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A Record Quarter, a 40-Year Yen Low, and a Refuted Peace Trade: Q3 Has Begun

Let me lead with the scoreboard, because for once it settles an argument rather than starting one. Seven days ago I titled this column “Gold Refused the Peace Trade But Couldn’t Refuse the Dot Plot.” Gold just closed the quarter at $3,969.30 on the COMEX August front-month, down another leg from the $4,129.90 I flagged on June 24, and down roughly 14% on the quarter — the worst three months for the metal since 2013. The $4,320 floor I said would break is not a floor anymore; it is a ceiling. The peace trade that everyone wanted to blame got upstaged by the one thing that actually reprices real assets: a Federal Reserve chair who told the market rates are going higher, and meant it. The verdict on that thesis is not ambiguous. Warsh’s higher-for-longer signal beat Hormuz, exactly as titled, and the same repricing that crushed gold quietly rewrote every other asset class in the closing weeks of Q2.

Here is the part the record-quarter headlines keep burying. The S&P 500 finished the quarter up about 14%, its best since the stimulus-fueled Q2 of 2020, the Nasdaq Composite added roughly 20%, and the Philadelphia Semiconductor Index put up something between 81% and 86% — the best quarter on record for the chip index, surpassing even the dot-com bacchanal of Q1 2000 and its 67.75% print. On Tuesday the S&P rose 1.18% to 7,440.43, the Nasdaq Composite jumped 2.07% to 25,820.14, and the Dow tacked on 0.59% to 52,182.74. That Dow number is a new all-time high. The index reclaimed the 50,000 handle it first crossed back on February 6, surrendered during the Iran war drawdown, and retook in May — so spare me the “first time” framing that is going to litter the financial press this week. What is genuinely new is the level, and the fact that it printed on a day the pension funds were supposed to be selling.

And they were supposed to be selling in size. JPMorgan penciled up to $165 billion in quarter-end equity rebalancing pressure into June 30, one of the largest such mechanical events on record, driven by equities crushing bonds all quarter. The market ate it whole. Alphabet, freshly added to the Dow, jumped 4.8% on its first day as a component; the semiconductors ripped; AeroVironment rose about 17% on earnings. The contradiction I keep coming back to is this: the AI hardware layer went vertical while the hyperscalers who are actually spending the money bled out. The Magnificent Seven are down about 4% year-to-date — Microsoft off 24%, Meta down nearly 15% — while the picks-and-shovels chip suppliers doubled. Markets have decided the near-term monopoly on AI cash flow belongs to whoever sells the shovels, not whoever digs with them. That is a rational bet against $754 billion of projected hyperscaler capex with no clean line of sight to return. It is also the kind of bet that works right up until it doesn’t.

Chart 1 — U.S. indices, indexed to January 2, 2026. The SOX semiconductor complex left every large-cap index behind.

(Continued for paid subscribers)

Cross the Pacific and the same trade shows up with the volume turned to eleven. The Nikkei 225 closed at 70,062.32, up about 37% on the quarter — the best quarter on record — and Korea’s KOSPI put up an almost cartoonish 67.77% to 8,476.48, its biggest quarterly gain since Q4 1998. Taiwan’s Taiex ran roughly 46%. Europe was the tortoise: the STOXX 600 gained about 9.7%, its best quarter since 2020, with the DAX up double digits and the FTSE 100 a comparative laggard near 4% as its commodity and political weightings dragged. The central banks moved with the tape rather than against it. The ECB delivered its first hike since September 2023 on June 11, lifting the deposit rate to 2.25%, and the Bank of Japan raised to 1.00% on June 16 — a 31-year high — while the Bank of England held at 3.75% on a 7-2 vote on June 18, with the two dissenters wanting a hike. This is a synchronized global tightening impulse, and it is happening while equities make records. That combination does not usually end with everyone getting paid.

The divergence between Japan’s equity euphoria and its currency is the single most instructive chart of the quarter. The Nikkei printed the best quarter in its history and the yen printed a 40-year low, settling at 162.42 per dollar — the weakest since December 1986 — even after the BoJ hiked. Rate differentials trump domestic tightening when the other side of the trade is a Fed being repriced toward hikes, and the carry trade that was supposed to unwind simply refused to. Tokyo’s finance ministry is back to jawboning about acting “at any time,” which is what officials say when the intervention clock is running but the ammunition is finite. Foreigners, notably, have been selling into both the Japanese and Korean rallies to rebalance — this is a domestic and retail melt-up, not fresh global conviction, and that is a more fragile foundation than the index levels suggest.

Chart 2 — International developed markets, indexed to January 2, 2026. KOSPI and Nikkei broke away from a plodding Europe.

Emerging markets tell the cleanest version of the whole story, because they separate the winners and the casualties by force. The MSCI EM index leads every major region year-to-date at +26.35%, but strip out TSMC, Samsung, and SK Hynix and that headline evaporates — three memory names carry the bloc. On the other end, MSCI China is down 14.64% year-to-date, its worst relative showing against developed markets since the aftermath of 2001, with Tencent and Alibaba each shedding more than 29%. The China story itself is split down the middle: the domestic CSI 300 is up roughly 26% on the year as A-share chip manufacturers ride the AI capex wave, while offshore Hang Seng fell about 7.5% on the quarter, the worst in Asia. Two markets, one country, opposite directions.

And the genuine wreck is Indonesia, where the Jakarta Composite closed at 5,643.19, down a staggering 35.49% on the year — the worst major equity index on the planet, undone by capital flight, a rupiah at record lows, and civil unrest that traces straight back to imported energy inflation. India held up better in relative terms; the Nifty 50 closed at 23,865.75 and the Sensex at 76,478.67, both slipping on the session as IT names took profit and rate-hike fear crept in, with the Reserve Bank still holding its repo rate at 5.25%. The three-speed EM — chip exporters, a bifurcated China, and Hormuz’s oil-importing victims — is not noise. It is the map of who pays when the war premium and the rate premium move in opposite directions at the same time.

Chart 3 — Emerging markets, indexed to January 2, 2026. EM leads on chips while Indonesia and China diverge sharply.

Which brings me to the corner of the market where my thesis lives and where the regime reset is most visible. Gold at $3,969.30 on the COMEX August contract — spot briefly touched $3,956.92 intraday, breaking the $4,000 handle to the downside — is not the peace-trade story the consensus keeps trying to tell. Brent fell about 38% on the quarter to $72.92 and front-month WTI settled at $69.50, the largest quarterly drop for crude since the COVID collapse, and it happened while the Strait of Hormuz sat physically closed for a 124th straight day. Read that again: the largest oil supply disruption in modern history is still in effect, and oil round-tripped back to pre-war levels anyway, because the market is pricing the probability of resolution ahead of the fact of it. Bitcoin closed near $58,056, down about 12% on the quarter as the AI trade vacuumed up the risk-on liquidity crypto used to command, and ether was worse, near $1,600 for a roughly 25% quarterly loss and its first-ever three straight quarterly declines. The dollar, meanwhile, ground out a fourth consecutive quarterly gain, with the DXY closing at 101.163.

In my view the market is missing that gold, oil, and crypto did not each break for their own idiosyncratic reason — they broke together, on one repricing, and the asset that quietly won the argument is the dollar. Real yields did this. The 10-year TIPS breakeven sits near 2.22% while the nominal 10-year yields 4.36%, an implied real yield above 2% that historically strangles gold, and PCE at 4.1% headline and 3.4% core — the hottest since 2023 — is the reason Warsh can say higher-for-longer with a straight face. Notably, bond volatility is down: the MOVE index sits near 65, off roughly 42% from its Q1 panic peak, which tells me the market believes the hawkish regime rather than fearing it. That is a market on borrowed time only if inflation cools on schedule — and the June flash prints out of Germany at 2.3% and France at 2.0% suggest Europe’s disinflation may arrive faster than America’s.

Chart 4 — FX, crypto, and gold, indexed to January 2, 2026. The rate-transmission sweep: real assets down, dollar firm.

What I’m watching next week: Warsh at the ECB’s Sintra forum yesterday, his first major communication since the FOMC, for any hint that the “hawkish hold” tilts toward an actual September move. I’m watching the July jobs report for confirmation that a 7.594-million JOLTS print and a robust labor market keep the hike alive. I’m watching whether the yen’s 40-year low forces Tokyo’s hand on intervention, and whether the ECB’s July path softens now that German and French inflation are undershooting. I’m watching the gold-refusal thesis one more week for a T+14 stamp, though the ink is nearly dry: refuter dominant. And I’m watching the one number that has quietly narrated the entire quarter and will narrate the next — the dollar. It won Q2 without anyone cheering for it. Q3 starts now, and it starts on the dollar’s terms.

The Lead-Lag Report is provided by Lead-Lag Publishing, LLC. All opinions and views mentioned in this report constitute our judgments as of the date of writing and are subject to change at any time. Information within this material is not intended to be used as a primary basis for investment decisions and should also not be construed as advice meeting the particular investment needs of any individual investor. Trading signals produced by the Lead-Lag Report are independent of other services provided by Lead-Lag Publishing, LLC or its affiliates, and positioning of accounts under their management may differ. Please remember that investing involves risk, including loss of principal, and past performance may not be indicative of future results. Lead-Lag Publishing, LLC, its members, officers, directors and employees expressly disclaim all liability in respect to actions taken based on any or all of the information on this writing.

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When Oil Broke Gold’s Hand

● WTI cratered 14.4% on the week to $75.83 and Brent shed 13.5% to $79.46 as a US–Iran MOU put Strait of Hormuz reopening on the clock — the cleanest geopolitical-premium unwind of the cycle.

● Gold held at $4,353 and the 10-year retraced to roughly 4.46% — meaning crude and yields obeyed the peace trade while gold flatly refused, decoupling from the very risk premium it supposedly tracked.

● Warsh’s first FOMC delivered the hawkish hold the bond market was quietly preparing for — unanimous 12-0 vote, median 2026 dot moved to 3.8% from 3.4%, easing bias gone, one 25bp hike now penciled in by year-end; Warsh almost certainly abstained from his own dot.

Let me lead with the contradiction, because it is the entire edition. When the US and Iran signed a memorandum of understanding on June 15 and put a Strait of Hormuz reopening inside a thirty-day window, the market did exactly what the textbook says it should: it stripped the geopolitical risk premium out of the crowded trades. WTI front-month — NYMEX July 2026 — collapsed 14.4% on the week to $75.83, and ICE Brent August front fell 13.5% to $79.46. The 10-year retraced from its 4.55% post-payrolls peak back to roughly 4.46%. VIX compressed 17.4% to 16.41. Every leg of last week’s “yield repricing unwind” thesis came apart at the seams — except one. Gold, the asset that is supposed to be the purest expression of geopolitical fear, closed at $4,353, holding its gains while the fear that allegedly bid it up walked out the door. That divergence between oil and gold is not noise. In my view it is the most important intermarket signal on the board this week, and it is telling you something about durable versus flighty money that the headline tape is missing.

Start with the US, where the regime looks deceptively orderly. The S&P 500 added 1.69% on the week to 7,511.35, the Nasdaq Composite ran 2.72% to 26,376, and the Dow extended its run 2.22% to 51,999 — comfortably back above the 50,000 line it first reclaimed in May, not some maiden voyage. The Russell 2000 moved with the cyclical crowd, but the leadership story underneath is the rotation that matters: financials (XLF) led the tape at +3.60% over five sessions while energy (XLE) was the lone meaningful laggard at -3.54%, deepening the leader-to-laggard flip whose MACD rolled over back on May 27. This is the intermarket plumbing working in plain sight. A 14% crude collapse mechanically drains the forward inflation impulse — energy was running +23.5% year-over-year in the May CPI print — and banks get paid twice: once on the disinflation read that takes the edge off hawkish repricing, and again on the steepening pressure as the front end pulls cuts forward by a hair. The 2s10s sits around +38–39bp, little changed from roughly +42bp at the June 10 high — the curve flattening modestly into the FOMC rather than steepening.

But do not confuse the rotation for resolution. Core CPI is still +2.9% year-over-year, May PPI ran +6.5% year-over-year, and the 172,000-job May payrolls blowout has not been revised away. The energy leg of the inflation story is reversing; the labor and core legs are not. That is why the market repriced cuts back in only at the margin — the 9bp move in the 10-year — rather than pricing an actual easing cycle. Earnings color the same picture: the slate was light into the meeting, with CarMax, Jabil and Progressive due June 17, and the AI capex engine still anchored by NVIDIA’s +140% year-over-year EPS from its May quarter. The tape is rallying on lower oil, not on a Fed pivot, and those are very different fuels.

The only event that actually mattered Wednesday afternoon delivered the answer in a single move. The Fed held at 3.50%–3.75% on a unanimous 12-0 vote — the first unanimous vote in a year — but the dot plot did the talking. The median 2026 dot moved from 3.4% in March to 3.8% in June, formally penciling in one quarter-point hike before year-end and erasing the last 2026 cut that had survived the March projections. Nine of eighteen committee members now project at least one hike this year. Only eighteen dots were submitted versus nineteen in March, meaning Kevin Warsh — the 17th Chair, sworn in May 22 — almost certainly abstained from his own projection, consistent with his stated skepticism of forward guidance. The statement itself shed its easing bias and was meaningfully shortened. Year-end PCE projections were lifted to 3.6% from 2.7%. The contradiction I flagged before the meeting — a deflating oil complex giving him cover to stay neutral — held in spirit but the committee leaned the other way: the labor and core inflation legs of the inflation story carried more weight than the unwinding energy leg, and the dot plot blinked toward a hike where the market was pricing a hold-into-cuts path. Two-year yields jumped roughly ten basis points to 4.15% on the print, equities sold off about a half percent off the SEP, and money markets repriced toward thirty basis points of net tightening by December where they had been pricing twenty before. This is the hawkish hold the bond market has been quietly preparing for. Warsh did not need to flirt with hike language — his committee did it for him.

(Continued for paid subscribers)

Across the Atlantic the relief rally was even cleaner. The STOXX Europe 600 printed a fresh record close Tuesday June 16 at 636.00 (+2.81% on the week), with Monday Jun 15 already touching an intraday record near 639.20, led by the peripheral financials — Spain’s IBEX (+5.44%) and Italy’s MIB (+4.32%) — as the BTP-Bund spread compressed to 72bp, a multi-month tight. This is the Eurobanks-over-US-banks trade extending into its eighth-plus week, and the ECB’s June 11 hike to a 2.25% deposit rate — the first G7 tightening of the Iran shock — keeps feeding the net-interest-margin story. The DAX lagged (+0.97%), caught between the risk-on tape and a firmer euro pinching exporters, while German ZEW expectations swung +20.7 points to +10.5, the first positive reading since the war began — pure forward-looking optimism, given current conditions still sit at -81.0.

Japan is where the regime shift is loudest. The Bank of Japan hiked 25bp to 1.00% on a 7-1 vote — the highest policy rate since 1995 — with Governor Ueda hospitalized and Deputy Governor Uchida deliberately vague on the path to neutral. The Nikkei 225 broke through 70,000 intraday for the first time ever on June 16 before settling back to close at 69,317 (+5.96%); be precise about that — the index touched the milestone but did not close above it. USD/JPY barely flinched at 160.36, parked in the same intervention-sensitive zone where Tokyo already spent a record ~¥11.7 trillion this spring per official MOF disclosure (Apr 28–May 27 window), because a fully-priced hike with no 50bp surprise is a non-event for the pair. The 10-year JGB rose to 2.61%. A central bank tightening into Brent below $80 is running a dual-disinflationary play on its import-heavy base — and the market read it as constructive, not contractionary.

The emerging-market tape split exactly along the oil seam, and that split is the cleanest read of who wins and who loses from the peace trade. India, the quintessential oil importer, ran higher — the Sensex closed at 76,264 (+3.73%) and the Nifty 50 at 23,623 (+2.16%) — as cheaper crude eased the current-account and inflation math, with the rupee firming toward 94.54 and the RBI holding its repo at 5.25% after roughly 100bp of cumulative cuts. China diverged: the Shanghai Composite essentially flatlined at 4,091.89 (-0.11% on the day), still digesting a 35th consecutive month of falling new-home prices despite fresh Shanghai purchase-rule relaxation. The bifurcation between an importer that rallies on cheap oil and a structurally-impaired domestic demand story is the EM story in miniature.

The other side of that seam is Brazil, where the oil collapse hit directly. Petrobras absorbed the crude move — down 5.15% Monday as the deal shock registered — dragging the Ibovespa to back-to-back losses near 169,648 (-0.45% Tuesday) even as the broader risk-on tone held. The real softened toward 5.09 against the dollar, and Copom’s Wednesday decision sits in the same “Super Wednesday” window as the FOMC, split between a hold and a cut from the 14.50% Selic. The lesson EM is teaching this week is the durable-versus-flighty distinction in raw form: oil-importer FX and equity drew durable buyers on improved fundamentals, while commodity-exporter complexes saw the flighty geopolitical bid evaporate the moment the premium did.

So return to gold, because this is where the edition lives. Crude obeyed the peace trade. Yields obeyed the peace trade. The DXY barely moved — 99.54, down 0.38%, refusing the classic safe-haven bid an oil shock unwinding “should” have triggered. Bitcoin ran 6.11% to $65,684 and Ether 8.58% to $1,792.67 on the same risk-on relief. And gold, the asset whose entire June rally was attributed to the Hormuz risk premium, closed at $4,353 — roughly 18% below its January peak near $5,318, but holding, not unwinding, while the premium that supposedly explained it walked off the field.

The market is missing what that refusal means. If gold were merely a geopolitical-fear trade, it would have sold off with crude this week; it didn’t. It is trading on the real-rate path — a deflating oil complex lowers the forward inflation trajectory and pulls real yields down — and on a quiet bid for the one asset that doesn’t care which Chair runs the Fed. After the 2pm SEP release, gold held above $4,330 while the dollar firmed and yields jumped — the same refusal pattern, now stress-tested against a hawkish surprise that should have hurt it most. Copper up 2.71% to $6.481 reinforces the read: this is reflation-and-duration money, not fear money. Oil broke gold’s hand this week, and gold didn’t let go. That is durable money showing its grip, and it is living on borrowed time only if the disinflation it is pricing reverses.

What I’m watching next week: the follow-through on a dot plot that just penciled in a hike — does Warsh’s first press conference frame it as a forecast or a commitment, and does the 2-year yield extend its move toward 4.20%; the Geneva MOU signing scheduled for June 19 and whether it survives the diverging US–Iran reads on Hormuz “service fees”; the Hormuz Day 109-to-120 window for any slippage in the thirty-day reopening clock; the BoJ follow-through after its move to 1.00% and whether USD/JPY tests intervention levels again; the oil–gold correlation watch — does gold’s refusal to unwind hold, or does it finally catch down to crude; the BoE on June 18 and its vote split; and China’s stimulus deliberation as property prices fall for a 35th straight month. The peace trade unwound the easy legs. The leg that refused to unwind is the one worth your attention.

The Lead-Lag Report is provided by Lead-Lag Publishing, LLC. All opinions and views mentioned in this report constitute our judgments as of the date of writing and are subject to change at any time. Information within this material is not intended to be used as a primary basis for investment decisions and should also not be construed as advice meeting the particular investment needs of any individual investor. Trading signals produced by the Lead-Lag Report are independent of other services provided by Lead-Lag Publishing, LLC or its affiliates, and positioning of accounts under their management may differ. Please remember that investing involves risk, including loss of principal, and past performance may not be indicative of future results. Lead-Lag Publishing, LLC, its members, officers, directors and employees expressly disclaim all liability in respect to actions taken based on any or all of the information on this writing.

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When the Yields Won

Let me lead with the contradiction at the center of this week: the safest asset on earth did the most damage. The May employment report printed 172,000 jobs against an 80,000 consensus, and the bond market did the rest of the work — the 10-year Treasury yield rose roughly 11 basis points from the June 3 baseline of 4.45% to about 4.55%, with the 2-year jumping near 4.20% intraday Monday before easing. Goldman Sachs scrapped its December 2026 cut call outright. That move in yields was not a sideshow to the week’s equity and commodity drama; it was the week. Everything that had been priced for a dovish Fed and a fat geopolitical risk premium — gold, oil, crypto, the long-duration AI complex — got repriced off the same lever at the same time. When the yields won, six crowded trades lost at once.

Start with the tape that looked deceptively quiet. The S&P 500 closed Tuesday at 7,386.65, down 0.26% on the day and essentially flat for the week, holding a +7.9% gain on the year. The Nasdaq Composite finished at 25,678.82, down about 0.1% week-over-week but still +10.5% YTD, and the Dow Jones closed at 50,872.11 — reclaiming and holding above the 50,000 level it first crossed back in February. Underneath those round numbers was real violence: Friday June 5 saw the S&P fall 2.64% and the Nasdaq drop 4.18%, the steepest single-day declines since October 2025, on the NFP shock. Monday’s semiconductor-led bounce (SOX +5.6%, Intel +11.2%) faded badly, and Tuesday reprised the pattern — indices opened up half a percent then surrendered the gains as chip names reversed again.

The internals told the rotation story the headline indices buried. The Russell 2000 rose 1.2% on the week even as the Nasdaq slipped, a clean small-cap-over-mega-cap rotation as the CPI print loomed. The VIX, at 15.77 on the June 3 baseline, spiked to 21.51 on NFP Friday and settled at 19.87 Tuesday — a near-26% week-over-week jump that the options market is explicitly pricing into the CPI-to-FOMC window, with the 9-day VIX trading above spot. Credit, by contrast, refused to flinch: high-yield spreads sat near 265 basis points, the tight end of the historic range, pricing near-zero default risk even as the rate market repriced toward a hike rather than a cut.

The single cleanest Mag-7 story was Apple. The company held its WWDC keynote Monday, briefly notching an all-time intraday high of $317.40 on the long-awaited Siri AI reveal, then closing the two-session stretch at $290.55 — down 8.5% from that high — as investors concluded the upgrade was still largely in beta with no launch timeline for the EU or mainland China. Nvidia, by contrast, was a study in resilience, holding near $208 across both sessions even as the chip index whipsawed around it, still carrying its canonical +140% Q1 FY27 EPS growth. The broadening narrative is intact: the S&P 493 is up more than 10% on the year, nearly double the Mag-7’s collective return, with Microsoft and Meta both down double digits YTD. The AI bid is alive; the index weight of disappointed mega-caps is the headwind.

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We’ll discuss:

- What “heavy asset, low obsolescence” actually filters for as a screen

- Why the AI capex cycle may rotate from compute toward heavy assets, infrastructure and materials over the coming years

- Sector-level implications for advisor portfolios

- Live Q&A with Matt Tuttle, Michael Gayed (Lead-Lag), xx, and zz [two RIA partners; will insert names and firm names]

**1.0 hour of CFP CE credit available** (Investment Planning, Intermediate).

📅 Monday, June 1, 2026

🕑 2:00 PM ET

🎥 Live on Zoom

**Register:** https://us06web.zoom.us/webinar/register/WN_FDWhyy9MTMy_wsGO2Tukyw

Hosted by Tuttle Capital Management and Lead-Lag Publishing, LLC. This webinar is educational; no specific product is being marketed.

Disclaimer:

This is sponsored advertising content for which Lead-Lag Publishing, LLC has been paid a fee. The information provided is solely the creation of Tuttle Capital Management. Lead-Lag Publishing, LLC does not guarantee accuracy or completeness. All statements are the sole opinion of Tuttle Capital Management. Past performance does not guarantee future results. Investing involves risk including possible loss of principal. Nothing in this webinar should be construed as a recommendation to buy or sell any security or as personalized investment advice.

Let me lead with the contradiction. The Dow Jones Industrial Average reclaimed 50,000 on May 20 — first breached in February 2026 but surrendered during the early Iran war selloff — and extended to 50,461.69 by May 26. The S&P 500 closed at 7,519.11 on Tuesday. The Russell 2000 surged +4.56% over the two-week window — the standout performer of 2026 so far in any two-week stretch — as the 10-year Treasury pulled back from its 16-month high of 4.70% down to 4.50%. Risk assets were ripping. The institutional narrative was euphoria. And yet. The same week that the Dow retook 50,000, the U.S. Central Command conducted airstrikes on Iranian missile launch sites and mine-laying vessels inside the Strait of Hormuz. Front-month ICE Brent settled at $99.58 on May 26, a 3.58% jump on the strikes. WTI closed near $92.86. The Strait remains on Day 86 of its effective closure to commercial traffic — still the largest oil supply disruption in modern history. The Bitcoin ETF inflow streak of $2.7 billion in consecutive sessions broke definitively: the week ending May 24 produced $1.47 billion in net outflows, the worst weekly withdrawal of 2026. Gold settled at $4,500.40 on COMEX — confirmed 15% below its January all-time high. The bifurcation between equity euphoria and risk-asset stress has never been cleaner.

The Russell 2000’s +4.56% surge is the mechanical explanation for the week’s optimism. The 10-year yield peaked at 4.70% on May 20 — its highest print in 16 months — as markets digested the prior week’s hot CPI and PPI data stacking into the new trading session. Then the diplomatic signals out of Tehran briefly softened the oil picture, WTI pulled toward $91.61 midweek, and Treasury yields retraced sharply. That 20-basis-point round trip — 4.70% to 4.50% in four sessions — is the largest two-week rate-relief window in 2026. Small caps, which are the most rate-sensitive major index and which had been the biggest casualty of the rate rout in prior weeks, snapped back violently. The math is straightforward: Russell 2000 companies carry floating-rate debt at far higher proportions than S&P 500 constituents. When the 10-year falls 20 basis points, the rate-relief trade goes immediately to the index that had been crushed by the rate spike. That is exactly what happened. The Dow’s May 26 close at 50,461.69 is well back above the 50,000 line that was first crossed in February and then lost during the Iran war drawdown — but it is the Russell that tells you more about the macro environment’s current posture.

NVIDIA reported Q1 FY2027 on May 20: revenue $81.62 billion, +85.2% year-over-year, beating a consensus range of roughly $78.4–79.0 billion by $2.6–3.2 billion. EPS $1.87, up 140% year-over-year, against a $1.78 estimate. Data center revenue $75.2 billion — 92% of total revenue. Q2 guidance $91 billion, $4.5 billion above consensus. By any historical measure, the best quarter ever reported by a semiconductor company. The stock fell 1.77% the next day. By May 26, NVDA was 4.64% below its May 15 pre-earnings level. Sell the beat, four consecutive quarters running. Kevin Warsh was sworn in as the 17th Federal Reserve Chair on May 22, pledging a “reform-oriented Federal Reserve” — balance sheet reduction, fewer FOMC meetings, reduced dot-plot reliance, fewer Fed speakers. Markets read this as structurally hawkish but not immediately disruptive. VIX fell to 16.76 the day after the swearing-in. But the June 16-17 FOMC meeting is Warsh’s first, and rate hike risk is explicitly on the table — FOMC members discussed it in the days before Memorial Day. The Flash Manufacturing PMI hit 55.3, a 48-month high. Jobless claims: 209,000. Consumer Confidence: 93.1. The economy is not softening fast enough to create room for cuts. And Brent at $99.58 after the May 26 airstrikes is a persistent inflation headwind that Warsh has no policy tool to address.

(Continued for paid subscribers)

The international developed market story this week is a case study in the same bifurcation playing out across three different policy regimes. The Nikkei 225 broke above 65,000 for the first time in its history on May 25, closing at 65,158.19, before settling back to 64,996 on May 26 — still a +5.8% gain from the May 15 baseline. The Japanese megabanks reported extraordinary earnings: MUFG net income up 30% to ¥2.4 trillion, SMBC up 34%, Mizuho up 41% — all record fiscal years. Nintendo surged 52% on Switch 2 momentum. But the yen is at 159.30 — approaching the 160 level that triggered MOF intervention in April — and the Bank of Japan faces a genuine policy dilemma. Governor Ueda’s remarks at the BOJ-IMES Conference on May 26-27 were pointed: “Japan’s experience shows that oil price shocks are never just oil price shocks — they are tests of the entire inflation regime.” OIS markets are pricing a 70% probability of a 25-basis-point hike at the June 15-16 meeting. The BoJ’s own trend inflation gauge came in at +2.8% YoY for April — above target. Yet Ueda declined to pre-commit. The Nikkei’s record breach above 65,000 sits against a backdrop of a structurally weak yen at 159.30 and a central bank waiting on the May 30 Tokyo CPI print to decide whether to become the first major central bank to hike explicitly into an oil shock this cycle.

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The Senate confirmed Kevin Warsh as the 17th Federal Reserve Chair on May 13 by a vote of 54–45. One Democratic senator crossed the aisle. Jerome Powell’s term as Chair expired May 15. He is staying on the Board of Governors — the first former Fed Chair to do so in roughly 75 years — because his governor term runs to January 2028 and because, apparently, the institution needs continuity in a way that the Trump administration is not providing. What this means in practice: Powell has a vote at the June 16–17 FOMC meeting, on a committee he no longer chairs, presided over by a man who was not his choice, facing the first hot inflation print of the new regime. The market priced all of this correctly in the initial days of the week. The S&P 500 set a new all-time high of 7,501.24 on Thursday. The Dow reclaimed 50,000 for the first time since the Iran war began in late February, closing at 50,063.46. The Nasdaq reached 26,635 intraday. Cisco had just reported $15.8 billion in revenue, record AI orders raised to $9 billion for the year, and the stock surged 15% after-hours. Applied Materials followed with $7.91 billion in quarterly revenue and a gross margin of 50% — its highest in 25 years. The AI capex supercycle narrative was alive and validated and priced into equities at new record levels.

Then the bond market voted. The 10-year Treasury yield rose roughly 12 basis points on Friday alone to close at 4.60%, its highest level since the spring of 2025. The 2-year added 9 basis points to 4.09%. The curve steepened to +51 basis points — not because growth is accelerating, but because the market is pricing out any 2026 cuts and beginning to take seriously the possibility that the next Fed move might not be a cut at all. The S&P 500 fell 1.24%. The Dow gave back 537 points. The Nasdaq shed 1.54%. The Russell 2000 — rate-sensitive, energy-cost-exposed, the canary in the macro coal mine — dropped 2.4%, the week’s worst performer. The proximate cause was oil. Brent crude moved above $111 a barrel on Friday. The Strait of Hormuz entered its 76th day closed to commercial traffic. Iran called U.S. demands “Unreasonable.” Trump called Iran’s counter-proposal “a piece of garbage.” The Pentagon said mine-clearing could take up to six months. The IEA has characterized this as the largest oil supply disruption in modern history. None of that was new information on Friday. What was new was the April CPI: +3.8% year-over-year, the hottest print since May 2023. And the April PPI: +6.0% year-over-year, the largest gain since December 2022. And the April NFP: +115,000 — well above the 48,000–55,000 consensus. That combination — accelerating inflation, resilient labor market, oil above $111, and a brand-new Fed Chair inheriting an FOMC whose forward rate expectations have already collapsed from 80 basis points of 2026 cuts to fewer than 20 — is the definition of stagflation risk re-entering the narrative. The record close on Thursday was real. The Friday reversal was also real. The question Warsh now owns: which of those two days describes 2026?

Nvidia reports on May 20. The consensus expects $78.8 billion in revenue — 78% year-over-year growth. The stock went into the week at all-time highs. JPMorgan noted that Mag-7 earnings growth is running more than 40 percentage points above the rest of the index. Cisco’s AI order trajectory and AMAT’s record margins say the infrastructure buildout is intact. The bull case says the AI capex cycle is large enough to sustain earnings growth even if the cost of capital rises. The bear case says 4.60% on the 10-year, CPI at 3.8%, a new Fed Chair with unknown reaction functions, and oil at $111 is not a backdrop for record P/E multiples. Both cases were represented in the same week. The ATH happened Thursday. The bond market answered Friday.

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The Federal Open Market Committee voted 8-4 on April 29 to hold the federal funds rate at 3.50–3.75%. That is the most divided the Committee has been since October 1992, and the split is not a footnote. On one side, Governor Miran argued for an immediate cut. On the other, Presidents Hammack, Kashkari, and Logan pushed to remove the easing bias entirely—effectively arguing that the next move might be up, not down. Powell held the center, kept rates unchanged, and delivered what markets will remember as his final press conference as Chair. He will remain as a Governor, but the institutional signal was unmistakable: the person who guided the Fed through the 2022 hiking cycle, the 2023 pivot debate, and the 2024–2026 cuts is stepping back from the podium at precisely the moment when the Committee can’t agree on its own direction. The bond market processed that complexity efficiently. The 10-year Treasury yield rose 8 basis points to 4.39%. The 2-year added 9 basis points to 3.89%. The curve is steepening, but not because growth is accelerating—it’s because no June cut is coming, and the path beyond June is genuinely unclear. The Strait of Hormuz remains closed, the ISM Manufacturing Prices subindex printed 84.6 in April (the highest since April 2022), and Core PCE for March came in at 3.2% year-over-year, the hottest reading since November 2023. That is the inflation data the next Fed Chair will inherit.

The week of April 27–May 1 was the most consequential earnings stretch of 2026, and the market’s verdict was surgical in a way that tells you something important about where we are in the cycle. Alphabet reported $109.9 billion in revenue, up 22%, with Cloud accelerating 63% to $20 billion—a genuine beat, and the stock jumped 10% the next session. Microsoft reported $82.9 billion in revenue, Azure up 40%, a clean beat on the headline—and the stock sold off 3% because the company guided $190 billion in full-year capital expenditure. Meta reported $56.3 billion in revenue, up 33%, $7.31 in EPS—and fell 5% after-hours because CapEx guidance came in at $125–$145 billion for the year. Amazon reported $181.5 billion in revenue, AWS up 28%, net income of $30.3 billion boosted by the Anthropic investment—broadly well-received. Apple reported Q2 FY2026 on April 30: $111.2 billion in revenue, EPS of $2.01, a $100 billion buyback authorization, and the stock added 3.2% on May 1. The sorting principle is not which company grew faster. It is which growth came with visible capital discipline versus unconstrained infrastructure spending. Cloud growth at Alphabet was rewarded because the return profile looks credible. CapEx at Microsoft and Meta was punished because $190 billion and $145 billion are numbers that require long holding periods to justify. The S&P 500 closed at a new all-time high of 7,230.12 on May 1. The Nasdaq ended the week at 25,114.44, also a record, capping what was April’s best month since 2020 at +14%. The index hit those numbers while the market was simultaneously telling two of the five mega-cap companies that their spending plans were a problem.

The macro data framing those records deserves its own paragraph. Initial jobless claims for the week ending April 26 printed 189,000—the lowest reading since 1969. That is not a typo. The labor market is not breaking. ISM Manufacturing for April came in at 52.7, an expansion reading, with the Prices Paid subindex at 84.6—the highest since April 2022, when the Fed was still in the early stages of its historic tightening cycle. Both the employment and the inflation data are running hotter than the Committee’s models projected. The VIX closed Friday at 16.99, down from 18.92 the prior week. The Russell 2000 closed at 2,812.82, up roughly half a percent on the day. The Dow finished at 49,499.27, essentially flat, continuing to lag on a relative basis as the chart above illustrates. The April NFP print will arrive May 8 and will either confirm that the labor market tightness is durable or provide the first genuine softening signal of the year. What the current data combination—ATH equities, 189K claims, 84.6 ISM Prices, a divided FOMC, and a still-closed Strait—most resembles is not the soft landing. It resembles the last quarter before the soft landing narrative breaks in one direction or the other.

The Bank of Japan’s April 28 decision was a 6-3 hawkish hold—meaning the Committee held at current rates but three members voted to hike immediately to 1.00%, and the FY2026 core CPI forecast was lifted from 1.9% to 2.8%. That is not a central bank preparing to ease. The Nikkei 225 closed above 60,000 for the first time in its history on April 27, touching 60,537 before pulling back—with Tokyo then closed for Golden Week through May 6. The index is the dominant story in international developed markets, running well above the S&P 500 on a relative basis across the four-month period. June 15–16 is now the live date for the next BoJ hike, with implied probability sitting near 66%. What the BoJ decision clarified is that Japan’s central bank is more concerned about inflation persistence than about the yen’s structural weakness—a posture that the FX market tested immediately and violently. The STOXX 600 finished essentially flat for the week at 611.55. The DAX added 0.6% to roughly 24,339, the strongest performer in continental Europe, benefiting from industrial activity that has not yet been fully repriced for energy cost inflation. The FTSE 100 at 10,364, roughly flat on the week, continues to lag, weighed down by a UK inflation print that came in at 3.3% in March—three-tenths above the Bank of England’s own forecast—and a Bank of England that has held at 3.75% with its next decision meeting not until June 18.

The ECB held unanimously at 2.00% on April 30, but Lagarde’s characterization of the decision as “informed but based on insufficient information” is among the more honest admissions from a central bank in recent memory. The Committee debated a hike. Both the adverse and severe macro scenarios embed two hikes in their projections. Q1 GDP came in at just +0.1% quarter-on-quarter, below the 0.2% consensus, as energy cost transmission worked its way through the industrial base. April CPI for the eurozone surged to 3.0%, with energy up 10.9%—a direct function of the Hormuz supply shortfall and TTF gas at €45.41 per megawatt-hour, up 39% year-on-year. On the earnings side, BP reported Q1 profits up 453% year-on-year to $3.8 billion—the highest quarterly figure in four years—and Adidas topped guidance by 16%. Shell reports May 7. The energy sector is the clearest beneficiary of the Hormuz disruption and the reason XLE is the best-performing US sector at +10.3% year-to-date, even as nearly every other cyclical sector lags. What the international developed chart shows is an asset class that has been outperforming the S&P 500 for four months straight, driven by earnings momentum and a weaker dollar, now beginning to price a more complicated second half.

The Strait of Hormuz remains closed. Brent crude peaked intraday at $126 on April 29—a four-year high—before reversing to approximately $105 by April 30 as a combination of demand destruction signals and short-covering unwound the spike. WTI was trading in the $103–$106 range on May 1. The EIA’s April estimate puts the supply shortfall at 9.1 million barrels per day. Approximately 2,000 vessels remain trapped. The IRGC announced a “new management framework” for the Persian Gulf on May 2, language that neither reopens the Strait nor signals imminent resolution. The War Powers Act 60-day clock expired May 1; the Trump administration is claiming a “ceasefire” pauses it, a legal position that has not been tested in a comparable context. The UAE left OPEC effective May 1, the most significant structural change to the cartel’s composition in years, removing a member that has increasingly aligned production decisions with market pricing rather than cartel discipline. Against that backdrop, Korea’s KOSPI hit a new intraday all-time high above 6,750 on April 30, closing at 6,598.87 on May 1—a pullback of 1.38% from the high, but still the dominant performer in the EM complex. Korea is a net energy importer and a semiconductor exporter, and the AI buildout cycle that is punishing Microsoft’s CapEx multiples is simultaneously driving demand for the chips Korea’s fabs produce. The EEM ETF closed May 1 at $63.50, up 15.99% year-to-date.

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The S&P 500 closed Friday at 7,126.06. That is a record high. The Nasdaq gained 6.8% on the week, extending its winning streak to 13 consecutive sessions. The Russell 2000 surged 5.6%, bringing its year-to-date return to +11.9%—nearly triple the S&P 500’s +3.6%. The Dow finished at 49,447.43, up 3.2% on the week. Every major index is now above its January 1 starting line. The VIX collapsed from 19.23 to 17.48. By the numbers, this was one of the best weeks of 2026. The market is celebrating. And here is what it is celebrating: a statement by Iran’s Foreign Minister on Friday morning that the Strait of Hormuz is “completely open.” That single sentence, issued at 8:14 a.m. Eastern time, moved global asset prices by trillions of dollars. Trump echoed the claim on Truth Social. Both said “completely open.” Yet Hapag-Lloyd, Maersk, and the Norwegian Shipowners’ Association all said they would not send ships through until safety and insurance questions are resolved. Only two vessels transited on Thursday. The strait is “open” the way a road with mines on it is open: technically passable, practically terrifying.

The sector breakdown tells a story the headline index conceals. Energy—XLE—fell nearly 5% on the week as WTI crude collapsed 13.2% to roughly $84 and Brent dropped roughly 10% on the week to $90.38. Yet XLE remains the year’s best-performing sector at approximately +22% year-to-date, which tells you how far it had run in the preceding weeks. At the other end, consumer discretionary (XLY) surged +6.66% on the week as falling oil prices fed through to consumer spending expectations. IGV, the software ETF, sits near 52-week lows at approximately -27% year-to-date. The spread between sector winners and losers is not narrowing—it is simply rotating. Small caps are the notable story on the domestic side: the Russell 2000’s +11.9% YTD return versus the S&P 500’s +3.6% represents the clearest regime signal in domestic markets. The bounce from mid-March has not merely recovered the crash—it has exceeded the pre-crash highs.

The macro data was mixed in ways that matter. March CPI came in at 3.3% headline and 2.6% core—hotter than most hoped, cooler than feared. Initial jobless claims beat at 207,000. The Philadelphia Fed index printed 26.7, a substantial beat. But industrial production missed at -0.5%. Bank earnings were excellent across the board: JPMorgan reported $5.94 EPS, Goldman Sachs hit $17.23 billion in quarterly revenue—its second-highest quarter ever with segment records across the board, Citigroup grew earnings 14%, Bank of America 7%. Netflix beat on EPS but fell 10% after guiding weak on Q2 subscriber growth. The FOMC meeting is April 28–29, and betting markets assign a 99% probability of a hold. Oil’s collapse this week is being read as incrementally positive for a June cut, but the Fed’s credibility is staked on not cutting into record equity prices. The market is pricing a soft landing. What it may be getting is a ceasefire rally into a binary geopolitical event.

The STOXX 600 closed at 626.58, marking its fourth consecutive weekly gain and a +1.91% advance on the week. The DAX rose 3.77% to 24,702. The Nikkei 225 gained 2.73% and touched an all-time high of approximately 59,500 on Thursday before settling at 58,476—the latest benchmark to join the record-high club in what is becoming an unusually synchronized global equity rally. The FTSE 100 lagged at +0.63% to 10,668, held back by stubbornly elevated UK inflation. The ECB is widely expected to hold at its April 30 meeting, with approximately 97% probability priced in. Eurozone CPI sits at 2.6%, and a June hike is increasingly discussed rather than dismissed. ASML had a standout week, reporting €8.8 billion in sales with a 53% gross margin—numbers that confirm semiconductor infrastructure spending is accelerating even as software multiples compress. TTF natural gas fell nearly 10% to €38.6 per megawatt-hour, a six-week low, as the Hormuz relief trade spread from oil to gas.

Japan is the chart’s central irony. The Nikkei hit an all-time high while the Bank of Japan’s hike probability collapsed from approximately 70% to approximately 10%. BoJ Governor Ueda refused to signal any tightening at the IMF/G20 meetings, citing Hormuz uncertainty and global financial conditions. The consensus has shifted: June or July is now the expectation. USD/JPY sits at 159.24, just under the 160 psychological trigger that Finance Minister Katayama has warned against. He has warned before. The market has heard warnings before. The BoE is projected to hold at 3.75% through all of 2026 as UK GDP beat with +0.5% month-over-month growth—a data point that sounds positive until you consider that it’s coming alongside inflation that refuses to cooperate. Europe is outperforming the S&P 500 year-to-date by a meaningful margin, but that margin was built in the first six weeks of the year before the Hormuz crisis rewired every cross-asset correlation.

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The market had its best week of the year, and it happened because of a ceasefire that has already begun to unravel. The S&P 500 surged 3.56% to close at 6,816.89. The Dow added 3.03% to 47,916.57. The Nasdaq led with a 4.68% gain to 22,902.89. The Russell 2000 jumped 4.00% to 2,630.59, pushing small caps to +1.9% year-to-date—outperforming the large-cap index by nearly six points on a relative basis. Look at the chart above. The mid-March crash—the one that sent small caps deep into the red—is visibly recovering. The S&P 400 and Russell Microcap led the bounce, which is exactly what you would expect from a risk-on, ceasefire-driven relief rally. Smaller companies are more domestically oriented, more sensitive to liquidity conditions, and more responsive to fear dissipation. When the VIX collapses from 23.87 down to 19.49 in a single week, it is small caps that move first.

The sector story is extraordinary and has not gotten the attention it deserves. Energy came into this week up roughly 41% year-to-date, a number that simply has no precedent in modern market history for a full calendar-year run. Then came the ceasefire. Oil crashed nearly $19 per barrel in a single session—the largest one-day dollar collapse since April 2020. WTI settled at $96.57. Brent at $95.20. XLE—the energy ETF—fell 3.9% on the week and is now approximately +27% year-to-date, having given back roughly a third of its peak gains almost instantly. On the other end: IGV, the software ETF, sits at $74.67, down 27.5% year-to-date, hitting a fresh 52-week low. A 54-point spread between the best and worst performing major sectors is not a market anomaly. It is a market that has been repriced around a single geopolitical variable for four straight months. UMich consumer sentiment printed 47.6—an all-time record low—and you can draw a straight line from oil prices through gasoline through consumer confidence to that number. March CPI headline came in at 3.3% year-over-year. Gasoline was up 21.2% month-over-month, the largest single monthly gain ever recorded. Core at 2.6%. This is not mysterious.

The 10-year Treasury closed at 4.31%. That number tells you something the equity bulls may not want to hear: the bond market is not celebrating the ceasefire. Oil down $19, inflation impulse fading, and yet the 10-year barely moved. That means the bond market has already partially priced out the oil-driven inflation spike—and what remains is structural. The rate cut cycle is not being brought forward by this ceasefire. The Fed is still data-dependent, the data is still hot, and the uncertainty shock from the Strait closure is not fully resolved. The VIX at 19.49 is lower than last week but still elevated relative to the 2024 baseline. This market is pricing relief, not resolution. And those are very different things.

Europe had a massive week. The MSCI Europe indices are at or near year-to-date highs on a relative basis against the S&P 500, and the chart above shows why: while US equities were crashing through mid-March as the Hormuz disruption worsened, Europe—which depends heavily on Gulf oil but had partially pre-hedged through LNG diversification post-Ukraine—was simultaneously pricing both the energy risk and the possibility of resolution. When the ceasefire hit, Europe ripped harder than the US on a percentage basis. The DAX, CAC 40, and FTSE all surged. European small caps, which had been the best-performing cohort globally even through the worst of the crisis due to domestic demand insulation, extended that lead. The ceasefire is particularly meaningful for Europe because natural gas, which had been creeping back toward post-Ukraine highs as Hormuz-linked LNG shipments backed up, has begun to ease. This matters more to a German manufacturer or a Spanish consumer than it does to a Midwestern service business.

Asia Pacific is a more complicated picture. Japan’s Nikkei bounced hard on the ceasefire news—oil down sharply is unambiguously good for a country that imports essentially all of its energy—but the yen story is still working against Japanese equities on a dollar-adjusted basis. USD/JPY sits at 159.25. The yen has weakened steadily against the dollar throughout this entire period, which means that MSCI Asia Pacific returns in dollar terms lag the headline Nikkei index. The April 27–28 Bank of Japan meeting is now the key event: markets currently price a 57% probability of a hike. If the BoJ moves, the yen strengthens, Japanese equities fall in local terms but rise in dollar terms, and the carry trade unwinds again. The 2024 carry trade unwind episode should still be fresh in everyone’s memory. It is not a small risk. Meanwhile, MSCI Asia Pacific Small Cap remains the worst-performing developed market cohort year-to-date, still sitting well below the S&P 500 reference line. The bounce was real but the hole is deep.

The two-week ceasefire created a binary flip in emerging markets that the chart above makes visible. EM Latin America large cap—driven by Brazil’s Petrobras, Mexico’s Pemex, and Colombia’s Ecopetrol—has been the top-performing EM cohort all year, precisely because these are net oil exporters benefiting from elevated crude prices. Now oil has crashed $19 in a week. This will hit EM LatAm earnings. But here is the counterintuitive point: those stocks barely sold off. The market is treating the ceasefire as temporary, and the forward oil price curve reflects that. The ceasefire lasts two weeks. The Strait is not open. Only 15 ships transited in the first three days post-ceasefire announcement—compared to a normal rate of roughly 500 per week. US Navy destroyers entered the Strait on April 11 to begin mine-clearing operations, and Iran immediately threatened to attack them. The market is not pricing EM LatAm large caps as if WTI is going to $70. It is pricing them as if $96 is a temporary floor on the way back to $110.

EM Asia bounced hard on the ceasefire—India’s Nifty, South Korea’s KOSPI, and Taiwan’s TAIEX all surged as energy input costs fell. These are net energy importers, so oil down is unambiguously good for their current accounts. But the Islamabad talks collapse introduces a new ceiling. The first direct US-Iran negotiations since 1979 ran for 21-plus hours over April 11-12. VP Vance led the US side. They covered the nuclear program. They collapsed. Iran said there is “no plan for a next round of negotiations.” Trump responded by announcing a full naval blockade of any vessel that had paid Iran a Hormuz transit toll. That is not a ceasefire extension. That is escalation by another mechanism. EM Asia was buying relief; it is now re-pricing blockade risk. EM Europe—Russia-adjacent, commodity-linked, sanctions-constrained—remains the worst EM cohort by a wide margin and barely moved on the ceasefire news. There is no positive scenario for EM Europe in any of the outcomes currently on the table.

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The five-week losing streak is over. The S&P 500 surged 3.4% this week to close at 6,582.69 on Thursday—the last trading day before Good Friday—snapping what had become the longest consecutive weekly decline since the 2022 bear market. The Dow rose 3.0% to 46,504. The Nasdaq led with 4.4%. The Russell 2000 gained 3.3%, putting small caps firmly into positive territory year-to-date and continuing their relative outperformance over large caps. But before anyone declares the all-clear, understand what drove this rally: a single rumor. On Wednesday, Trump told reporters the Iran conflict would end “within weeks.” Markets ripped. Then on Thursday he walked it back, threatening energy infrastructure strikes after April 6. Markets gave back half the gains. This is not a durable bottom. This is a market trading one headline at a time with one eye on the calendar.

The sector divergence widened further into absurdity. XLE is now up nearly 38% year-to-date with a record 14-week winning streak—though it actually fell 3.9% on Thursday as WTI surged 11.4% in a single session. Read that again: the energy ETF fell on the day oil had its largest single-day dollar gain since the April 2020 Covid rebound. The explanation is positioning—traders taking profits into a $111 WTI print that screams “peak fear.” IGV remains down 24.5% year-to-date. The 62-point spread between the best and worst sectors is no longer an anomaly. It’s a regime. Consumer discretionary got a brief reprieve but Tesla fell another 5% on Thursday. The VIX dropped to 23.87 from 31.05 the prior week—the largest single-week VIX decline of the year—but still sits well above the 15–18 range that defined calm in 2024.

The macro data was a study in contradiction. March nonfarm payrolls shocked at +178,000 versus the +59,000 consensus—released on Good Friday while markets were closed, meaning equities will digest this number Monday. ISM Manufacturing came in at 52.7, expanding for a third consecutive month, but Prices Paid surged to 78.3—the highest since June 2022—confirming what every consumer already knows: oil is flowing through to everything. Initial claims at 202,000 hit a near two-year low. The 10-year Treasury jumped to 4.37% in after-hours trading Friday on the jobs beat. The bond market is now telling you what the equity market refuses to accept: rate cuts are not coming. Betting markets give a 92% probability the Fed holds all year. The word “stagflation” keeps getting thrown around. I’d call it something more specific: a labor market that won’t crack and an inflation impulse that won’t quit, all while the geopolitical risk premium expands by the hour.

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Five consecutive weekly losses. The worst monthly decline in the S&P 500 since 2022. And a VIX that just closed above 31 for the first time since the initial Iran shock. If you’re looking for a bottom in this market, the tape is telling you we haven’t found one yet. The S&P 500 closed the week at 6,368.85, down 3.42% on the week and 6.74% year-to-date. Three out of four stocks in the index fell on Friday alone. The Dow entered formal correction territory—down more than 10% from its February record high—and joined the Nasdaq in what is now a broad-based, multi-week liquidation. The Russell 2000, interestingly, posted a mild gain of 0.36% on the week, making small caps the relative outperformer for the first time in three weeks. But let’s not call that a rotation. IWM is still down 2.28% year-to-date and 10.5% from its January high. This is a market where the best you can say about small caps is they fell less.

The sector story is becoming cartoonishly divergent. Energy, measured by XLE, is now up 37% year-to-date. Software, measured by IGV, is down 25%. That is a 62-percentage-point spread between the best and worst performing sectors in the U.S. market. I don’t think investors fully appreciate how extreme that is. IGV fell another 7.35% this week alone—the worst weekly performance of the month—and is now nearly 35% below its 52-week high. Meanwhile, XLE hit a new year-to-date high at $62.79, gaining 5.48% on the week. Consumer discretionary was the worst broad sector, down 2.89% on Friday as cruise lines, restaurants, and retail got hammered by gasoline-price anxiety. Amazon and Meta each fell 4% on Friday. The VIX closed at 31.05, up from 26.78 the prior week. What’s notable is the VIX “stair-stepped” higher even on days when stocks rallied, indicating persistent elevated demand for hedges regardless of direction.

The macro data confirmed the uncomfortable picture. The University of Michigan consumer sentiment final reading for March came in at 53.3, below both the preliminary estimate of 55.5 and February’s 56.6. One-year inflation expectations surged to 3.8%—up 34% from the prior month’s 3.4%. This is the kind of expectations unanchoring that keeps the Fed awake at night. Vice Chair Jefferson acknowledged the dilemma in his March 26 speech: “I confront an outlook where there is downside risk to the labor market and upside risk to inflation.” He estimated February core PCE at 3.0%—“little progress in lowering core inflation over the past year.” Governor Barr echoed the same message. The April FOMC hold probability stands at 94.8%. Betting markets now give a 26-to-41% chance of a rate hike in 2026. Q4 GDP was revised down to 0.7% from 1.4%. The polite word is “stagflation.” The honest word is “trapped.”

European markets whipsawed all week on conflicting Iran signals. The STOXX 600 managed a tiny +0.35% gain, but that number masks violent daily swings—up 1.3% Wednesday on de-escalation hopes, down 1.2% Thursday after Lagarde warned markets were “too optimistic,” and down nearly 1% Friday on the U.S. selloff. The DAX closed at 22,300, roughly 12% below its pre-war February high. The FTSE 100 briefly reclaimed 10,000 mid-week before giving it back, closing at 9,967. ECB President Lagarde’s March 25 speech at the ECB Watchers Conference was the week’s most important central bank communication. She called Iran “a real shock” and outlined a three-principle framework for responding to energy shocks. The key signal: J.P. Morgan and Barclays now forecast up to three ECB rate hikes in 2026; Goldman Sachs expects two, in April and June. The ECB went from a cutting cycle to a potential hiking cycle in less than a month. European natural gas prices are up 89% since February 28. The OECD cut the eurozone GDP forecast to 0.8% from 1.2%.

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The Great Rotation is dead. Or at least it’s on life support. The Russell 2000 was up 8.9% year-to-date as of March 11. As I write this nine days later, it’s down 0.41% on the year. That’s a 9.3-percentage-point drawdown in less than two weeks. The S&P 500 is at roughly 6,583, down 3.49% year-to-date and sitting at four-month lows. Small caps, mid caps, micro caps—everything that was leading the market in early March has been destroyed by the combination of triple-digit Brent crude, a scorching PPI print, and a Fed that is now openly discussing a rate hike. The energy sector is the sole winner, up 34% year-to-date. Software, measured by IGV, is down 20%. The VIX spiked back to 26.5 after briefly dipping to 22.45 on Tuesday’s relief rally. The pattern this week was textbook: hope on Monday, reality on Wednesday.

Let me walk through the macro data because it was genuinely ugly. The February PPI, delayed by the government shutdown, finally dropped on March 18—the same day as the FOMC decision. Headline PPI came in at 0.7% month-over-month, more than double the 0.3% consensus. Year-over-year headline PPI hit 3.4%, a 13-month high. Core PPI was 0.5% month-over-month and 3.9% year-over-year, the hottest in 13 months and the fourth consecutive hot print. Pipeline prices, measured by Stage 1 intermediate demand, are running at 5.3% year-over-year, the worst since December 2022. This is not transitory. This is inflation re-accelerating in the parts of the supply chain that take months to filter through to consumers. Hours later, the Fed held at 3.50–3.75% in an 11-1 vote, with Miran dissenting for a cut. The dot plot still shows one cut in 2026, but seven of nineteen officials now see zero cuts, up from six in December. Powell raised the core PCE forecast to 2.7% from 2.5% and admitted the committee discussed a potential rate hike at the April meeting. He rejected the stagflation label, but then said the Fed is “in a difficult situation” with inflation progress “not as much as hoped.” That’s stagflation with a press-conference smile.

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LEADERS: ENERGY DOMINANCE, DEFENSIVE ROTATION, AND A LUMBER COMEBACK NOBODY SAW COMING

Energy (XLE) – South Pars Changed Everything

Energy’s dominance reached a new level this week after Israel struck Iran’s South Pars gas field — the world’s largest — on March 19, and Iran retaliated by hitting Qatar’s LNG facilities, knocking out an estimated 17% of global LNG export capacity for what analysts expect will be a 3–5 year repair timeline. The XLE/SPY ratio surged another leg higher and is now up a staggering 35.6% over three months, the most extreme relative energy move since the Russia-Ukraine shock of early 2022. Brent crude spiked to $119 intraday on March 19 before pulling back as a late-session geopolitical headline triggered a reversal; WTI hit approximately $98. Iran is now developing a “selective” vetting system for Strait of Hormuz transit, with traffic down 95% and only India, Pakistan, China, and Iraq actively negotiating passage. The FOMC held rates at 3.50–3.75% on March 18 with an 11–1 vote, acknowledging the impossible bind: oil-driven inflation running hot while the economy decelerates. Energy isn’t just a trade anymore — it’s the axis around which every other asset class is rotating. With Brent still above $110 and no Hormuz resolution in sight, the XLE/SPY ratio could have substantially more room to run.

Utilities (XLU) – The Only Shelter That’s Actually Working

Utilities extended their remarkable 2026 run with the XLU/SPY ratio climbing another 11.3% over three months, making this the most sustained period of utility outperformance since the 2022 bear market. In a week where the S&P 500 fell to fresh 2026 lows at 659.80 on March 19 — down approximately 0.4% for the week through Thursday — utilities continued to attract capital as the ultimate defensive allocation. The AI data center demand narrative provides a rare secular growth tailwind for a traditionally boring sector, but make no mistake: this is primarily a fear trade. The FOMC’s dot plot showed 14 of 19 officials expecting zero or one rate cut in 2026, with the median at just one cut, and Waller — who had been a reliable dove — flipped to hold. That hawkish repricing should theoretically hurt rate-sensitive utilities, but the risk-off bid is overwhelming any yield sensitivity. When oil spikes to $119 and a major gas field gets bombed, investors aren’t doing duration math — they’re reaching for the safest equity exposure available.

Treasuries (GOVT) – The Flight to Quality Deepens

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A week ago I said the rotation was real. It’s more than real now—it’s accelerating in a way that’s forcing even the most stubborn large-cap bulls to pay attention. The Russell 2000 is up 8.9% year-to-date through March 11. The equal-weight S&P 500 is positive on the year by several percentage points. Meanwhile, the cap-weighted S&P 500 sits at 6,672.62 as of Wednesday’s close, down 2.53% on the year. That’s a spread of more than 11 percentage points between the Russell 2000 and the S&P 500, and it’s happening while the VIX is at 27.85 after spiking to 35.3 intraday on Monday. This is not a calm, orderly rotation. This is a market that’s simultaneously pricing in a regime change in equity leadership and a geopolitical crisis that has no clear resolution.

The sector story is equally dramatic. The Energy Select Sector SPDR is up roughly 27% year-to-date, hitting fresh 52-week highs almost daily as Brent crude trades above $100 a barrel for the first time since 2022. WTI is at roughly $96. The software sub-sector of the S&P 500, measured by the IGV ETF, is down 19.5% year-to-date. That’s a nearly 47-percentage-point divergence between the best and worst-performing sectors. I’ve been in this business a long time, and I cannot recall a YTD sector spread this extreme by mid-March. February CPI came in at 2.4% year-over-year on March 11, largely in line with expectations. But the real inflation story is in the ISM Manufacturing Prices Paid index at 70.5%, the highest since June 2022, and that reading was taken before Brent broke through $100. The February PPI release has been delayed to March 18 due to the government shutdown—the same day as the FOMC decision. The Fed is boxed in. CME FedWatch shows an overwhelming probability of a hold at the March 18 meeting. The dot plot update will be the real event. If the median dot shifts higher, that’s the Fed admitting the stagflation scenario is becoming baseline.

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Two days ago I wrote about the small-cap rotation being real. It still is, but the market just threw a curveball that complicates the story considerably. The Russell Microcap Index remains up roughly 8% year-to-date. The S&P 400 is up about 5.7%. The Russell 2000 is holding a 4.2% gain. Meanwhile, the S&P 500 is essentially flat on the year at − 0.22%. That relative outperformance in smaller names has not been erased. But the Iran conflict and today’s disastrous jobs report have injected a level of uncertainty that could either accelerate or completely derail the rotation depending on what the Fed does next.

Let me start with the number that matters most right now. February nonfarm payrolls came in at negative 92,000. Not positive 50,000, which is what the consensus was. Not even zero. Negative 92,000. And if that’s not enough, December was revised down to negative 17,000 from an already-weak 48,000. January was revised down 4,000 to 126,000. The combined revision is negative 69,000 jobs. The unemployment rate ticked up to 4.4% from 4.3%, and average hourly earnings came in hot at 3.8% year-over-year. Health care lost 28,000 jobs on strike activity. Federal government shed another 10,000. This is a labor market that is cracking in real time.

Now layer in the oil picture. WTI crude is at $80 per barrel as I write this, up over 20% in a single week since the U.S.-Israel strikes on Iran began. Brent is above $84. The Strait of Hormuz has effectively been closed for six days, which accounts for roughly 20% of the world’s oil and gas supply. The ISM Manufacturing Prices Paid index hit 70.5% in February, the highest since June 2022, and that was before the latest oil spike fully filtered through. Core PCE was already running at 3.0% in December. The energy sector is up 26% year-to-date while the software sub-sector of the S&P 500 is down roughly 17%. The divergence is breathtaking. And it puts the Fed in an impossible position. You cannot cut into rising inflation. You cannot hike into a labor market that just printed a negative payroll number. This is what stagflation looks like in practice, and it’s why the market has pushed the next expected rate cut all the way out to September.

Despite what has been an awful week for risk assets globally, European equities are still outperforming the S&P 500 by 300 to 500 basis points on the year. The STOXX 600 is up about 1.4% year-to-date even after falling nearly 5% this week, its worst weekly decline since April 2025. To put that in context, the STOXX 600 hit an all-time high of 634 on February 27, the day before the Iran strikes began. Europe has given back the late-February surge but the structural outperformance story remains intact. Germany’s €500 billion infrastructure fund is now into its implementation phase, with defense spending at roughly €108 billion in 2026, the highest since the Cold War ended. Goldman Sachs is projecting 1.1% GDP growth for Germany this year, which doesn’t sound like much until you remember the country had six consecutive years of stagnation. The ECB has held at 2.0% for five straight meetings and the March 19 decision is a 99% probability hold. Eurozone headline inflation ticked up to 1.9% in February from 1.7% in January, and the Iran oil shock has made any near-term cut a non-starter.

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• U.S. labor data remain low-fire, but survey growth indicators are cooling toward a ~1.5% annualized pace.¹ ²

• FOMC minutes reinforced a “higher for longer unless inflation reasserts disinflation” stance, with liquidity mechanics adding a subtle tightening bias.³

• Treasury yields drifted modestly lower across the curve, which remains positively sloped and not recessionary.⁴

• Equity index stability masks weak breadth and sharp dispersion within technology, particularly between semiconductors and software.⁵

• High-yield credit spreads remain near cycle tights, signaling risk repricing without systemic stress.⁶

Late-Cycle Macro With a Data and Policy Uncertainty Overlay

The defining feature of the Feb. 18–25 window was not a single outsized data surprise, but confirmation of a late-cycle configuration: labor markets remain resilient, growth is cooling at the margin, and policy uncertainty—particularly around trade—is injecting volatility into cross-asset risk premia.

Weekly initial jobless claims fell to 206,000 for the week ending Feb. 14, underscoring that layoffs remain subdued. Continuing claims rose to roughly 1.869 million, suggesting that while separations are limited, job-finding is becoming incrementally more difficult.¹ The signal is not labor stress, but labor normalization.

Forward-looking growth data tell a similar story. The February flash S&P Global composite PMI eased to 52.3 from 53.0, still expansionary but marking the slowest pace in roughly ten months. Survey-based GDP mapping implied growth closer to 1.5% annualized early in the year, down from the stronger late-2025 cadence.² Employment components hovered near stagnation. The expansion continues—but with diminishing momentum.

Inflation did not deliver a fresh catalyst during the week. Instead, the January FOMC minutes sharpened the Fed’s reaction function. Policymakers emphasized that inflation remains “somewhat elevated” and that further easing would require clearer evidence that price pressures are sustainably converging toward 2%.³ The Committee also referenced market pricing for one to two cuts in 2026, underscoring that policy is not on a preset path.

Importantly, the minutes highlighted liquidity mechanics that can tighten or ease conditions without a change in the policy rate. Reserve management purchases, Treasury General Account flows, and tax receipts were discussed as endogenous drivers of reserve levels.³ In an environment where reserve scarcity could re-emerge, these balance-sheet dynamics matter for money markets and front-end stability.

Macro uncertainty is also literal. The Chicago Fed’s CFNAI publication process has flagged delays stemming from federal shutdown-related disruptions and delayed statistical releases.⁷ The FOMC minutes similarly acknowledged data delays as a forecasting challenge.³ This is a subtle but material shift: uncertainty is no longer purely economic—it is embedded in the data pipeline itself.

Overlaying this backdrop is policy volatility. On Feb. 20, the U.S. Supreme Court struck down emergency tariffs, prompting the administration to signal new levies under alternate legal authority.⁸ The macro transmission channel here is uncertainty rather than immediate price effects. Rapid shifts in trade policy elevate risk premia across equities, credit, and FX—even absent a deterioration in hard data.

In short, growth is cooling but intact, inflation remains a constraint, and policy volatility has become the dominant shock variable.

The Rates Transmission: Mild Easing, No Recession Signal

Rates markets translated this environment into modest duration support but no recession warning.

Between Feb. 18 and the latest H.15 data available during the week (through Feb. 23), the 10-year Treasury yield declined from 4.09% to 4.03%, while the 2-year fell from 3.47% to 3.43%. The curve remained positively sloped, with the 10-year minus 2-year spread narrowing only slightly.⁴ This is not inversion; it is mild flattening within an upward-sloping structure.

Real yields also eased. The 10-year TIPS yield declined from 1.80% to 1.77%.⁴ That incremental decline supports duration-sensitive equities, but it does not suggest a collapse in real-rate expectations. Markets are pricing moderation—not contraction.

Fed communication reinforced this equilibrium. Governor Christopher Waller indicated he could support holding rates steady at the March meeting if incoming labor data confirm improved momentum.⁹ That conditional stance keeps front-end expectations tightly linked to labor confirmation rather than preemptive easing.

The curve’s message is therefore consistent: growth is decelerating, but not rolling over. Inflation is moderating, but not definitively conquered. The Fed is patient, and duration is drifting lower without signaling recession.

This rates backdrop matters because it forms the discount-rate anchor for equities. With real yields stable to slightly lower and no acute credit stress, equity volatility must be interpreted through the lens of dispersion rather than systemic repricing.

Equity Dispersion and Credit Containment Define the Regime

U.S. equities exhibited two simultaneous truths during the window. Index-level resilience persisted, but participation narrowed.

From Feb. 18 to Feb. 24 closes, the S&P 500 rose modestly, and the Nasdaq gained, while the Dow and Russell 2000 declined.⁵ This divergence signals that headline stability masks underlying concentration.

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• January payrolls rose 130,000 and unemployment dipped to 4.3%, reinforcing a growth floor rather than signaling labor stress.¹

• CPI cooled to 2.4% year over year, reopening the path to potential mid-year easing without validating aggressive near-term cuts.²

• The Treasury curve flattened modestly as long-end yields declined, with the 10-year falling 13 basis points over the week.³

• High-yield spreads widened only slightly, suggesting repricing rather than systemic stress.⁴

• The dollar weakened on the week as rate futures increased the probability of a June cut.⁵

• The yen posted its strongest weekly gain in roughly a year amid renewed tightening expectations in Japan.⁶

The U.S.: A Growth Floor with Cooling Inflation

The macro sequence this week mattered more than the absolute numbers. Labor came first. January nonfarm payrolls rose by 130,000, while the unemployment rate edged down to 4.3%.¹ Wage growth remained firm at 0.4% month over month and 4.2% year over year, with the workweek ticking up to 34.5 hours.¹ Initial jobless claims declined to 227,000 for the week ended February 7, reinforcing the view that layoffs remain contained.⁷

The signal was clear: the U.S. economy is not breaking. It is slowing at the margin, but it is not rolling over.

Consumption, however, showed signs of fatigue. December retail sales were unexpectedly flat, with the Census Bureau describing activity as “virtually unchanged” from November.⁸ That nuance matters. The labor market may be stable, yet spending momentum is no longer accelerating.

Inflation then shifted the narrative. January CPI rose 0.2% on the month and cooled to 2.4% year over year.² Core CPI increased 0.3% month over month and 2.5% year over year.² Gasoline prices fell 3.2%, while several service categories reflected early-year price adjustments.⁹

The takeaway is not that inflation has vanished. Core remains sticky enough to prevent an immediate easing cycle. Yet the disinflation trend resumed. That was enough to revive the mid-year rate-cut conversation without forcing the Federal Reserve’s hand.

Markets translated the sequence into duration demand. From February 6 to February 12, the 10-year Treasury yield declined from 4.22% to 4.09%, while the 30-year fell from 4.85% to 4.72%.³ The 2-year eased modestly, producing a flattening in the 10-year minus 2-year spread.³

Rate futures responded quickly after CPI, increasing the implied probability of a June cut and adding easing expectations into 2026.⁵

Credit markets did not flash stress. The ICE BofA U.S. High Yield option-adjusted spread widened slightly from 2.87% to 2.92%.⁴ That move reflects risk repricing rather than funding pressure.

Equities behaved like a market still sensitive to rate volatility and crowded positioning. A sharp growth-led selloff midweek tied to AI-related positioning concerns was only partially repaired by Friday’s inflation relief.¹⁰ Dispersion remained elevated, with internal volatility masking headline index stagnation.¹¹

Liquidity plumbing also remained in focus. The New York Fed indicated that elevated reserve-management purchases of Treasury bills would continue into mid-April, framing the activity as operational rather than stimulative.¹² Meanwhile, the Treasury General Account remained elevated on a weekly basis, leaving near-term liquidity sensitive to bill issuance and tax flows.¹³

The dollar’s weekly decline aligned with the shift in rate expectations. Even as it stabilized into Friday, the broader move reflected markets rotating away from “higher for longer” protection.¹⁴ U.S. policy commentary describing the dollar as closer to a “more natural” trade level added to that tone.¹⁵

Developed Markets: Policy Divergence Reawakens

Europe’s story was more narrative than numeric. An ECB policymaker emphasized that Europe should prepare for a larger safe-haven role globally, highlighting the importance of liquidity backstops and institutional resilience.¹⁶ The euro held firm on the week, consistent with a softer dollar backdrop.¹⁴

The U.K. remains constrained by soft growth and persistent underlying inflation. Public reports showed marginal late-year growth, while the Bank of England’s chief economist emphasized that underlying inflation remains around 2.5% and policy must stay restrictive long enough to complete disinflation.¹⁷ Sterling traded within a tight range, reflecting cross-currents between U.S. repricing and domestic caution.¹⁸

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• January payrolls rose 130,000 and unemployment dipped to 4.3%, reinforcing a resilient labor floor.¹

• CPI cooled to 2.4% year over year, reopening the path to mid-year easing.²

• The 10-year Treasury yield fell from 4.22% to 4.09% over the week, with curve flattening at the margin.³

• High-yield spreads widened only slightly, signaling repricing rather than systemic stress.⁴

• The dollar declined on the week, while the yen posted its strongest weekly gain in roughly a year.⁵

United States: Resilient Labor, Softer Inflation

The week’s macro sequence mattered more than the individual releases. January nonfarm payrolls increased by 130,000, and the unemployment rate edged down to 4.3%.¹ Wage growth remained firm at 0.4% month over month and 4.2% year over year, while the average workweek ticked up to 34.5 hours.¹ That combination does not describe an economy sliding toward recession. It describes an expansion that is cooling without cracking.

Weekly jobless claims reinforced that narrative. Initial claims fell to 227,000 in the week ended February 7, consistent with stabilization rather than deterioration.⁶ Retail sales, however, hinted at marginal cooling. December sales were unchanged from November, with official characterization describing activity as “virtually unchanged,” though still positive year over year.⁷

Inflation provided the pivot. January CPI rose 0.2% month over month, bringing the year-over-year rate to 2.4%.² Core CPI increased 0.3% on the month and 2.5% year over year.² Energy softness helped the headline, while services categories reflected early-year price resets.⁸ The sequencing is critical. A firm labor print tightened the market’s tolerance for immediate cuts. A softer inflation reading reopened the debate around mid-year easing.

Rate markets translated that balance into a duration bid. The 10-year Treasury yield fell from 4.22% on February 6 to 4.09% on February 12, while the 30-year declined from 4.85% to 4.72%.³ The 10-year minus 2-year spread narrowed modestly, reflecting flattening pressure.³ By Friday, the 10-year traded near 4.067% following the CPI release.⁹

Term premia remain an underappreciated driver. The San Francisco Fed’s yield premium estimates show the 10-year term premium above one percentage point, underscoring that long-end yields reflect compensation for duration risk beyond expected policy rates alone.¹⁰

Operational liquidity also mattered. The New York Fed signaled that elevated reserve-management purchases of Treasury bills and short-dated government bonds would continue into mid-April, framed as technical rather than stimulus-oriented.¹¹ The Treasury General Account remained elevated, keeping near-term liquidity impulses dependent on bill supply and tax flows.¹²

Equities absorbed the macro mix unevenly. A sharp growth-led drawdown tied to AI-related positioning pressure drove major index declines midweek.¹³ Friday’s softer CPI stabilized sentiment, though dispersion remained elevated. Commentary highlighted that internal breadth was healthier than index-level performance suggested, pointing to fragile leadership and rotation beneath the surface.¹⁴

Credit markets did not flash systemic stress. The ICE BofA U.S. High Yield option-adjusted spread widened from 2.87% to 2.92% over the week.⁴ That magnitude aligns with equity volatility and modest risk repricing rather than a funding shock.

In FX, the dollar weakened on the week as rate futures increased the implied probability of a June cut following CPI.¹⁵ U.S. policy commentary also reflected tolerance for a weaker dollar, with the Commerce Secretary describing the currency as closer to a “more natural” level for trade.¹⁶

International Developed Markets: Divergence Re-Emerges

Europe’s story centered less on data and more on narrative. An ECB policymaker argued that Europe should prepare for a larger global safe-haven role, emphasizing stronger liquidity backstops.¹⁷ The euro traded near $1.1863 into Friday, modestly higher on the week.⁵ The implication is structural rather than cyclical. A stronger institutional bid for euro assets alters funding dynamics over time.

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• Central banks are pausing in unison, but policy pivots remain conditional and uneven.

• Labor markets are cooling just enough to sustain rate-cut expectations without confirming recession.

• Equity leadership is rotating toward value, cyclicals, and smaller caps beneath stable index levels.

• A weaker dollar, record gold prices, and emerging-market strength suggest global capital reallocation rather than outright risk-on behavior.

A Pause Before the Pivot

The first week of February delivered a familiar but still consequential outcome: patience. In the United States, the Federal Reserve held interest rates steady, acknowledging gradual softening in labor conditions while emphasizing that progress on inflation remains incomplete. Chair Jerome Powell characterized the economy as “solid,” reinforcing policymakers’ preference to wait for clearer confirmation before shifting course.¹

With the policy decision widely anticipated, attention quickly turned to labor data. A partial government shutdown delayed the official January employment report, leaving markets to rely on alternative indicators. The ADP private payrolls report showed job gains of just 22,000, a sharp undershoot relative to expectations and a sign that hiring momentum is fading more rapidly than forecast.² While unemployment remains historically low and is expected to hold in the mid-4% range, the direction of travel has become increasingly difficult to ignore.³

Bond markets reacted accordingly. Short-dated Treasury yields declined as investors increased bets on eventual rate cuts, while longer-dated yields remained relatively anchored. The result was a persistently inverted yield curve, reflecting confidence that inflation pressures are easing alongside lingering concern about medium-term growth prospects.⁴

Equities extended January’s gains but with noticeably higher volatility. Earnings season exposed investor sensitivity to guidance rather than headline results. Several mega-cap technology companies reported strong quarterly numbers only to see their share prices fall sharply, as markets reassessed valuation and growth durability.⁵ At the same time, select consumer and hardware companies delivered upside surprises that helped stabilize broader indices.

One asset class stood apart. Gold surged to record highs above $5,500 per ounce, supported by a weaker dollar, declining real yields, and elevated geopolitical risk.⁶ The rally signaled not panic, but growing demand for insurance as markets transition away from peak-tightening conditions.

Rotation Beneath the Surface

Beneath relatively calm index levels, leadership continued to rotate. Value stocks extended their outperformance over Growth for a third consecutive month, driven by investor preference for cash-flow durability and valuation discipline.⁷ Cyclical sectors such as Energy, Materials, and Industrials again led the market, supported by higher commodity prices and supply-side uncertainty.⁸

Energy equities benefited from oil’s rebound toward the upper-$60s per barrel, its highest level since late 2025. While global demand growth remains modest, geopolitical risks and tighter inventories have sustained a risk premium in energy markets. Defensive sectors also held firm. Consumer Staples and Utilities attracted steady inflows as investors balanced optimism about easing policy with caution around slowing growth.

Market-capitalization dynamics reinforced the theme of rotation rather than speculation. Small-cap equities, which surged in January, continued to outperform large caps. The Russell 2000’s relative strength reflects easing financial conditions and domestic economic resilience rather than excess risk-taking.⁹ Importantly, leadership within small and mid-cap indices skewed toward profitable firms with improving fundamentals.

Financials lagged, weighed down by compressed yield spreads and uncertainty surrounding loan growth.¹⁰ Within technology, dispersion widened further. Profitable, established companies and AI-linked infrastructure providers continued to attract capital, while higher-valuation speculative growth names struggled to maintain momentum.

Overall, market behavior suggests broadening participation accompanied by selectivity. Investors appear willing to embrace opportunity, but only where quality and downside resilience remain evident.

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Global markets opened the year with a tone of cautious confidence. In the United States, economic momentum remains firm enough to keep the Federal Reserve on hold at its January meeting, with consensus firmly expecting no policy change.¹ Growth has proven resilient, inflation has moderated but remains above target, and policymakers appear comfortable maintaining restrictive settings while they assess how disinflation evolves.¹ Bond markets are already looking ahead. The decline in short-term yields relative to longer maturities reflects expectations that policy easing may arrive later in the year, even as the Fed signals patience.¹

Equity indices, however, tell only part of the story. Major benchmarks have been largely flat, masking a pronounced internal rotation.¹ Volatility remains subdued, suggesting investors are broadly comfortable with the macro backdrop despite political noise and ongoing debates about central bank independence.¹ The message from U.S. markets is not one of exuberance, but of stability paired with a growing willingness to reposition risk.

Rotation Beneath the Surface

That repositioning has been most visible in the shift away from mega-cap dominance. After several years in which a narrow group of large technology companies accounted for an outsized share of returns, leadership has begun to broaden.¹ Small- and mid-capitalization stocks have surged early in the year, recapturing investor attention after prolonged underperformance.¹ Equal-weight equity strategies have also attracted strong inflows, reflecting a desire for diversification away from heavily concentrated benchmarks.¹

This rotation appears tied to both valuation and macro expectations. As interest rate pressures ease and the prospect of future policy accommodation comes into view, investors have shown renewed interest in more cyclical and economically sensitive companies.¹ Energy, industrials, and value-oriented sectors have outpaced growth-heavy areas, while several of last year’s market leaders have stumbled out of the gate.¹ While similar false starts have occurred in the past, the current move has been notable for its breadth and its alignment with a clear policy catalyst: the Federal Reserve’s pause.¹

The durability of this shift remains an open question. If large technology companies simply consolidate rather than resume leadership, conditions remain favorable for smaller firms to continue outperforming.¹ Earnings season will be critical in determining whether this rotation reflects a genuine regime change or merely a temporary adjustment within an ongoing range-bound market.

Diverging Global Paths

Outside the United States, policy inflection points dominate the landscape. In Europe, business activity continues to expand modestly, though momentum is uneven across countries.¹ Inflation has fallen sharply from last year’s highs, allowing the European Central Bank to pause its tightening cycle.¹ At the same time, rising cost pressures in recent survey data have reinforced the ECB’s reluctance to discuss near-term easing.¹ The decision by the U.S. administration to step back from proposed tariffs on European goods has removed a key downside risk, offering relief to exporters and improving sentiment across the region.¹

The United Kingdom faces a more delicate balance. Inflation surprised modestly to the upside late last year, yet policymakers remain confident that price pressures will ease toward target in coming months.¹ With growth showing tentative signs of improvement and the labor market beginning to cool, the Bank of England appears inclined to proceed cautiously, holding rates steady while preparing the ground for gradual easing later in the year.¹

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• U.S. inflation continues to cool without a sharp deterioration in labor markets, reinforcing expectations that the Federal Reserve will remain on hold near term.¹

• Equity leadership is widening meaningfully, with small- and mid-caps outperforming mega-cap technology and signaling healthier market breadth.²

• Globally, disinflation is allowing central banks in Europe, the U.K., and parts of emerging markets to pause or pivot, while Japan begins a historic normalization cycle.³

Resilient Growth and a Shifting U.S. Market Narrative

The U.S. economic backdrop entering early 2026 reflects a rare combination of moderating inflation and continued growth. Consumer prices rose 2.7% year over year in December, with core inflation easing further to 2.6%, underscoring how far price pressures have retreated from their post-pandemic peak.⁴ The labor market has softened only modestly, with unemployment hovering near 4.4%, a level consistent with stability rather than contraction.¹

This balance has allowed Federal Reserve officials to step back from aggressive tightening. After cutting rates late last year, policymakers have signaled patience, emphasizing the need to assess incoming data before making additional moves.⁵ Futures markets still price in rate cuts later in the cycle, but stronger-than-expected retail sales suggest the economy retains momentum.⁶

Equities have responded accordingly. The S&P 500 remains near record highs, supported by earnings resilience and declining volatility.⁷ Temporary pullbacks tied to sector-specific news, including technology export restrictions and uneven bank earnings, have been met with renewed buying interest rather than broad risk aversion.²

Bond markets have reinforced this message. Treasury yields have edged lower as inflation expectations stabilize, easing pressure on valuations without signaling recession fears. The yield curve remains inverted, but the inversion has narrowed, suggesting markets are beginning to look beyond the tightening phase.⁴

Rotation Takes Hold as Market Breadth Improves

One of the most important developments of early 2026 has been the broadening of equity participation. After years of dominance by a narrow group of mega-cap technology stocks, smaller and more cyclical companies are regaining leadership. Both small- and mid-cap indices have reached record highs, while the equal-weighted S&P 500 has meaningfully outperformed its capitalization-weighted counterpart.²

This shift reflects several forces. Valuation dispersion widened significantly in prior years, leaving non-mega-cap segments comparatively attractive. As rate pressures eased, investors began reallocating toward sectors tied more closely to domestic growth, including industrials, materials, and selected financials. The result has been healthier internal market dynamics, with gains distributed across a broader range of companies rather than concentrated in a handful of names.

Sector rotation has followed a similar pattern. Cyclical and value-oriented groups have outperformed, while technology has paused after an extended run. Energy and materials benefited briefly from geopolitical headlines and commodity volatility, while defensive sectors quietly attracted flows during periods of equity consolidation.² Importantly, these rotations appear to reflect repositioning rather than wholesale risk reduction. Capital has remained largely within equities, shifting leadership rather than exiting the market altogether.

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