Good morning investors,
Markets are digesting a new reality. After ignoring two hot inflation prints last week to push to record highs, the weight of elevated prices and rising yields is finally asserting itself.
Futures are under pressure this morning. S&P 500 futures have dropped 0.4%. Nasdaq 100 futures are down 0.7%. Dow futures have shed 77 points, or 0.2%.
The 10-year Treasury yield spent part of Monday above 4.6%, the highest level in nearly a year. The last time yields were this elevated, we were in the depths of the trade war. The bond market is sending a message that equity investors can no longer ignore.
Oil prices have eased slightly after President Trump announced late Monday that he was calling off a planned attack on Iran after the heads of Saudi Arabia, the UAE, and Qatar asked him to "hold off." WTI has pulled back to $108.21. Brent has dipped to $110.96.
The ceasefire, fragile as it remains, bought another day of negotiations.
Monday's Mixed Session
The S&P 500 closed down 0.1%. The Nasdaq fell 0.5% as chip stocks sold off. The Dow gained 0.3%.
The headline you did not hear was that Monday produced the best breadth day of May, with 72% of S&P 500 stocks advancing. The index finished lower because semiconductors, which have driven the vast majority of this year's gains, finally took a breather.
Prior to Monday, semiconductor stocks had accounted for more than half of the S&P 500's 8% year-to-date gain, contributing 563 index points. Nvidia alone has contributed 110 points. Micron added 58, Broadcom 44, AMD 40, and Intel 39.
The remaining 495 stocks in the index have collectively contributed just 272 points.
This concentration has been extraordinary. When chips pause, the index pauses. But the breadth improvement underneath suggests the market may be healthier than the headline numbers indicate.
The Bond Vigilantes Return
Warsh took the oath on Friday with a clear agenda: ease monetary policy and let AI-driven productivity gains do the heavy lifting on inflation. The bond market had different plans.
Since he assumed the chair, the 10-year yield has ripped higher to levels not seen since last May's trade war panic. Both the 30-year and 2-year now sit above the Fed's target rate. Traders are essentially telling Warsh that his dovish intentions are dead on arrival.
The problem extends far beyond U.S. borders. A synchronized global repricing is underway as investors everywhere brace for persistent inflation:
UK gilts at 10 years broke 5% for the first time since the financial crisis. German bunds touched 3.15%, a level not seen in 15 years. Japanese government bonds reached yields last witnessed when Clinton was president.
This matters for a structural reason that often gets overlooked. Foreign capital has long flowed into Treasuries because they offered superior yield. With European and Asian bonds now paying competitive rates, that automatic bid for U.S. debt weakens. America must now attract buyers based on fiscal credibility alone, and the deficit running near 6% of GDP does not help that case.
The implication for June's FOMC meeting is clear. Any hint that cuts remain on the table would be interpreted as the Fed falling behind. Bond investors would demand compensation for that risk through even higher yields.
Warsh may have arrived wanting to cut. The market is telling him he cannot.
The China Can Kicked Again
President Trump's China trip is over. The stock market went up during a potentially fraught meeting that averted disaster. In that sense, it was a success.
But the three biggest issues remain unresolved: a plan on Iran and opening the Strait of Hormuz, Taiwan uncertainty, and a longer, more durable trade truce.
One might argue the situation is more uncertain now than before the trip.
Since the White House's rollback of last year's trade war volleys and the Supreme Court's striking of some tariffs, the trade conflict has taken a back seat to AI, inflation, the Fed, and Iran.
But the China trip served as a reminder that this issue, which tanked the stock market in April 2025, is still present even if dormant. The bear is sleeping. It is still a bear.
Home Depot: The Consumer Holds
Home Depot reported this morning and beat expectations. Earnings came in at $3.43 adjusted versus $3.41 expected. Revenue hit $41.77 billion versus $41.52 billion expected.
The company said its core homeowner shopper remains resilient despite higher gas prices and plummeting consumer confidence. The full-year guidance was reaffirmed.
"The homeowner in a relevant sense is perhaps more protected financially than other customer cohorts and so we continue to see engagement," the finance chief said.
But engagement only goes so far. "They continue to tell us that they are going to defer their spend on larger projects. That's consistent with what they've told us the last few years."
Comparable sales rose just 0.6%, the third consecutive quarter where that figure failed to move more than 0.5% in either direction. Comparable transactions fell 1.3%, the fourth straight quarter of declines.
The housing market remains broken. Mortgage rates have spiked again following the Iran conflict. The optimism that rates might dip has been dashed.
Home Depot is managing through by winning professional customers. The pro segment now represents about 50% of revenue, and recent acquisitions have expanded their addressable market significantly.
Credit Stress Building
Consumer credit data continues to deteriorate.
Credit card serious delinquencies rose to 13.1% in the first quarter, the highest since the fourth quarter of 2010. This is just below the 2010 peak of 13.7% in the aftermath of the financial crisis.
Since the third quarter of 2022, serious credit card delinquencies have surged 5.5 percentage points, even larger than the 3.9 point increase during 2007 to 2010.
Auto loan serious delinquencies hit 5.6%, the highest on record. Student loan delinquencies jumped to 10.3%, the highest since early 2020.
The K-shaped economy continues to define the landscape. Higher-income households are absorbing elevated prices while lower-income households are falling behind.
The Software Breakout
Here is where I see opportunity emerging.
While semiconductors have dominated the conversation and the returns, I believe we are starting to see the software sector finally get its move. After months of underperformance driven by fears that AI would commoditize software businesses, the tide appears to be turning.
Microsoft is the worst-performing Magnificent Seven stock in 2026. It has beaten earnings in seven of the last eight quarters. Its forward price-to-earnings ratio sits at the lowest level since before ChatGPT launched. Among the Mag Seven, it has posted the second-weakest returns over the past five years, and now we have Bill Ackman as a bull.
I am watching Microsoft for a catch-up trade here. Salesforce as well. The iShares Expanded Tech-Software ETF can get back above the $100 level with the sector finally receiving its turn after AI fears proved overblown.
Software is in a better place than it was a few months ago. The application layer is where the next leg of AI value creation will occur. Microsoft sits at the center of that opportunity with Azure, Copilot, and the OpenAI partnership.
The hyperscalers built the infrastructure. Now the companies using that infrastructure to transform businesses will capture the next wave of returns.
Google and Blackstone Partnership
Speaking of AI infrastructure, Google and Blackstone announced a significant partnership yesterday.
The two will form an AI cloud business venture to capitalize on demand for computing services. Blackstone will invest an initial $5 billion in equity to bring 500 megawatts of data center capacity online in 2027, with further expansion planned. The total investment value could reach $25 billion including leverage.
The venture will provide data center capacity along with Google's custom TPU chips through a compute as a service model.
This partnership validates the demand thesis. When the world's largest alternative asset manager commits $25 billion to AI infrastructure, it reflects confidence in the durability of the spending cycle.
Risk Appetite at Extremes
A cautionary data point from South Korea.
Margin loans outstanding on Korean stocks have reached a record $24.3 billion. Since the start of 2025, margin debt has surged 140%. It is up 32% since January of this year alone.
For perspective, the value of leveraged bets on Korean stocks was approximately $5 billion in 2020.
Domestic investors have poured roughly $25.3 billion into South Korean shares year to date. Retail investors are aggressively rushing into stocks.
This level of speculative positioning typically appears late in rallies. It does not guarantee a reversal, but it does suggest that expectations have become elevated and the margin for error has compressed.
Tomorrow: Nvidia
All eyes turn to Wednesday.
Nvidia reports after the close. Analysts expect adjusted earnings of $1.78 per share on revenue of $79.2 billion. Any commentary from Jensen Huang about the China trip and potential H200 sales will dominate the discussion.
Despite the stock reaching new highs, some analysts sense muted enthusiasm. The setup, with expectations tempered even at elevated prices, could favor a positive reaction if results deliver.
This report will set the tone for semiconductor stocks and likely the broader market through the end of May.
Final Thought
The market is processing competing forces.
On one side we have record AI capital expenditure, strong corporate earnings, and an infrastructure buildout that shows no signs of slowing.
On the other side, inflation that refuses to cool, bond yields pushing higher globally, and geopolitical tensions that remain unresolved.
For weeks, the AI narrative overwhelmed the macro concerns. That balance is shifting. The 10-year yield above 4.5% demands attention. The Fed's path has narrowed. The consumer, while holding, shows signs of stress in the credit data.
Stay invested but acknowledge the risks. The cycle has years to run. The next few months may be bumpier than the destination.
Use volatility as opportunity. Build your shopping list. Watch software for the rotation trade. And remember that the best returns often come to those who maintain conviction through difficult periods.
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.