Will The Rally Continue?

* Analyzing the markets with Richie Naso, a Wall Street veteran of over 40 years and former member of the NYSE.

DJIA 52-wk: +12.02% | YTD: +3.00% | Wkly: +3.82%
S&P 500 52-wk: +13.05% | YTD: +4.96% | Wkly: +3.44%
NASDAQ 52-wk: +14.33% | YTD: +4.99% | Wkly: +4.25%
iShares MSCI EAFE ETF 52-wk: +14.06% | YTD: +18.16% | Wkly: +3.49%

1. Easing Geopolitical Tensions

• Limited Iran retaliation and a ceasefire between Israel–Iran helped calm markets early in the week.
  (reuters.com)
• Despite a snap in trade talks between the U.S. and Canada, news of a U.S.–China partial deal buoyed sentiment. (thetimes.co.uk)

2. Rate-Cut Expectations Gaining Strength

• Traders began pricing in a roughly 56% chance of three rate cuts this year — up from ~31% last week. (marketwatch.com)
• Dovish Fed commentary (including policymakers Bowman and Waller) supported market optimism. (marketwatch.com)

3. Sector Strength & AI

• Tech/semiconductors led the rally. Nvidia closed the week up ~1.7% at $157.75, helping fuel the Nasdaq’s record run. (washingtonpost.com)
• Growth ETFs, including semis, rose around 7% on the week. (investors.com)

4. Commodities & Inflation Dynamics

• Oil prices dropped sharply after early-week spikes due to easing Middle East tensions — WTI slid roughly 13% to the mid‑$60s. (edwardjones.com)
• PCE inflation was mixed: headline in-line, core slightly above forecasts; but falling energy costs kept overall inflation in check. (schwab.com)

• Nike surged over +15%, the largest gainer in the S&P 500 on Friday, as strong momentum and record index levels lifted its stock. (apnews.com)
• Tesla, Bumble, and Shell were among top weekly movers, reflecting sector rotation across EVs, tech, and energy. (wsj.com)

• Near-term outlook remains cautiously bullish; markets may pause or correct after sharp gains and headline volatility
• Upcoming events to watch: Tesla delivery figures (7/2), EV maker reports, U.S. June jobs/PCE data, and Canada trade tensions. (investors.com)

The S&P 500 rose to a new high on Friday, completing a swift recovery to a level last seen in February before expectations of a new business-friendly government gave way to widespread fears over the impact of trade tariffs.

It is a remarkable turnaround for a stock market that just a few months ago was being battered by investors’ fears that President Trump’s tariff proposals would bring chaos to global trade.

The NASDAQ for instance rose from minus about 20% to a new all time high in approximately 3 months.

MSFT, APPLE, AMZN, NVDA, MET, GOOG & TSLA better know as the Magnificent Seven—the S&P 500 would still be roughly 10 percent from its peak according to data from Howard Silverblatt, senior index analysts at S&P Dow Jones Indices.

And while more than 8 out of 10 stocks in the index have risen over that period, the average move higher is just a little over 2 percent, according to Mr. Silverblatt, far less than the more than 30 percent gain for the Mag 7 stocks.

The U.S. Strikes Iran, Equity Markets Rally, and Oil Prices Fall.

As readers know, the United States took military action on Iran’s nuclear facilities last weekend. From a pure investment perspective, the ‘bad-case scenario’ for markets was a risk of bold retaliation, a full blockade of the Strait of Hormuz, and/or the dawn of a wider war. If any of these three outcomes were realized, I would have expected markets to open on Monday with sharp downside volatility.

That didn’t happen.

As we know today—at least considering this immediate aftermath of U.S. military action—none of the above bad-case scenarios played out. From a market perspective, uncertainty continued to narrow as days passed and a cease fire took hold, and the negative tail end of bad outcomes became increasingly unlikely.

So, stocks went up.

When reality is better than expectations, the outcome is generally bullish. But we can also look historically to understand that conflicts involving the Middle East—which have been ongoing for decades—have yet to cause major ripple effects on global growth or corporate earnings. I do not believe this instance will be different.

Zooming out even further, we also know that looking back at conflicts since 1925—including the Korean War, Vietnam, the Cuban Missile Crisis, the Iran-Iraq War, two U.S. wars in Iraq, and so on—it was only World War II that resulted in a bear market. The Iran-Iraq War lasted from 1980 to 1988, which corresponded with a strong bull market that lasted from 1982 to 1987. And in the year following Hamas’s terrorist attack on Israel, the S&P 500 and global stocks as measured by the MSCI World rose approximately +30%.

Shifting back to the current situation, Iran did ultimately retaliate by firing on U.S. military bases in Qatar. But they also gave advance notice to the United States and Qatar hours prior to carrying out the attack—such that no lives were lost and the missiles were successfully intercepted.

On the matter of the Strait of Hormuz, a warning sign for markets emerged when Iran’s parliament approved a measure to block the strait in response to U.S. airstrikes. But I view this measure more as a pressure tactic than policy, considering that Iran itself exports a significant share of its oil through the Strait. Blocking the strait completely would be costly with limited strategic benefit, in my view. But oil markets appear to hold this view as well. Although oil prices saw a short-term bump, they quickly stabilized as current shipping traffic through the Strait continues without interruption.

I agree that uncertainty leading up to—and surrounding—a conflict is what tends to weigh on markets. But once the worst-case scenario is averted and/or fighting breaks out but remains regional, the uncertainty fades and markets can start to price in the effects on corporate earnings, financial markets, and global economic growth. In this instance, I think markets are already telling us that the impact on all of these key fundamentals should be minimal.

Geopolitical crises and wars are highly undesirable for their impact on the daily lives of affected civilians, global stability, trade, and so on. But a global recession requires trillions of dollars’ worth of damage to the global economy, which current crises do not seem capable of delivering. S&P 500 companies earn less than 1% of revenue from the affected regions, which includes Ukraine.

Market volatility may continue if the conflicts escalate, and news coverage will almost certainly be constant. But investors would be wise to foresee this environment for the next few months—or perhaps longer—and try to remember that the desire to react to a crisis is almost always counterproductive and costly. Now is a time to remain patient and focused on U.S. economic fundamentals and corporate earnings, which we believe are holding up quite well.

1) Tuesday: PMI

2) Thursday: Jobs Report

I’ve seen this before. The effects of positive gamma. As traders buy calls at new highs, market-makers have no choice but to buy stock to be delta neutral.

-Richie

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