Ben Graham’s classic “Mr. Market” character sums it up best. He’s your manic business partner who shows up every day offering to buy or sell at wildly different prices, depending on how he feels.
Last week, Mr. Market went from depressed to euphoric in record time. He woke up on Monday fearing recession—and by Friday, he was forecasting a soft landing, rate cuts, and an AI-powered boom.
Markets don’t move on fundamentals alone. They move on the perception of fundamentals. That’s why a rules-based strategy matters. It removes emotion from the equation, letting you stay consistent while others chase headlines.
Here’s what we’re watching, and why it matters.
Technicals accelerate bullish outlook
Last week we flagged that as the S&P 500 approached its 200-day moving average, the % of S&P stocks above their 200-day moving average was advancing toward its downtrend line, and noted that a breakout of both would be very bullish for the index.
We got that breakout on Monday, when the index gapped up 2.6% above its previous close. Traders use price gaps as reference points, and may try to engineer a pullback to close the gap.
While some profit-taking would be normal after such a strong runup, let’s not forget that many institutional investors missed out on this rally. In early April, hedge funds sold stocks at the fastest pace ever recorded, while inflows from retail investors were at record highs.
We continue to believe any pullback will be short-lived, as institutional investors reposition their portfolios in the wake of trade deals that will avoid the worst-case scenario.
China deal accelerates momentum
The U.S. and China agreed to a 90-day reduction in reciprocal tariffs, a move that was much more de-escalatory than initially expected.
Trade negotiations will take place over months, and we should be prepared for sporadic volatility. But this deal reduces inflation fears and eases pressure on global supply chains.
Our take: tariff policy uncertainty is now less of a concern, with the market pricing in a baseline of 10%. While tariffs could be inflationary for some goods, real-time inflation readings are still below the Fed’s 2% target.
Palantir going to $1 trillion?
Palantir (PLTR 0.00%↑) hit a new all time high last week on the heels of another strong earnings report. And now analyst Dan Ives is predicting Palantir’s market cap will hit $1 trillion in 3 years. (Read)
Palantir remains our favorite AI play, and certainly we hope he’s right. But even respected analysts can be wrong. With a rules-based strategy, it doesn’t matter. We let the numbers guide our decisions, not the noise.
More important than a price target for Palantir is the tailwind that’s powering the company’s growth. Capex and hiring in AI continue to support U.S. tech margins. If you’re waiting for AI to “cool off” before investing, you may be waiting a long time.
Earnings are strong, even if sentiment isn’t
Roughly 75% of S&P 500 companies beat profit expectations in Q1. Yet consumer sentiment, according to the University of Michigan, just hit its lowest level since 1980.
The disconnect between hard and soft data is stark. But for investors focused on fundamentals, strong margins suggest resilience.
Citigroup’s earnings revision index, based on the number of upgrades and downgrades, has turned positive for the first time in 6 months, indicating strong corporate performance despite broader economic uncertainty.
Moody’s downgrades US debt
Moody’s downgraded U.S. sovereign debt, following similar moves by Fitch and S&P, citing rising debt and unsustainable interest costs. (Read)
No surprise there if you’ve been reading along. We advised against piling into long term bonds ahead of the Fed’s rate cuts, as many analysts recommended. It’s hard to believe TLT 0.00%↑, a popular ETF for long-term treasury bonds, is still down ~45% from its 2020 high.
With $1 trillion in annual defense spending now locked in and deficit spending expected to grow from 6.4% of GDP in 2024 to 9% by 2035, the downgrade is a reminder that treasuries are not exactly risk free.
Yes, the U.S. will not default on its debt. But runaway spending means more money printing, which reduces the real value of fixed payments long term. Without significant change, investors are going to require higher rates to hold long term treasuries.