Hope for Iran resolution gives stocks room to rally

Crude oil is lower on hopes for a resolution with Iran, with WTI well below $100 bbl and Brent crude under $105 bbl. Longer-term interest rates are lower on the prospects for a lower inflation impact, while shorter-term rates are higher on expectations of a more restrictive Central Bank posture until the lower inflation shows up in the data. Equities, with a longer investment horizon, are following the longer bonds and trading higher. 

Optimism that the AI momentum will help drive the economy in the short term by the hundreds of billions being spent on data centers, as well as growth and margin improvement from the adoption of AI solutions in the longer term, is taking the market higher. Call options volume for the S&P is at an all-time high trying to get in front of a resolution with Iran, and is providing a technical push as well. 

The upcoming SpaceX initial public offering (IPO) is also bringing enthusiasm for new growth potential of further demand for technology in space. When the IPO prints in early June, Elon Musk is anticipated to be the world’s first trillionaire. OpenAI is also expected to come with an IPO in the months ahead, which should further burnish the value of AI assets. 

Wall of worry outside of AI

The Michigan Consumer Surveys now show consumer sentiment at its lowest in 30 years, with rising expectations for higher inflation.

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No one takes these surveys as highly accurate, but it is nevertheless concerning.

Delinquency rates on credit cards, car loans and leases, even mortgages, are pushing to levels not seen since the Great Recession.

The K-shaped economy leaves the market vulnerable to a consumer-driven recession should the Iran situation become extended, and energy prices spike higher. But the market is saying that is not a likely outcome.

Kevin Warsh is being sworn in on May 22 as the new Fed Chairman, while Trump is hoping for a more dovish Fed.

Warsh’s hands seem tied with the current energy-driven inflation numbers. He also wants to shrink the balance sheet, which would put upward pressure on interest rates, but it’s unlikely that he will pursue that strategy anytime soon.

It’s of note that history says a new Fed chairman has often been associated with a market pullback, though the cause and effect is unclear, much like the weak markets during midterm election years. 

For now, the market’s positive momentum continues. The massive spend on data centers is driving the near-term economic expectations, and the Iran situation/energy inflation is seen as transitory. The demand for AI solutions appears strong and will materially boost efficiency and profit margins.

Perhaps the biggest risk is that the AI momentum is so strong that it can’t avoid the calls that it is a bubble. If it is, it doesn’t look like it is ready to pop anytime soon, and with record funds in money markets, it likely has a lot further to run. 

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