US Strategy Weekly: Russell versus the MAG 7

The first few hours of the US blockade of the Strait of Hormuz — with US warships located outside the strait in the Gulf of Oman — resulted in only eight vessel crossings. This was touted as a disaster by some politicians since it is a mere fraction of the 130 per day that was typical a few weeks ago. However, war-risk insurance costs remain high, according to insurance experts, and this will take time to change. Nevertheless, the US blockade may be less about opening the strait to global commerce and more about keeping Iran from exporting oil to China and other friendly nations. In short, the blockade may be meant to pressure Iran economically, to stop Iran from exporting oil, and to reduce Iran’s ability to fund more weapons. Financial markets appeared to understand this strategy better than news sources and WTI light crude oil futures remained relatively unchanged at $91.48 but equities rallied and regained all of their year-to-date losses.

The year-to-date performances of various equity indices is revealing. From best to worst these are: the Dow Jones Transportation Average up 22.5%, the Dow Jones Utilities Average up 9.6%, Russell 2000 index up 9.0%, the Wilshire 5000 composite up 2.25%, the S&P 500 index up 1.8%, the Nasdaq Composite index up 1.7%, and the Dow Jones Industrial Average up 1.0%. The huge advance in the Dow Jones Transportation Average appears counterintuitive given the recent increase in fuel costs, but this benchmark now includes many logistics and trucking firms that have been helped by a healthy economy. Plus, talk of a possible merger between American Airlines Group Inc. (AAL — $12.13) and United Airlines Holdings, Inc. (UAL – $97.20) helped to boost the index this week. Utility stocks are up this year due to an aging infrastructure coupled with a massive power demand from AI data centers.

The 9% gain in the Russell 2000 index is the most interesting to us. We believe this performance reflects the resilience of the US economy and the fact that this index is heavily weighted to smaller domestically based companies versus the large international companies that dominate the S&P 500, the Dow Jones Industrial Average and Nasdaq Composite. As we noted several weeks ago, while most analysts focus on the risk of inflation due to higher energy costs, they miss the point that the higher cost of oil, which is based in US dollars, is a bigger burden to non-dollar, non-oil-producing countries than it is to Americans. In short, we worry less about the US and more about global growth. In our view, the US is the global economic leader and therefore, a relative safe haven for investors. Equally important is the fact that some of the “magnificent seven” stocks have recently encountered skepticism that the massive investment in AI infrastructure will continue and/or reap the financial benefits needed to support sky high valuations. As a result, they have been the underperformers this year. The good news is that valuations have become more reasonable. And from an historical perspective, it is bullish that this group of stocks has encountered skepticism. The alternative would have been a mania for the MAG 7, a roaring stock market bubble, followed by an inevitable bear market!

What we are Watching: Bank Earnings

In terms of 2026 price performance, the financial sector has been one of the worst performing sectors this year due to a variety of issues including President Trump’s urging to banks to cap credit card interest rates at 10%, a weak housing market, a sluggish auto loan market, and the risk of another wave of inflation in 2026. Risk of a crisis in the private credit market has also weighed heavily on the financial sector. But since banking is at the heart of all economic cycles, it is important to have solid leadership from this sector to support a healthy bull market cycle. For all these reasons, first quarter earnings season will be important and enlightening for the banks. Investors should watch not only for earnings but to see if loan loss reserves increase, which we expect will materialize due to recent defaults in software company loans. To date, earnings reports from Wells Fargo & Co. (WFC – $81.70), JPMorgan Chase & Co. (JPM – $311.12), and Citigroup Inc. (C – $129.58) revealed strong trading revenue across the board, but most companies had a cautious view emphasizing future economic risks. Goldman Sachs Group Inc. (GS – $909.63) reported record revenue in equity trading but weakness in fixed income, currencies, and commodities. More bank earnings, including Bank of America (BAC – $53.35), will be released later this week. Price action in these banks has been mixed in response to earnings releases; yet we believe the financial sector may be poised to become a relative outperforming sector if the Iranian conflict gets resolved. This would be bullish for all equities.

Technical Indicators Improve

There was some improvement in our technical indicators this week, in particular the 10-day average of daily new highs was 163 and the 10-day average of daily new lows fell to 90. This combination of daily new highs above 100 and new lows below 100 shifts this indicator from neutral to positive. The last time the NYSE cumulative advance/decline line made a new high was on February 26, 2026, but it is currently a net 1,865 advances away from making a new record. The possibility of a new high in this indicator, coupled with the outperformance of smaller capitalization stocks is favorable. In sum, we remain a buyer on weakness. See page 10.

Inflation Insights

Inflation picked up in March as expected and headline CPI jumped from 2.4% YOY to 3.3% YOY. Nevertheless, core CPI remained relatively unchanged, inching up from 2.5% YOY to 2.6% YOY. Note that both CPI indices remain below the long-term average of 3.5% YOY. PPI indices were more directly impacted by soaring oil prices and the PPI for finished goods jumped from 1.6% YOY in February to 4.1% in March. Core PPI for finished goods remained unchanged at 3.7% YOY. The PPI final demand index, the most watched index, rose from 3.4% YOY to 4.0% YOY. This puts all these indices above the long-term average of 3% YOY. See page 3.

There is a growing disparity between core PPI and core CPI at the moment, and this is a relatively rare occurrence. Similar disparities occurred in 1973-1974 during the Oil Embargo, in 2008-2009 during the financial crisis, and in 2022-2023 when the Biden-Harris administration focused on reducing fossil fuel reliance, hindered domestic oil & gas production, and paused new LNG export terminals. History shows that the CPI is heavily influenced by the PPI index but does not always have the same extremes. A chart combining CPI, PPI, and WTI oil prices is important. See page 4. Although the high price of fuel is a big negative for households, note that the current 66% YOY increase in WTI prices is not that unusual and not as extreme as the March 2021 to March 2022 period when oil prices rose 237% YOY as of April 2021 and averaged gains of 97% YOY for the subsequent 12 months! The NFIB small business optimism index fell to 95.8 in March, matching the low seen in April 2025, and sliding below the long-term average of 98.0. The uncertainty index rose to 92.0, the highest since the 100 seen in September 2025. There has been an historical correlation between small business optimism and the inverse of the unemployment rate. Since early 2023, the unemployment rate has been slowly rising, and small business optimism has been slowly falling. In other words, the trend is not new or extreme, but it is worrisome. Our biggest concern for 2026 continues to be weakness in the job market. The next employment report is scheduled for Friday, May 8, 2026. See page 5.

Gail Dudack

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