Good morning investors,
As I write this, West Texas Intermediate crude has crossed $100 per barrel for the first time since the early days of the conflict. Brent is trading at $111. The oil market is sending a very different signal than the equity market.
Yet stocks continue to grind higher. The S&P 500 and Nasdaq both posted fresh record highs yesterday, extending the rally despite stalled peace talks and rising energy prices. The S&P 500 rose 0.1%. The Nasdaq climbed 0.2%. The Dow slipped 0.1%.
Opening Bell
This morning, futures are mixed. S&P 500 futures have dipped 0.2%. Nasdaq 100 futures are down 0.6%. Dow futures have added 117 points or 0.2%.
The Iran situation remains fluid but showed a glimmer of progress yesterday.
White House press secretary Karoline Leavitt confirmed that President Trump and his national security team discussed Iran's offer to reopen the Strait of Hormuz if the war ends and the US lifts its blockade. Whether Trump is willing to consider this as a pathway to de-escalation remains unclear. He has said sanctions relief would come only once a deal is "100% complete."
Over the weekend, Trump cancelled plans to send negotiators to Pakistan, saying talks could happen by phone. Iran's Foreign Ministry confirmed no meetings are currently planned between Tehran and Washington.
The stalemate continues, and the global oil supply picture grows more precarious by the day.
Today brings a heavy earnings slate including Starbucks, General Motors, UPS, Spotify, Coca-Cola, BP, T-Mobile, Robinhood, and Visa. The Conference Board's consumer confidence index will provide another read on how Americans are feeling amid elevated energy prices.
The Oil Math Does Not Add Up
JPMorgan's commodities team published a note warning that oil prices could spike significantly higher because "something is off" in the current market dynamics.
Nine weeks into the conflict, global supply disruption has reached 13.7 million barrels per day, nearly 15% of the world's demand of roughly 100 million barrels daily. That is an extraordinary shortfall.
The typical levers to balance such a disruption are strained. Spare production capacity is largely located in the Persian Gulf, where the Strait closure has sent exports to near-zero. Adding capacity in the US takes six to twelve months. Inventories have been drawn down at an "extraordinary" rate of 7.1 million barrels per day in April as nations tap strategic reserves.
Yet prices are not at all-time highs. WTI at $100 remains roughly $13 below its 2008 record. Brent at $111 is about $20 below its peak.
The disconnect is revealing. Futures prices do not reflect the all-in cost of buying physical oil in a scarce market. In recent weeks, physical prices for near-term delivery in Asian markets have traded far above headline benchmarks, reaching as high as $210 per barrel in Singapore and $286 per barrel in Sri Lanka.
Goldman Sachs raised its fourth quarter price targets to $90 on Brent and $83 on WTI, assuming Persian Gulf production normalizes by the end of June. If that timeline slips, the picture changes dramatically. Citi forecasts that if oil flows remain disrupted through June, Brent could reach $150 per barrel.
The market may be assuming that "the conflict is too big not to be resolved quickly," keeping prices lower than fundamentals would suggest. That assumption will be tested in the coming weeks.
Ray Dalio Warns on Stagflation
Ray Dalio offered a cautionary view yesterday, warning that the US economy has slipped into a stagflationary environment.
The founder of Bridgewater Associates said in a CNBC interview that persistent inflation pressures alongside slowing growth create a backdrop that demands caution from policymakers. He stated bluntly that cutting interest rates under current conditions would be a mistake that would damage the Fed's credibility.
"Certainly, you would not cut interest rates now," Dalio said. "You will lose your credibility. The Federal Reserve would lose its credibility, particularly now."
Traders are pricing in 100% odds that the Fed holds rates unchanged at this week's meeting. Fed funds futures indicate policy is likely to remain on hold for the rest of the year.
Despite his macro concerns, Dalio said the dramatic equity rebound made sense given the strength of corporate earnings. He recommended a 5% to 15% allocation to gold as an effective diversifier.
Powell's Final Meeting
Wednesday is likely to mark Jerome Powell's last policy meeting and press conference as Fed chair. His term concludes May 15, and Kevin Warsh is now on a clear path to confirmation following the dropped investigation.
Less certain is whether Powell will remain on the Board of Governors. He could continue serving as a governor until 2028, which would be an unusual situation with a new chair in place. How that dynamic plays out will be interesting to watch.
The meeting itself should be uneventful from a policy standpoint. The Fed will hold rates steady. The statement will likely acknowledge elevated inflation from energy prices while noting the transitory nature of the supply shock. Powell will thread the needle on forward guidance, committing to nothing.
The more important signal will be any commentary on how the Fed views the handoff to Warsh and whether institutional independence remains firmly intact through the transition.
Early Earnings: GM Beats, UPS Disappoints
General Motors delivered a significant beat this morning, reporting adjusted earnings of $3.70 per share against expectations of $2.62. The outperformance was largely driven by a roughly $500 million benefit from the Supreme Court decision to terminate and refund tariffs paid under IEEPA.
Even excluding the tariff adjustment, GM's earnings would have beat expectations and grown about 7.5% year over year. The company raised full-year guidance accordingly. Shares rose nearly 4% in premarket trading.
UPS told a different story. The delivery giant beat modestly on both earnings and revenue but shares fell more than 3% as the results highlighted ongoing volume declines in the domestic segment. Revenue in that business fell 2.3% as package volumes contracted.
The company is in the midst of a turnaround plan, achieving $600 million in cost savings from network efficiency programs in the first quarter with expectations to reach $3 billion in savings for the full year. But cost cuts can only carry results so far when the top line is shrinking.
Spotify also disappointed, forecasting second quarter earnings and premium subscriber growth below expectations. Shares dropped 9% in premarket trading, a sign that growth is slowing in the company's major markets.
Tomorrow Is the Main Event
The Magnificent Five report over the next two days. Microsoft, Alphabet, Amazon, and Meta release results tomorrow. Apple follows Thursday.
The most important number investors will scrutinize is capital expenditure guidance. In January, these four hyperscalers announced plans to invest upward of $630 billion to fuel their AI ambitions. Taking the high end of forecasts, these companies projected combined spending of $670 billion this year.
Whether this number rises, holds, or falls will tell the whole story of how the biggest winners of the AI trade see the landscape right now.
There are few signs pointing to a pullback. Taking Nvidia's results from February together with more recent indications from Taiwan Semiconductor, demand remains robust. But last week we noted that Meta announced 8,000 layoffs and Microsoft began offering buyout packages. This investment comes with costs, and after years of these companies generating enormous free cash flow, Big Tech is now tapping debt markets to fund expansion.
Google also signed a deal with the Department of Defense to use its AI models for classified work, joining OpenAI and xAI in supplying models for sensitive government applications. The agreement allows the Pentagon to use Google's AI for "any lawful government purpose," though it includes language stating the system should not be used for domestic mass surveillance or autonomous weapons without appropriate human oversight.
My Assessment
The divergence between equity and oil markets continues to widen.
Stocks are at all-time highs. Oil has crossed $100. These two realities are difficult to reconcile. Either the equity market is correct that resolution is imminent and energy prices will normalize, or the oil market is correct that supply disruption will persist and eventually force a repricing of risk assets.
JPMorgan's analysis suggests the oil math does not support current equity valuations if the conflict extends. Demand destruction is already occurring at a pace nearly double the 2008 financial crisis peak, yet prices remain below historical extremes. That is an unstable equilibrium.
My view is that the equity market has gotten somewhat ahead of itself on the peace optimism while the oil market is pricing in a more realistic timeline for normalization. Even if hostilities ended tomorrow, returning to normal market conditions would take months. Mines need to be cleared. Tanker congestion needs to ease. Production and refining need to restart gradually.
I continue to believe the direction is ultimately toward resolution, but the timing remains highly uncertain.
Tomorrow's Big Tech earnings will likely determine whether this rally has more room to run or whether it is time to consolidate the gains.
Final Thought
The week ahead will answer many questions. Can the Magnificent Five deliver results that justify the rally? Will AI capex guidance remain robust? Is the consumer holding up despite $4 gas? What does the Fed signal about the transition?
By Friday, we will have a much clearer picture.
Stay disciplined. Let the earnings speak.
As always, feel free to reach out with questions about navigating this environment.
Best regards,
Dan Sheehan [email protected]
Subscribe: https://substack.com/@dansheehan3
This newsletter is for informational purposes only and should not be considered investment advice. Market Pulse is an independent publication by Dan Sheehan and is not affiliated with, sponsored by, or associated with my employer. Please consult with your financial advisor about your specific situation.