Good morning investors,
Kevin Warsh will be sworn in as Federal Reserve Chair at the White House later today. Jerome Powell's era officially ends. A new chapter in monetary policy begins.
The handoff comes at a complicated moment. Inflation is running hot. Bond yields have spiked to multi-decade highs. The Fed's April minutes revealed most officials believe rate hikes may become necessary. Warsh inherits a central bank that is pivoting hawkish despite his preference for accommodation.
Futures are edging higher this morning. Dow futures have climbed 124 points, or 0.25%. S&P 500 futures are up 0.18%. Nasdaq 100 futures have added 0.27%.
Oil prices are firmer with both Brent and WTI up around 2% as traders continue monitoring the Iran peace talks. The 30-year Treasury yield has pulled back from its mid-week highs above 5.19% to around 5.09%, providing some relief to equity valuations.
A Winning Week Despite the Volatility
The S&P 500 is up 0.5% for the week, putting the benchmark on track for its eighth consecutive weekly gain. That would be the longest winning streak since a nine-week run that ended in late 2023.
The Dow has climbed 1.5% and closed at a record high yesterday. The Nasdaq has added 0.3%, on pace for its seventh weekly advance in the past eight weeks.
These gains came despite significant turbulence. Long-term Treasury yields surged to levels not seen since before the financial crisis. Oil prices whipsawed on conflicting Iran headlines. The Nvidia report delivered exceptional results that barely moved the stock.
The market's ability to absorb these crosscurrents and still grind higher speaks to the underlying strength of the AI investment thesis.
Thursday's Session
Stocks finished mixed as peace deal optimism provided support.
The S&P 500 gained 0.2%. The Dow advanced 0.6% to reach a fresh all-time high. The Nasdaq edged up 0.1%.
Secretary of State Marco Rubio said there were "good signs" that an agreement to end the Iran conflict is within reach. Iran indicated the latest American proposal has narrowed the gaps between the two sides, but significant obstacles remain.
Iran: Progress With Major Hurdles
The sticking points are clear. Tehran wants to maintain control over the Strait of Hormuz through some form of toll or payment system. Washington has rejected this outright.
"No one in the world is in favor of a tolling system. It cannot happen and would be unacceptable," Rubio told reporters. "If we cannot get a good deal, the president has been clear he has other options."
Iran's Supreme Leader also issued a directive that near-weapons-grade uranium must remain within the country. The United States has pushed for Tehran to surrender its enriched uranium stockpile, fearing it could be destined for a nuclear weapon.
The USS Abraham Lincoln carrier strike group is maintaining position in the Arabian Sea while enforcing the blockade against Iranian ports. The military pressure continues even as diplomatic channels remain open.
My read: a deal is more likely than not, but the market has already priced in significant optimism. The stagflationary effects from elevated energy prices will persist for at least the next few quarters regardless of when an agreement is reached.
Quantum Gets Government Backing
The White House announced over $2 billion in equity stakes and funding across nine quantum computing companies yesterday.
IBM received $1 billion to build the country's first dedicated quantum foundry. GlobalFoundries got $375 million. The remainder was divided among D-Wave, Rigetti, PsiQuantum, Quantinuum, Atom Computing, and Infleqtion.
Rigetti closed 30% higher on the news. The entire quantum sector surged.
I have written extensively about quantum computing as the optionality trade at the end of this decade. This funding validates the thesis. The government is signaling that quantum represents a strategic priority on par with semiconductors and critical minerals.
The investment logic here is straightforward. When the federal government takes equity stakes in companies, it is providing both capital and an implicit endorsement. These businesses are unlikely to be allowed to fail.
Look at Intel. Since the government took its stake last year, the stock has rallied more than 400%. The common thread across these investments is building a strategic supply chain for the AI age: semiconductors, critical minerals, and quantum compute.
Investing alongside the government has become a strategy in itself. It continues to work.
The Fed Path Forward
Despite the hawkish tone in the April minutes, I remain of the opinion that the Fed will stay on pause rather than raise rates.
Warsh faces a difficult balancing act. Inflation is elevated but the economy is showing signs of strain. Consumer confidence has collapsed to record lows. Walmart warned yesterday that shoppers will feel more pressure as tax refund tailwinds fade.
Hiking rates into this environment carries significant risks. The bond market has already done much of the tightening work by pushing yields higher. The 10-year above 4.6% and the 30-year above 5% represent meaningful headwinds for housing, corporate borrowing, and consumer spending.
Warsh likely wants to see more data before committing to either direction. The June meeting will bring updated projections, but I expect rhetoric about maintaining optionality rather than a definitive pivot toward hikes.
The futures market pricing a coin-flip chance of a hike by year end feels about right. But my base case remains no change in the policy rate through 2026.
Walmart's Warning
The retail earnings this week painted a nuanced picture.
Target surprised to the upside with its strongest results in years. Home Depot and Lowe's reaffirmed guidance while acknowledging pressure. But Walmart's outlook was the most concerning.
The largest American retailer beat on revenue but guided below expectations for both the full year and the current quarter. The finance chief was explicit: tax refunds masked the pain from elevated gasoline prices during the first quarter. That cushion is now depleted.
Walmart absorbed $175 million in fuel cost headwinds during the quarter and expects that drag to grow if oil prices remain elevated. The company is choosing to absorb costs rather than pass them to consumers, which protects volume but pressures margins.
This matters because Walmart processes more transaction data than almost any company on earth. When they signal caution about consumer health, the warning deserves serious attention.
Software Continues to Strengthen
Two enterprise software names delivered encouraging results after the bell yesterday.
Workday exceeded expectations for both revenue and profit as demand for its AI-powered finance and HR tools accelerated. The company supported 14 million hiring processes with its recruiting agent during the quarter, up 44% from a year ago.
Zoom raised its annual revenue and profit forecasts, betting on continued demand for AI features integrated into its communication platform. The company also authorized an additional $1 billion buyback.
These results reinforce my view that the software sector is in a better position than it was several months ago. The fears that AI would commoditize enterprise software have proven overblown. Instead, AI is becoming a feature that drives customer adoption and deepens usage.
I continue to watch Microsoft for a catch-up trade. The stock has lagged the broader AI rally but looks poised to break into the gap created after January earnings. Azure growth remains strong. Copilot adoption is accelerating. The valuation relative to its Magnificent Seven peers is compelling.
AMD Signals Tight CPU Market
Lisa Su said something important from Taiwan yesterday. AMD is working with partners to ramp up production capacity because demand for CPUs has significantly exceeded expectations.
"The overall CPU market has had significantly higher demand than any of us predicted a year ago," she said. "The CPU market is tight."
This undercuts the narrative that AI is exclusively about GPUs. The agentic AI workflows driving the next phase of the buildout require CPUs to orchestrate tasks, manage memory, and coordinate between models. The "middle managers" of the AI stack are becoming bottlenecked.
AMD plans significantly more supply for 2027 and beyond. In the meantime, the tightness should support pricing power across the semiconductor complex.
Global Markets Rally
Asian markets closed higher across the board as peace deal optimism spread.
Japan's Nikkei surged 2.68% to close at 63,339, another record. Japanese inflation eased more than expected in April, with core CPI falling to 1.4% versus expectations of 1.7%. The softer reading weakens the case for an early rate hike from the Bank of Japan.
South Korea's Kosdaq jumped nearly 5%. Hong Kong's Hang Seng added 0.8%. China's CSI 300 gained 1.3%.
The global risk-on sentiment heading into the weekend suggests investors are growing more confident that the Iran situation will resolve favorably.
Consumer Sentiment This Morning
The University of Michigan's final May reading on consumer sentiment arrives at 10 AM ET. The preliminary number showed confidence at 48.2, near record lows.
Perhaps more important are the inflation expectations. The preliminary one-year reading came in at 4.5%. The five-to-ten year expectation was 3.4%. Any further increase in these metrics would validate concerns about inflation becoming embedded in consumer psychology.
The Fed watches these numbers closely. Warsh will be paying attention on his first day.
Final Thought
Eight consecutive weeks of gains for the S&P 500. Records for the Dow. The AI infrastructure buildout continuing to deliver earnings that justify elevated valuations.
Yet the warning signs have not disappeared. Bond yields remain at uncomfortable levels. Walmart is signaling consumer strain ahead. The Iran situation is progressing but unresolved. Fund manager positioning is at historic extremes.
The market has demonstrated remarkable resilience through all of this. The question is whether that resilience reflects genuine strength or complacency that will eventually be tested.
I remain constructive over meaningful time horizons. The AI cycle has years to run. Earnings continue to deliver. The hyperscaler capital expenditure curve shows no signs of bending.
But I also expect consolidation in the near term.
Stay invested. Stay disciplined. Enjoy the weekend.
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.