Oil jumps, missiles fly: stocks wobble but fundamentals are strong
Markets dipped on geopolitical shockwaves, but nervous selling masks underlying strength
Global markets were jolted Friday by news that Israel had launched a strike on Iranian nuclear facilities. Oil spiked and stock futures sold off sharply. But the selling was relatively contained.
Even as geopolitical headlines screamed danger, investors showed a surprising ability to look past the immediate shock and focus on the bigger picture: an economy that, while slowing at the edges, remains resilient.
While the situation remains serious and could easily get worse, the truth is from a financial perspective we’ve been here many times before.
Stock markets have continued to climb decade after decade, despite all kinds of crises. Any volatility we see over the next few weeks is likely to be a fantastic buying opportunity, just as it has been in the past.
S&P 500 forward EPS hits all time high
Despite lingering macro concerns, forward EPS for the S&P 500 over the next 12 months hit $280, an all time high. Despite CEO sentiment falling, very few companies have lowered forward guidance.
This makes the rally more durable than many think. The usual suspects will continue to complain about valuations. But markets aren’t just riding multiple expansion, they’re being driven by real earnings power.
Unemployment claims data signals subtle cracks
Initial jobless claims for the first week in June came in at 248,000 just below the 250k that was expected. Continuing claims for the week ending May 31 increased by 54,000 to 1.96M, the highest level since 2021. This signals it’s taking longer for laid off workers to find new jobs.
The divergence between initial vs continuing is often an early warning of weakening demand for labor.
The chart below is from Wolf Richter (Wolfstreet.com), and shows the number of people receiving unemployment after week 1 (i.e. continuing claims) against the level that historically has resulted in a recession. Currently, that recessionary number is 2.7 million people (it has grown over time as a result of total employment growth).
So, while unemployment is historically low, the slow-to-hire environment we’re in does pose risks that the economy won’t absorb laid off employees fast enough.
US travel slump grabs headlines
Our friends at Bloomberg report that some of Trump’s policies are driving travelers away from the US and could cost the economy $12.5 billion this year. (Read)
While this sounds alarming, travel-related stocks make up a tiny slice of the S&P 500 (less than 2% of index weight). The broader market isn’t particularly vulnerable to this trend. Hence the saying, ‘the stock market is not the economy.’
It’s a reminder that dramatic headlines don’t always translate into material market risks. Stock selection and sector weightings matter far more than narrative-driven fears.
Small cap breakout vs. massive bearish positioning
While small caps have staged a technical breakout (inverse head & shoulders, snapping a 6-month downtrend), short interest in IWM 0.00%↑, an ETF that tracks the Russell 2000, continues to rise.
Short interest in the ETF has now reached 36% of the float, which means there’s a powder keg of potential short-covering fuel.
The potential for asymmetric returns is high. Small caps could deliver outsized gains if shorts get squeezed. The risk/reward in small companies now tilts bullish purely from positioning dynamics, even if the macro backdrop remains murky.
Most Russell 2000 companies lose money, so stock selection is critical. The key is to focus on quality companies with earnings momentum.
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