The Big Picture

Briefing.com Summary:

*Ceasefire signals de-escalation with Iran triggered short covering, cash deployment, and rapid shift from correction fears to record highs.

*Key risks reversed: oil, yields, and S&P rebounded sharply, fueling momentum, FOMO, and speculative buying in high-beta stocks.

*Rally now driven by AI enthusiasm, mega-cap strength, and rising earnings estimates, though consumer weakness could threaten growth outlook.

The stock market has had a monster rally, and we saw it coming. Maybe not the monster part, but certainly the rally part.

Our concluding thought in our March 27 column was this:

With the S&P 500 nearing a 10% correction and some other important red lines coming into focus, there is an opportunity to start legging into the market with cash sitting on the sidelines. However, with other issues lurking out there, like the private credit worries, rising mortgage default rates, tariffs, and AI disruption, it is not an "all-in" environment because it is tough to be all-in like before on the achievability of earnings estimates.

In short (covering) order, the market has gone from red lines to green lights and record highs.

The Beginning of the End

What happened? We're going to skip to the end before we go back to the beginning.

President Trump issued a threat in late March that the U.S. would destroy Iran's power and energy infrastructure if a ceasefire deal isn't reached and the Strait of Hormuz is not immediately open for business. Then, there were reports that the president was willing to end the war with Iran, even if the Strait of Hormuz was not fully open.

The market read between those lines that the president might be seeking an off-ramp from the war. 

The ebb and flow of this contentious matter continued, though, with a subsequent warning from the president that a whole civilization will die if Iran did not meet an 8:00 p.m. ET deadline on April 7 to open the Strait of Hormuz.

It was at a boiling point of being a worst-case scenario, so there was much relief when the president announced ahead of the deadline that the U.S. and Iran had agreed to a two-week ceasefire agreement. The market read between those lines: the beginning of the end was at hand.

It was a headline that unleashed a wave of short-covering activity, a scurry by money managers to rebalance, and a move by investors to put cash sitting on the sidelines back to work.

A Good Monster

What red lines were crossed? From our vantage point, they were oil trading above $100/bbl, average gas prices above $4.00/gallon, a move in the 10-yr note yield to 4.30% but particularly above 4.50%, and a 10% correction in the S&P 500 that would take it to the 6300 area.

These were laid out in our March 5 column.

WTI crude prices peaked at $117.63/bbl on April 7; average gas prices hit $4.15/gallon a week ago; the 10-yr note yield got as high as 4.46% on March 27; and the S&P 500 hit a low of 6316.91 on March 30.

Today, oil prices went as low as $78.97/bbl with news that the Strait of Hormuz will be opened for all to transit, except Iran, until it agrees to U.S. conditions; average gas prices are at $4.07/gallon (but should be falling further); the 10-yr note yield is at 4.25%, and the S&P 500 (oh, the S&P 500!) hit an all-time high of 7140.10, up 13% from the March low in a span of just 13 trading sessions.

That is a good monster that scares the living cash out of investors sitting on the sidelines, fearful of missing out on further gains. It is the monster that fuels momentum trading and speculative energy into high-beta names.

It is a monster, the degree of which we did not see coming.

Briefing.com Analyst Insight

With the Iran war going from boiling to simmering, the market was free to divert its attention to other matters. Specifically, it got reacquainted with mega-cap stocks, it found comfort in bank CEOs downplaying the systemic risk of problems swirling in the private credit market, it embraced the AI boom again, and it seized on an otherwise impressive earnings growth outlook.

The forward 12-month EPS estimate has risen from $317.69 at the start of the Iran war to $335.25 today; meanwhile, the CY26 EPS estimate has increased from $309.82 to $320.23, the latter of which is an 18.5% increase over CY25.

There is a lot of faith in the ability of companies, in aggregate, to live up to those high expectations. So far, there haven't been any convincing warnings that the end of this strong growth outlook is also at hand, but it may not be the kind of smooth sailing the estimate trend suggests if real earnings and real spending continue to dwindle in the face of higher prices.

That is something to keep a close watch on in the months ahead, because if the consumer pulls back harder on the discretionary reins, the strong earnings growth won't materialize as expected, and a bad correction monster could show itself again.

For now, though, the stock market is wrapped up in a good, monstrous rally as it believes the Iran war is about to wrap up without lasting economic damage.

--Patrick J. O'Hare, Briefing.com

(Editor's note: The next installment of The Big Picture will be published the week of April 27).