Dan Niles@DanielTNiles
On March 31st, I titled my post “History May not Repeat Itself but it often does Rhyme.” In 1997 due to the Asian currency crisis and in 1998 due to the Russian bond default, the S&P despite having an intra-year drawdown of 11% and 19% respectively, finished the year up 31% and 27%. This was in year 3 and 4 of the internet infrastructure buildout. My view was 2026, which was year 4 of the AI buildout, would also see a solid rebound especially given a war can get walked back versus the structural issues in 97/98. In addition, Agentic AI was ramping which required 10-100x more tokens versus Chat-based AI.
After a 9% intra-year drawdown from 1/27-3/30, the S&P has now rebounded 12% with just one down day over the past 13 trading sessions as the war with Iran heads to a conclusion. It took just 11 trading days for the S&P RSI to go from oversold to overbought which is the fastest since 1982.
The Nasdaq has been even more impressive with a 13 consecutive day winning streak over which it gained 18%. This is the longest streak since 12 consecutive days of gains in 1992 with a gain of 16% for perspective.
Future positives include a new Chairman of the Fed likely by mid-May who was chosen largely due to his preference to cut rates and continue the easy money policies that have fueled this market over the past 3 years. In addition, the AI infrastructure buildout seems to be taking another step function higher with the emergence of Agentic AI earlier this year fueling token production which requires more hardware.
But first comes the meat of earnings. There was lackluster stock performance last week by important tech stocks which reported earnings such as $ASML (-1%), $TSM (flat) and $NFLX (-6%). In addition, their were mixed results by the big banks which reported this past week such as $WFC -5% but $C +6%. But despite this, the S&P financials sector as a whole still gained 3% with much better results seen in the S&P (+5%), Nasdaq (+7%), R2K (+6%) and Magnificent 7 (+9%.)
A 13% decline in WTI last week to $84 on positive Iran headlines was the major catalyst of the market rally. Having said that, it was in the mid-$60s before the war started and the S&P is at all-time record highs. Looking to what the market is discounting looking forward, the 12 month futures contract is about $71 and was down 3% last week but it was in the low-$60s prior to the war.
10 year treasury yields also seem to reflect the higher oil prices. They were close to 4.0% before the Iran war and while down from their highs of closer to 4.5% they are still around 4.25%.
Finally, the S&P is technically overbought as noted earlier due to the speed and gains during this 13 day rally.
As a result of the above factors of: 1) higher oil, 2) higher bond yields and 3) overbought technicals with the market at all-time record highs, the near-term risk versus reward in my opinion is not great. I am expecting a minor pullback. A sell the news reaction to the final settlement around Iran or further angst around the opening of the Strait and under what terms could easily do this as well especially if oil does not come down further. But I would use a minor pull-back to add exposure. During 1997/98 following those macro scares during the internet buildout, after the prior losses were recouped and the market went to new highs, the pullbacks were contained to around 5%.
All the best in the week ahead.
