WTI oil has now erased all yesterday’s losses as risks for a more prolonged US-Iran stalemate increase. What matters for the markets is not the Q1 earnings, but how things are going to look like in the next 6-12 months.
For now, I keep my view that we have reached an inflection point and for further upside we will need an official resolution on the US-Iran front and the reopening of the Strait of Hormuz.
In fact, it wasn’t just the US-Iran de-escalation supporting the stock market since April, but also the Federal Reserve’s easing bias. This has led to an easing in financial conditions even without rate cuts as real yields fell. These are generally subtle moves before a pivot in monetary policy. I think that’s the strongest signal of too much optimism if you couple it with the “record rise in equity allocations in May”. There’s too much good news already priced into the market.
Although a second wave of inflation is now the biggest tail risk, Fed rate hikes would be even worse
