As noted last week, some strategists feel that last week’s historic SpaceX (Space Exploration Technologies Corp. – SPCX – $201.80) IPO could mark the last hurrah of an equity bubble. In our view, the SPCX IPO may actually mark the initiation or the earliest phase of an equity bubble. If we are right, equities could continue to rise for several more years before a decline of 20% or more appears. And SPCX did not fail to impress. After its second day of trading the new stock closed nearly 50% above its offering price.

Cursor

In addition, SpaceX announced a $60 billion deal to acquire Anysphere, the parent company of AI coding agent Cursor. What makes this combination interesting is that Cursor, which according to recent financial reports generates $2.6 billion in annualized B2B business, allows developers to use AI to automate coding. This means Cursor competes directly with companies like OpenAI and Anthropic. Keep in mind that analysts who believe SpaceX is overvalued admit that the primary problem is the difficulty in valuing the xAI division of SpaceX. However, this week’s deal to acquire Cursor is a sign that Musk intends to develop SpaceX’s xAI division and compete directly with OpenAI and others. Acquiring Cursor is a boon for SpaceX, but it could make OpenAI’s filing for an IPO this week more interesting and challenging than it was a week ago.

Warsh

This week also marks Kevin Warsh’s first meeting as Chair of the Federal Reserve. The financial press has finally focused on what Warsh has been saying in all his interviews, that the Fed’s balance sheet is too large, it distorts markets and is harmful to the US economy. He plans to fix this. It has been well documented that quantitative easing, or an expanding Fed balance sheet, is a boost for the stock market. On the other hand, the impact of reducing the Fed’s balance sheet is more ambiguous. Even so, less liquidity in the banking system means less money is in the financial system, which means quantitative tightening could be detrimental to the economy and the stock market. We believe this is particularly true in a sluggish or weak economy; but quantitative tightening in a robust economy is apt to have less of an impact since velocity, or the turnover of money is high. We expect the new Fed Chair to understand this. It is likely he will be asked to comment on the Fed’s balance sheet during his first press conference on Wednesday, if he gives a press conference. Fewer press conferences are also apt to be part of the new Warsh Fed.

A week ago, Warsh would have been asked many questions about inflation, but things have changed recently. In particular, we are referring to the 14.8% decline in WTI crude oil futures (CLc1 – $76.68), that appeared in the last five trading sessions. Crude oil still remains above February 2026’s level of $67 a barrel, but the opening of the Strait of Hormuz could result in prices falling to that level, or even lower. Some energy analysts believe the end of the war could result in an oversupply of energy. The reason is that the end of the conflict would release oil sitting in tankers in the Strait of Hormuz at the same time that producers are close to full production. For example, the US exported a record 10.5 million barrels per day of crude and fuel in May, becoming the world’s largest oil exporter, surpassing Russian exports of 7 million barrels per day and Saudi Arabian exports of 5.9 million barrels per day. According to Vortexa Ltd., in 2025, the US exported only 6.6 million barrels per day, Russia exported 5.8 million barrels per day, and Saudi exports were 8.1 million barrels per day. Plus, the closing of the Strait of Hormuz has forced many energy consumers to find new suppliers and new sources of energy or to become more energy efficient. Demand for heavy crude may have peaked.

Inflation, Rates, and Earnings

This would be good news since May data was disturbing. Headline CPI rose from 3.8% YOY to 4.25% YOY. Core CPI was less affected by energy prices and increased from 2.75% YOY to 2.85% YOY. However, motor fuel soared, up nearly 41% YOY, and transportation sector inflation increased to 9.3% YOY. On the other hand, housing inflation was unchanged at 3.6% YOY and service-sector pricing was up a mere 0.1% to 3.5% YOY. See page 3. The special CPI indices that excluded energy were relatively unchanged in May. For example, all items less energy increased 2.9% YOY in May, up from 2.8% YOY. All items excluding food, shelter, energy and used cars and trucks were up 2.7% YOY versus 2.6% YOY in April. The index excluding food, shelter, and energy was 2.4% YOY versus 2.3% YOY. But all items excluding just food and shelter rose to 5.2% YOY, up from 4.3% and all items less medical care increased to 4.4% YOY from 3.9% YOY.

The heavily weighted owners’ equivalent rent index was 3.3% YOY and unchanged in May. This component has been below the fed funds rate for 14 consecutive months. (Until March, headline CPI had been below the Fed funds rate for 36 consecutive months. See page 4.) Since crude oil is now at $77 a barrel, and potentially moving lower, we believe there is a possibility that both the CPI and interest rates could decline later in the year.

Lower interest rates are what the housing market needs. Housing construction data for May was disappointing. Total housing starts were 1.177 million (SAAR) in May, down 8.7% YOY and the lowest level in six years. Housing starts for single-family homes were 882,000, the lowest since September 2025, and down 6.7% YOY. Housing permits were also weak, but not as severe. Total permits were 1.4 million (SAAR), down fractionally from April and down 0.2% YOY. Single-family permits were 886,000, up from April, but down 1.8% YOY. Unfortunately, homeownership is out of reach for many households. See page 5.

The NAHB/Wells Fargo housing market index fell from 37 to 35 in June, remaining well below the 50-point threshold, a sign of poor building conditions over the next six months. All three subcomponents of the index (current sales, expected sales and customer traffic) declined or held steady in June. Builders are facing cost pressure from higher input prices while demand remains soft due to weak affordability. The NAR housing affordability index fell from 108 to 105.6 in May which was the result of mortgage rates rising from 6.4% to 6.5% and the price of a median existing single-family home increasing from $421,900 to $434,300. Median family income rose from $109,547 to $111,513 in May, but this means the price of an existing home rose from 3.85 times median income to 3.89 times median income. See page 6. Our technical indicators are mostly positive, but our 25-day up/down volume oscillator is neutral. This is a concern since it means buying and selling pressure is equal, which is a sign of weakness at all-time highs. However, consensus earnings estimates continue to rise which means even as the broad market indices record new highs the market is still trading at 22.1 times the IBES 2026 estimate and 18.9 times the 2027 estimate. See pages 7-8. In sum, we remain bullish for the longer term and would be a buyer on weakness.

Gail Dudack

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SpaceX is scheduled to hold its initial public offering of 555.6 million shares on Friday, June 12, 2026, with final pricing set for the close on June 11, 2026. However, this is not a normal IPO by many measures since the price has already been set at $135 a share (take it or leave it), the offering targets a retail allocation of 30% (whereas 5% to 10% is typical) and is said to be four-times oversubscribed. Keep in mind that many institutions will submit bids late in the process, and there are reports that several big institutions have already placed individual orders as large as $10 billion, but in this case, underwriters will stop accepting institutional orders on Wednesday at 4pm. Retail bids will be accepted after the Wednesday deadline, but in the end, the offering is expected to raise $75 billion. This would be more than 2.5 times the record $29.4 billion Saudi Aramco (TADAWUL: 2222 – $7.24 USD) IPO in 2019. SpaceX will be listed on the Nasdaq Exchange under the ticker symbol SPCX, and the anticipated $1.77 trillion valuation would make SPCX the eighth largest company in the world.

Experts such as Aswath Damodaran, NYU’s Dean of Valuation, as well as the research firm, Morningstar, have written that the SpaceX offering is significantly overvalued. Others say much of this valuation gap is due to the inability to price the artificial intelligence and social media assets of xAI, a subsidiary of SpaceX. However, nothing seems to dampen the enthusiasm for this IPO even the fact that xAI and SpaceX are being sued by Mississippi residents for the “omnipresent and inescapable” noise from a power plant fueling data centers. Nor does it seem dampened by the fact that the US is currently launching new strikes on Iran in response to Tehran shooting down a US Apache helicopter in the Strait of Hormuz. Nor by the US Energy Information Administration announcement that the oil stockpiles of the world’s largest economies are close to the lowest levels seen since at least 2003. In addition, CPI data for the month of May will be reported prior to the IPO, and since WTI crude futures (CLc1 – $88.20) were up 46% YOY in the month of May, this release could be negative for financial markets. All in all, it would not be surprising if the market was wobbly ahead of Friday’s debut of SPCX.

Many experts are turning bearish on the equity market and feel that the SpaceX IPO represents a classic bubble ending. We do not think so. In our opinion, the SpaceX IPO could be just the beginning of the final stage of a bubble, but with a dramatic finale yet to be seen. By that we mean the enthusiasm for AI and semiconductors could now begin to shift from the nuts and bolts of producing AI to AI implementation and the opportunities of space. Elon Musk has been years ahead of most mortals and the value of the Starlink global satellite constellation and orbital rocket transportation is obvious, but what plans Musk has for xAI and communication infrastructure and managing space-to-ground data traffic will be fascinating to see.

In short, this IPO is not just about SpaceX but also about the “Musk mystique” which translates into Elon’s genius and vision. Keep in mind that Tesla Inc.’s (TSLA – $396.68) amazing performance since its 2010 IPO or since the early years of 2011 to 2012, has created an estimated 3,000 to 5,000 millionaires. We expect many of them will be active investors in SpaceX, a company already more “established” than Tesla was in 2010.

Although it is encouraging to see that crude oil prices are down from April’s levels, we are worried about May’s inflation report. On the other hand, recent reports had encouraging news about employment. The May employment report was a big positive surprise with a gain of 172,000 new jobs, but equally important, another 93,000 jobs were added due to positive revisions to March and April. The unemployment rate was unchanged at 4.3%. (Without rounding, the unemployment rate actually declined 0.4%.) The majority of job growth was in the leisure and hospitality sector, where hiring had been weaker in 2025. Other sectors with job gains were government and healthcare. Nonetheless, the disparity between the two BLS surveys continued in May with the establishment survey showing job growth of 0.3% YOY and the household survey showing a job loss of 0.3% YOY. This is disturbing because job losses are characteristic of recessions. See page 3.

In the establishment survey, the 6-month average of job gains rose from 70,170 to 92,000 in May, which is the highest level since February 2025. The household survey showed a 6-month average of job losses of 164,830 in May and has been in negative territory for five consecutive months. The difference is that the establishment survey includes all employees issued a W-2, whereas the household survey also includes legal and illegal employees, unpaid home workers, and/or any working person not receiving a W-2. In short, it is a broader survey of employment. This could help explain the disconnect between the two surveys and the disconnect with sentiment indicators. See page 4. However, sentiment indicators have been warning of a recession for the last six years, not just the last six months.

May’s data on earnings was a highlight. Average weekly earnings grew from $1089.37 in April to $1092.08 in May, representing a 4.2% YOY increase. This 4.2% gain is important since inflation in May will be reported later this week, but in April it was running at 3.8% YOY. In short, real earnings are growing, but modestly, which reveals why inflation is a tax on households. The current inflation driver is energy prices, which makes the current price of WTI, down from $103.34 at the end of April, a hopeful sign for consumers. See page 5.

May’s ISM nonmanufacturing index was less positive than the ISM manufacturing survey since only four of the nine components rise in the month, one of which was prices paid. However, all but one component, employment, remained above the 50 benchmark indicating expansion for the sector. The combined ISM manufacturing/nonmanufacturing employment index rose from 94.4 to 96.5 in May, which is a good sign for the US economy. See page 6.

The NFIB small business optimism index fell 0.6 points to 95.3 in May, its lowest level since October 2024, and it was the third consecutive reading below the long-term average of 98. The employment index was essentially flat at 100.3, above the long-term average of 100, but below the 2025 average of 101.2. Net respondents planning to increase employment fell to 9%, the lowest since May 2020. A net 34% plan to raise prices, the highest since July 2022. Actual earnings and actual sales improved to -15 and -5, respectively. The -15 reading in actual earnings is the second-best result since December 2021. See page 7.

The LSEG IBES and S&P Dow Jones consensus earnings estimates for 2026 are $340.07 and $336.27, respectively. For 2027, earnings forecasts are $395.95 and $392.41, respectively. This means the S&P 500 is trading at 21.7 times 2026 and 18.7 times 2027 estimates. These multiples are not indicative of an overvalued market, particularly if inflation trends lower later this year. In short, we expect upcoming equity offerings could generate volatility in the near term, but we remain a long-term buyer of equities on weakness.

Gail Dudack

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We are more perplexed by the equity market than we have been in a long time. On one hand, the fundamental underpinnings for equities, boosted by sterling first quarter earnings reports, continue to support this bull market. And in our Outlook for 2026 we indicated that it would be a year of positive earnings surprises. This has come to pass, and it remains core to our bullish outlook. Yet even though we expect earnings to remain strong this year, strong earnings have become the consensus view. In short, fewer positive surprises are likely in upcoming quarters. Plus, earnings forecasts are rising exponentially at a time when quarterly earnings comparisons will become more difficult. Nevertheless, with the S&P 500 up 11.2% year-to-date, and up 28% since June of 2025, the S&P 500 12-month trailing operating earnings growth rate is a stunning 22%. In short, valuations have not been stretched this year. More importantly, strong earnings growth is not a characteristic of mania, or a bubble.

On the negative side, the outsized gains in many semiconductor and AI-related stocks make us dizzy and remind us of other over-extended markets. Equally important, a number of impressive IPO offerings are on the horizon. The combination of SpaceX, OpenAI, and Anthropic is expected to raise a total of $4 trillion.

The IPO marketplace has been relatively consistent over the last 25 years, and according to the Securities Exchange Commission, there has been an average of 280 offerings a year which raised an average of $66 billion per year. The exception was 2021 which saw a 120% increase in offerings. A total of 1,078 IPOs raised over $302.7 billion in total proceeds. Some of this IPO excitement was fueled by low interest rates, but new companies were in demand, and the average first-day gain of an IPO was 34%, nearly double the long-term average. Healthcare companies dominated the traditional offerings, but special purpose acquisition companies (SPACs) were the hot item of the year and represented 611 of the year’s listings. See page 3. Sadly, two-thirds of the IPOs that went public in 2021 were trading below their original prices by the end of December.

What makes us think about the 2021 IPO market is that in the next twelve months the combined offerings of three stocks — SpaceX, OpenAI, and Anthropic — are expected to raise a total of $160 billion in proceeds, with a target valuation of $4 trillion. This would be more than 2.25 times the proceeds raised in 2025 and more than half of what was raised in 2021. More importantly, the IPO proceeds raised in 2021 represented a mere 0.6% of total market capitalization. This year is on a path to exceed that. According to the World Federation of Exchanges, total US market capitalization was $82.2 trillion in March 2026. In other words, the $4 trillion in valuation from just these three companies could represent nearly 5% of today’s total market capitalization. That may not sound like a lot, but it would be historic. Moreover, the current IPO pipeline represents a big increase in the supply of stock which should alter the supply/demand balance for equities. And we should remind everyone that active IPO offerings are a characteristic of a market top.

When we get perplexed, we turn to fundamental data. Most major market peaks occur when the trailing S&P PE reaches 29 times or more. But this is not an exact science, and history shows that each successive major top reaches successively higher valuations. Moreover, the S&P PE exceeded 29 times in April and June of 1999, many months before the peak in March 2000. But to ease our mind, we applied a 29 multiple to the IBES 2026 earnings estimate of $339.51. This equates to 9845 in the S&P 500 index. All in all, there are excesses in the current equity environment, but in our view, while it is prudent to be vigilant it is too early to be bearish.

Economic data was mixed this week. First quarter GDP grew 1.6% (SAAR) after a weak 0.5% in the fourth quarter. There was solid contribution from nonresidential private investment, particularly in intellectual property products and equipment and software. Personal consumption was concentrated in nondurable goods and services. Net trade subtracted from growth. See page 4.

Personal income rose 2.5% YOY in April, but real personal disposable income declined 1.1%, the first monthly decline since December 2022. This is a concern. Personal consumption expenditures rose nearly 6% YOY, but the saving rate fell from 3.2% to 2.6%. Consumers are stretched and inflation is taking a toll on households. See page 5.

Our data shows that the steady deceleration seen in income growth matches the trend in adjusted proprietors’ income which declined 1.1% YOY in April. This points to pressure in the small business sector. Both of these trends align with employment growth, which grew a mere 0.2% YOY according to the BLS establishment survey and decreased 0.8% according to the household survey. May’s employment data will be reported Friday. See page 6.

The ISM manufacturing index rose from 52.7 in April to 54.0 in May. All components, with the exception of prices paid, rose for the month. (The decline in prices paid is positive!). The ISM manufacturing survey has been in expansion mode this year after being below 50 for all but three months between November 2022 and December 2025. In other words, the manufacturing sector is emerging from a long period of contraction. This shift should provide a nice boost to the economy. See page 7.

Although 68% of US GDP is tied to personal consumption and 47% is service-driven, the ISM manufacturing index has had a long history of correlating well with both the S&P 500 index and S&P operating earnings. However, the ISM manufacturing index was in recessionary mode from 2022 to 2025 which was a drag on and a risk to the economy. This revival in the ISM manufacturing index should bode well for both corporate earnings and equities. See page 8.

Inflation is the biggest problem the economy faces, and crude oil futures prices are up 41.5% YOY in June. And while this is down from the 84% YOY gain seen two months ago, consumers need to see more improvement. Inflation is what turned real personal disposable income negative in April, a trend that concerns us. Producer price indices for finished goods jumped from 4.3% in March to 6.4% in April and final demand PPI rose from 4.3% to 6.0%. Core PPI for finished goods was relatively unchanged and rose from 3.7% to 3.8%. Ex-Fed Chair Jerome Powell’s favorite inflation benchmark, the PCE deflator, was 3.5% in March and 3.8% in April while the core PCE deflator was essentially unchanged at just under 3.3% in April (i.e., relatively unchanged but up 0.1% after rounding). See page 9. Crude oil prices move relatively quickly through the economy which is why April’s spike in PPI indices suggests higher consumer prices are ahead. And since real personal disposable income is already showing negative growth, this is a major risk. To date, the core PCE deflator at 3.3% and core CPI at 2.8% are not at critical levels. But as seen in the Biden administration, the longer crude oil prices remain high, the greater the risk that this is not a short-term spike in prices, but the start of another inflationary cycle. See page 10.

Gail Dudack

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A New Chair

Kevin Warsh is now the Federal Reserve Chair, and he is bound to be in the news this week when the PCE deflator is reported for April. The consensus expectation is that the deflator will show inflation rising to 3.9% YOY and investors may rush and take this data point to hypothesize what the Warsh-led FOMC will do in June. However, in his own words, Kevin Warsh wants to be a less-public more reform-oriented Chair of the Federal Reserve. He may remain silent on the matter. We believe his true legacy will be in revamping the Federal Reserve’s policy on communications (a return to pre-Financial Crisis levels), retooling bank regulation (which would include reducing “matters requiring attention,” or MRAs, and ask regulators to focus more on operating principles. According to Vice Chair for Supervision Michelle Bowman, an obsessive use of MRAs has been distracting both regulators and bank management. This was seen by the Silicon Valley Bank bankruptcy which had 19 open MRAs when it collapsed, most of which did not focus on the core issues that brought it down. Bowman’s recent remarks indicate she is looking for changes that would reduce attention on foot-faults and focus more on real risks) and rethinking monetary policy tools (more use of interest rates which impact all individuals versus expanding the Fed’s balance sheet which mainly helps equity holders). If a Warsh-led Fed is less transparent and reduces the use of quantitative easing, it would not hurt the financial markets, but it could dampen risk-taking in the equity market.

Peace Rally

It was surprising to us that the equity market rallied strongly ahead of 3-day holiday weekend. Traders tend to be risk-averse and as a result reduce exposure ahead of most long weekends. However, last week equity traders were clearly expecting a peace plan with Iran (lower oil prices, inflation, and interest rates) and the market rallied strongly. The Dow Jones Industrial Average jumped 294 points on Friday after having gained nearly 922 points in the prior two days! We are less convinced than most that true peace with Iran is on the horizon. Israel is increasing its operations in Lebanon. Still, even as the US conducted “self-defense” strikes on boats and missile sites in Iran on May 26^th and Iran indicated they had the right to retaliate, the DJIA retrenched a mere 118 points. At the same time the S&P 500 and Nasdaq Composite index rose to record highs.

Last week’s action is a bit manic in our opinion, and our technical indicators show that the recent advance took place on weakening breadth. Although the NYSE cumulative advance/decline line made a new high on May 26^th, our 25-day up/down volume oscillator continues to oscillate around zero. This latter indicator reveals that the volume in declining stocks over the last 25 days has been slightly greater or equal to the volume in advancing stocks. See page 7. In short, buying pressure was not convincing. Over the last 10 days the number of stocks recording new highs has averaged 303 and the number recording new lows has averaged 135. With both highs and lows above the 100 benchmark, this indicator became neutral two weeks ago. The daily high/low numbers were much stronger with 350 new highs and 53 new lows at the end of April. See page 8. These are subtle, but important signs of breadth weakness. In our view, it also means that a lot of good news has been discounted by current prices, which makes the equity market riskier than it was a few weeks ago. We remain long-term bullish, but last week we became a bit worried about the near-term outlook.

Earnings Driven

The most amazing thing about the equity market is that while the indices have been making a series of record highs over the last six weeks, the price-earnings multiples for 2026 and 2027 have remained constant at roughly 22 times and 19 times earnings, respectively. This is the basis for our long-term bullishness. But our concern is that positive earnings surprises are no longer surprising and have become expected. According to recent LSEG data, first-quarter earnings growth is projected to be 29% YOY compared with the 16.1% estimated a month ago. This is more than 3.5 times the long-term average of 8.1% YOY. In short, the first quarter has been spectacular, but spectacular may be difficult to maintain. Semiconductor stocks were the darlings of the market last week, and this helped drive the iShares MSCI South Korea Capped ETF (EWY – $200.65) up 15% over the last five trading days generating a gain of more than 106% year-to-date. See page 10. And an analyst’s price target of $1,625 for Micron Technology Inc. (MU – $895.88) drove the stock up 19.3% in a day making it a $1 trillion market capitalization. While the AI mania may not be over, these are signs that it is heating up. 

Economic News

The University of Michigan consumer sentiment index fell from 49.8 to a revised 44.8 in May, falling below its previous record low of 50 in June 2022. The revisions suggested that confidence fell substantially late in the month. Present conditions fell 6.7 points and expectations fell 4 points.

Conference Board consumer confidence fell from an upwardly revised 93.8 in April to 93.1, due entirely to a 3.2 decline in present conditions since expectations actually rose 1 point. Note the recent negative disparity in the University of Michigan sentiment index. However, both sentiment surveys have been overly pessimistic and wrong for the last four years. In short, they have not been the helpful predictive tools that they were a few years ago. See page 3.

Housing and autos are two of the most important sectors of the US economy, and yet both have been languishing for the last three years. For example, total seasonally adjusted unit sales of vehicles were 16.54 million in April 2026 which is just slightly higher than the 16.41 million units sold in April 2023. In terms of housing, total residential construction spending was $924.9 billion in April 2026, which is even lower than the $934.5 billion seen in November 2022. Future spending does not look promising given recent housing starts and permits. April housing permits were down 0.2% YOY and single-family permits fell 5.5% YOY. April’s total housing starts were down for the month but up 4.6% YOY, but single-family starts decreased 2.4% YOY. In short, both the auto and housing market have been in a multi-year slump and if inflation and interest rates continue to rise it could put even more downward pressure on these important parts of the economy.

Gail Dudack

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The S&P 500 had its first three-day decline since March 30, and in our view, this pullback was long overdue. There is no denying that the current advance has been remarkable. Yet even as the S&P 500 rallied 11% in the last six weeks, the price-earnings multiples for the S&P 500 remained consistently at 22 times 2026 earnings and 19 times 2027 earnings. Seen another way, the S&P 500 index has increased by a stunning 23.3% since May 19, 2025, while earnings for the S&P 500 have increased an even greater 25.1% YOY in the same timeframe. In short, it has been an amazing time for equity investors, and we believe there will be more good times ahead.

Caution

Nevertheless, we became a bit more cautious last week. Much of this was due to the fact that we feel the Iranian conflict is unlikely to be resolved without more bombing, some of which could impact Iranian energy facilities. If this were to occur it would send energy prices even higher and trigger more inflation fears. In short, things could become worse before they get better.

This week President Trump indicated he was only an hour away from ordering another huge attack on Iran before leaders of Qatar, Saudi Arabia and the United Arab Emirates asked him for time to pursue an agreement over Iran’s nuclear program. However, some market gurus suggest there would have been a pause in the conflict regardless. And this view is supported by the fact that the Senate just advanced a war-powers resolution that could end hostilities with Iran unless President Trump obtains Congress’ authorization.

But if we are right, more bombing would be a negative surprise, and in our opinion, the Senate’s resolution may only serve to hasten President Trump’s decision to act. It should not go unnoticed that the concept that President Trump always “chickens out” or, TACO, has become popular on Wall Street. But this assessment fails to understand how complicated international negotiations are, how divergent geopolitical forces require President Trump to allow Iran and any other nations involved — directly or indirectly — sufficient time to try to negotiate, or what is involved in deciding what the best options are for the US, and last, but far from least, how determined President Trump is to remove the Iranian nuclear threat.

This administration, like most of the world, knows that there is no way to negotiate with the Islamic Revolutionary Guard Corps (IRGC). The IRGC believe that by using stalling tactics they are winning, and that in the end they will always win. Therefore, they have no need or desire to negotiate. But perhaps this recent delay actually helps the US cause. For example, Europol, the law enforcement agency of the European Union, designated the IRGC to be a terrorist group in February, and this week announced a major digital crackdown that led to the removal of thousands of online accounts linked to Iran’s IRGC. It also suspended the group’s primary X account in the EU. This online digital presence was used by the IRGC to communicate, spread propaganda, recruit supporters, and raise funds. These moves by Europol are a blow to the IRGC.

In addition, new US sanctions are targeting Iranian regime currency exchange houses and associated front companies and blocking 19 vessels involved in Iranian petroleum and petrochemicals shipments to foreign customers. In sum, the US Treasury is systematically dismantling Tehran’s shadow banking system and shadow fleet under Economic Fury. The US Treasury also froze nearly half a billion dollars in regime-linked cryptocurrency. What we see is a flurry of action taking place behind the scenes to cut off revenue to Tehran, but in our opinion, these acts are in anticipation of more bombings in the near future. If so, the risk for equities is high in the next few days or weeks.

Inflation Dominated Economic Data

Moreover, the financial backdrop has deteriorated in the last week. The 10-year Treasury note yield touched 4.687% this week, marking its highest level since January 2025. The 30-year Treasury yield hit its highest level in nearly 19 years and West Texas Intermediate futures, while down slightly this week, are still trading well above $100 a barrel. This puts downward pressure on equity valuation models and high interest rates are also a blow to the housing and auto markets which have been under stress this year.

Some housing data showed improvement in April. The pending home sales index, which precedes existing home sales by about two months, increased 3.2% YOY which was the largest annual increase since August 2025, but this followed seven straight months of flat or declining activity. And the data was mixed, increasing in the South, West, and Midwest, but declining in the Northeast. The South had the strongest gain of 4.7% YOY.

Most economic releases have revealed how the conflict with Iran and the rise in energy prices have taken a toll on consumers. In particular, April inflation data was striking. The CPI rose from 3.3% YOY to 3.8%, core CPI rose from 2.6% YOY to 2.8%; final demand PPI rose from 4.3% YOY to 6.0%, the PPI for intermediate unprocessed goods rose from 12.4% YOY to 21.2%. Import prices rose from 2.3% YOY to 4.2%, import prices excluding fuel rose from 2.4% YOY to 2.9% and export prices rose from 5.4% YOY to 8.8%. These reports point to the fact that while inflation is already high, more inflation is in the pipeline.

Retail sales for April looked strong with a headline increase of 4.9% YOY, up from 4.2% in March. But due to higher inflation, real retail sales increased a mere 0.8% YOY, down from 1.3% in March. The best part of retail data was from internet sales, which increased to $326.7 billion in the first quarter of the year, up 9.8% YOY. Even after inflation (which averaged 2.7% in the same period) this was an impressive gain, and internet sales now represent roughly 17% of total retail sales. Many retail companies will be reporting earnings this week as is typical of the end of earnings season. Looking ahead there are no significant economic releases next week, earnings season is ending, and the next FOMC meeting is June 16-17. In short, a dearth of economic data will bring political news to the forefront.    

Earnings Forecasts

For the first time in fifteen weeks the LSEG IBES S&P earnings estimate for 2026 declined and for the S&P/Dow Jones survey forecasts declined for the first time in twelve weeks. See pages 3 and 10. The declines were small, totaling 35 cents for LSEG IBES and 86 cents for S&P/Dow Jones, but the shift may prove significant since the market has reached all-time highs and the financial backdrop is less supportive. We do not believe the market has reached extreme valuations that would require a major setback, but we worry that the market has become too complacent about Iran, the price of oil, and inflation. Moreover, Nvidia Corporation (NVDA – $220.61), the stock at the center of the AI cycle, and key to S&P 500 earnings, reports after the close on Wednesday. The market’s reaction to this earnings report may be a sign of how the broader market will do in the near term.

Gail Dudack

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