather than flee them. This behavior creates opportunity, but it also masks underlying structural vulnerabilities that could surface when the next shock hits.

Futures are surging as risk appetite returns. Dow ($DIA ( ▼ 0.51% )) futures jumped over 350 points, with the S&P 500 ($SPY ( ▼ 0.17% )) and Nasdaq ($QQQ ( ▼ 0.09% )) gaining 0.9% and 1.2% respectively. Monday's 1% rally in the S&P marked a rapid reversal from Friday's gloom, with equities buoyed by Iran's muted retaliation and growing hopes that the Fed will soon cut rates.

Oil prices have collapsed back below $70 (WTI), shedding nearly 8% from Sunday's highs, while gold slipped and the dollar weakened, textbook signs that traders are unwinding hedges and rotating back into equities. VIX is drifting toward 18, a healthy drop from recent highs but not yet in complacency territory.

European markets are extending gains, with the STOXX 600 up 1.2% as energy stocks lead the charge lower, ironically. Asian markets closed mixed, with Japan's Nikkei benefiting from lower energy costs while China remained cautious on ongoing trade uncertainty.

The weekend's escalation has given way to diplomatic theatre, with both sides claiming restraint, and both accused of violating the ceasefire within hours. Still, markets are taking Trump's "please do not violate it!" post as a sign that tensions may de-escalate from here.

The sharp drop in oil, WTI back under $70, signals a collective sigh of relief over the Strait of Hormuz. Online prediction markets had priced a 52% chance of its closure as recently as Sunday. By Monday night, that had plunged to 11%. That re-pricing alone explains much of the equity rally.

Strategic Implications: This rapid volatility compression creates a false sense of security. While the immediate threat has receded, the underlying instability in the Middle East remains elevated. Markets that move this quickly on geopolitical news are inherently fragile to the next headline shock.

But let's examine the deeper market mechanics at play. The correlation between oil and equity volatility has strengthened dramatically over the past two weeks, with the VIX moving in near-lockstep with crude prices. This suggests that energy security concerns are now driving broader risk sentiment more than traditional economic indicators.

Iran remains "with hands on the trigger," and Israel has already accused Tehran of further missile launches. Geopolitical volatility may have eased, but it hasn't evaporated. Markets are forward-looking, but they're not blind to the reality that this ceasefire is built on shaky foundations.

Today, Fed Chair Jerome Powell begins his two-day testimony to Congress. He walks in with a ceasefire and falling oil at his back, but with the White House breathing fire down his neck.

Trump has dialed up his pressure campaign, publicly demanding rates between 1–2% and lambasting Powell as a "total and complete moron." The Supreme Court may have shielded Powell's job security, but the political pressure is unprecedented for a Fed Chair mid-cycle.

Markets are increasingly pricing in a July cut, with fed funds futures showing 23% odds of a 25bp reduction per CME Group data, up from minimal expectations following last week's hold decision. Fed Governor Bowman's pivot to join Waller in signaling openness to action represents a meaningful shift in FOMC dynamics. Her conversion from hawk to dove removes a key dissenting voice and suggests the Committee is coalescing around easing.

Powell's Dilemma: The Fed Chair faces a complex calculus. Cutting rates now would ease political pressure but risk looking reactionary to Trump's demands. Holding steady maintains credibility but ignores softening economic data and disinflationary trends.

The economic backdrop supports easing: Core PCE has moderated to 2.6%, unemployment has ticked higher to 4.1%, and leading indicators suggest economic momentum is waning. Add falling oil prices and reduced geopolitical risk, and the case for accommodation strengthens.

Today's economic calendar includes housing price indices, Richmond Fed surveys, and the Conference Board's Consumer Confidence reading. The latter is particularly relevant — any improvement in confidence metrics would support the Fed's case for patience, while deterioration would argue for preemptive action.

The technology sector faces a more complex regulatory environment. Alphabet confronts UK regulators who may force changes to search rankings, while Amazon doubles down on international expansion with a $54 billion UK commitment. These divergent paths highlight the sector's maturation — some companies face regulatory constraints while others use scale as competitive advantage.

Earnings Calendar Critical: This week's results from FedEx, BlackBerry, and Carnival will test corporate resilience amid multiple headwinds. FedEx's performance as a global logistics bellwether carries particular weight given supply chain disruption risks from Middle East tensions.

Banks enter focus with stress test results due. Analysts expect clean passes and bigger dividends from major players — a needed catalyst if bond yields spike again. The banking sector's ability to return capital will be crucial for maintaining investor confidence in a potentially volatile rate environment.

This rally is fueled by relief, not fundamentals. That doesn't make it illegitimate — just precarious. A ceasefire holds markets together for now, but credibility tests loom in the coming days.

Technical Analysis: The S&P 500's swift recovery from 5,900 support suggests the bull market structure remains intact. However, resistance near 6,100 will be formidable, especially if achieved on light volume. The index needs to hold above 5,950 to confirm this bounce has legs.

Oil's reversal is helping suppress volatility, and history shows markets often shrug off geopolitical shocks unless they severely disrupt energy or credit conditions. Morgan Stanley's analysis of 20+ geopolitical events since 1950 shows average S&P 500 returns of +2% one month later, +3% after three months, and +9% after twelve months.

But this time could be different. Unlike previous crises, markets are starting from elevated valuations with limited policy support. The Fed's room to cut is constrained by political pressure, and fiscal policy remains gridlocked. These factors could amplify rather than dampen the next shock.

The ABC Correction Framework: We remain in the corrective phase I've outlined, with this bounce potentially representing the "B" wave before a final "C" leg lower. The correction's magnitude will depend on whether fundamental conditions deteriorate or if this proves to be a shallow, time-based consolidation.

Rate Sensitivity: Powell's testimony could trigger significant moves in rate-sensitive sectors. Any dovish pivot creates opportunities, but don't chase defensive plays.

Stay Offensive: Geopolitical volatility is temporary noise. Maintain exposure to growth sectors and quality cyclicals rather than rotating to defensives.

Technology Leadership: Continue favoring AI infrastructure leaders and secular growth themes. Regulatory headwinds are manageable for dominant players.

Quality Over Safety: Focus on companies with strong competitive positions and pricing power, not bond proxies masquerading as stocks.

Markets are betting on the best-case scenario — ceasefire holds, Powell stays accommodative, and oil remains benign. That trifecta is delivering a rally, but it's built on shifting sands.

The big lesson from this episode: geopolitics moves markets, but doesn't define them unless economic fundamentals deteriorate. The rapid reversal in sentiment shows markets remain resilient, but also highlights their vulnerability to sudden shifts in narrative.

With oil falling, yields stable, and the Fed increasingly flexible, the technical path is clearing — not for euphoria, but for continued resilience. This remains a bull market working through normal corrections, not a broken cycle.

The key insight for investors: use geopolitical volatility as opportunity, not warning. Market history shows that patient capital deployed during crisis periods typically generates superior long-term returns. That principle remains our guiding philosophy.

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Dan Sheehan [email protected]

This newsletter is for informational purposes only and should not be considered investment advice. Please consult with your financial advisor about your specific situation.