US Strategy Weekly: Echoes of April 2025

US equities had an impressive rally on the last day of the quarter, with the Dow Jones Industrial Average jumping 1125 points, boosted by reports that President Trump may be willing to end the military campaign against Iran without reopening the Strait of Hormuz. However, there were conflicting reports from the Wall Street Journal and CBS News regarding this issue. There were also rumors that Iran’s president is prepared to discuss a process to end the conflict. Iran’s foreign minister Abbas Araghchi, told Al Jazeera TV he is exchanging direct messages with US envoy Steve Witkoff, but denies this constitutes “negotiations.” (Smoke and mirrors?) But behind the scenes, the US targeted a huge Iranian ammunition depot in Isfahan and Iran responded by threatening to attack Americans on Saudi Arabian soil listing 18 American businesses, including Microsoft Corp. (MSFT – $370.17). The US State Department warned Americans in Saudi Arabia to shelter in place since hotels and other gathering points including US businesses and US educational institutions could be potential targets. In the background, Israeli military reports it has struck a senior Hezbollah commander and a senior fighter in separate attacks in Beirut. And OPEC announced that oil output plunged by 7.3 million barrels per day in March to 21.6 million barrels per day, the lowest output level since June 2020, during the pandemic.

All in all, it was a busy and confusing day of news with both the US and Iran issuing threats. Defense Secretary Pete Hegseth said the next few days could be decisive (we agree) and he warned Tehran that the conflict would intensify if it did not make a deal. Equity prices rose on hopes that an end to the conflict was within reach, but it is important to note that energy markets were less enthusiastic. The key issue for the financial markets is the price of energy and here prices actually moved higher. The Brent crude May contract (LCOc1 – $118.31) closed up 64% and WTI intermediate crude contract (CLc1 – $101.93) rose 53% for the month of March. Not surprisingly, the average price for a gallon of gasoline soared over $4 in the US. Clearly, energy prices are reaching pressure points not only in the US but globally.

Economic and Political Pivot Points

Not only did energy prices not celebrate along with equities, but long-term Treasury yields declined, not because inflation is declining, but because the risk of recession increases the longer crude oil prices remain high. Without a resolution of Middle East turmoil this week, expect more talk about recession, not only for the US but globally. Pressure from higher oil prices is also straining US relations with NATO nations as seen by Spain closing its airspace to US jets, Italy denying military aircraft to land at a base in Sicily and Poland retracting plans to relocate its Patriot batteries to the Middle East.

Technical Pivot Points

In our view, equity prices may have been boosted less by rumors and more by end of the quarter window dressing of portfolios by institutional investors. Several technical indicators are also at interesting pivot points. Our 25-day up/down volume oscillator is currently at negative 1.22, down from last week, and one of the lowest readings since early April 2025. See page 6. Another parallel to April 2025 is seen in the AAII sentiment survey where bearish sentiment hit 52% on March 18, 2026, the highest bearish sentiment since April 30, 2025. In short, the stock market entered the week revealing several extremes that suggested it was ready for an oversold bounce. Our only concern is that while the market resembles the extremes seen in the April 2025 tariff panic, the Iran conflict may be less easy to manage than tariffs. This is the risk.

The Dow Jones Industrial Average, the Nasdaq Composite Index, and the Russell 2000 all fell into correction territory in recent sessions and were down at least 10% from their record highs in late March. The S&P 500 did not register a decline of 10% or more, but more than half of its sectors did reach correction territory. Nevertheless, the end of the quarter bounce reversed some of these losses and the year-to-date performances of the indices ended more mixed than negative. Year-to-date, i.e., quarter-to-date results were losses of 7.1%, 4.6%, and 3.6% in the Nasdaq Composite, S&P 500, and Dow Jones Industrial Average, respectively and gains of 0.6%, 7.2%, and 8.5% in the Russell 2000, the Dow Jones Transportation Average, and the Dow Jones Utility Average, respectively. There was clearly a wide range of performances among the indices with losses concentrated in high PE and technology-based stocks.

And the underlying action of sectors was also mixed. This is seen on page 10 where S&P 500 year-to-date sector performance shows six sectors outperforming the index and five underperforming. The range of performance reveals the dichotomy in the marketplace with the energy sector up over 37%, followed by materials up 9.3% and utilities up 7.5%. While at the bottom, the financial sector is down 9.8% year-to-date, followed by consumer discretionary down 9.3%, and technology off 9.3%. To date, 2026 has been a year that underscores the lesson that a diversified portfolio is the best long-term strategy.

Fundamentals Also Rhyme

The LSEG IBES consensus earnings estimate for 2026 rose $2.26 this week to $322.74 and the 2027 forecast rose $4.62 to $377.12. The S&P Dow Jones consensus forecast for 2026 rose $0.16 to $319.75 and the estimate for 2027 fell $0.47 to $373.00. On March 30^th, the market was trading at 19.7 times the IBES 2026 estimate and 16.8 times the 2027 estimate, the lowest multiples since April 2025. Although interest rates have been rising, the forward earnings yield of 5.25% and dividend yield of 1.2% compare well to a 10-year Treasury bond yield of 4.3%. Plus, the 12-month sum of operating earnings shows a gain of 16.7% YOY, far better than the 75-year average of 8.1% YOY. See pages 4 and 5. This is the main reason that we remain bullish about the longer-term outlook.

Still, the risk of a recession is rising, and this could make Friday’s employment report for March a market moving event. There are already signs that the residential housing market continues to decelerate, and a weak job market would add to the problems that higher energy prices present. Given the fluidity of the conflict in the Middle East, and the possibility that the jobs report could be less than the consensus expectation of a modest rebound of 60,000 to 80,000 jobs in March, we remain near-term cautious. Separately, The Conference Board’s consumer confidence index rose from a revised 91 in February to 91.8 in March, yet it continues to linger below the long-term average of 96. March’s increase was led by the present situation index, which rose slightly from February’s 5-year low. The expectations index was 70.9, down from 72.6. The University of Michigan sentiment survey was 53.5 in March, down from 56.6 in February with weakness concentrated in the expectations index, which was 51.7, down markedly from 56.6. The report said that about one-third of all responses came in before the start of conflict in the Middle East and since energy prices have increased dramatically it is normal to expect that sentiment has deteriorated. However, we would not rely on sentiment indices because they have been forecasting a recession for four consecutive years. In sum, they have been of little use for investment decisions or for predicting the economy. See page 3.

Gail Dudack

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