A Shot Across the Strait?, GameStop Shocker, AI Alarm

Very early on Monday morning, Iranian state media and Al Jazeera had reported that two missiles had struck a U.S. frigate near Jask Island in the Strait of Hormuz, but the U.S. denies the claims. Futures markets had turned sharply lower on these headlines. The information here is murky and the story is fluid. Stay tuned.

Eternal Father! Strong to Save (Naval Payer)

Eternal Father, strong to save,
Whose arm does bind the restless wave,
Who bids the mighty ocean deep
Its own appointed limits keep;
O hear us when we cry to Thee
For those in peril on the sea.

- William Whiting (1860)

Liquid Plumber?

The plan? To unclog the Strait. On Sunday, U.S. Pres. Donald Trump unveiled "Project Freedom." This new plan will supposedly guide stranded maritime vessels from neutral countries that have been more or less paralyzed near that passage since the very early days of the war between the U.S. and Iran. The American president posted to his Truth Social account, “For the good of Iran, the Middle East, and the United States, we have told these Countries that we will guide their Ships safely out of these restricted Waterways, so that they can freely and ably get on with their business,”

The Wall Street Journal is reporting that the U.S. Navy is not currently involved in this operation, which sounds a bit ridiculous to me. The Financial Times, however, is reporting the story quite differently. According to that publication, CENTCOM (The U.S. military's command for the region) has stated that the U.S. military will support the project with guided missile destroyers, fighter aircraft, unmanned vehicles (drones) and up to 15,000 troops. An estimated 1,000 commercial vessels and 20,000 seafarers have been stranded due to the Iranian military's attacks on any ship trying to get through the Strait of Hormuz. Concerns include not only the obvious impacts upon global commerce, but that these ships' crews are getting low on sustenance.

This new initiative is expected to launch today. There are various reports circulating that Iran has threatened to attack any foreign military vessel trying to traverse this passage. There are also reports that France has refused to participate in the president's plan. To this point, 15 ships have safely passed through the Strait over five weeks' time, while paying a toll of roughly $2 million per ship to Iran's Revolutionary Guard. The U.S. naval blockade has intercepted or redirected 49 ships. Overnight, at least two tankers reported having been struck by projectiles in or near the Strait of Hormuz. Front month WTI Crude futures have both traded below $100 per barrel and for more than $104 per barrel overnight.

(Game)Stop the Presses

This is somewhat surprising, at least in my opinion. GameStop (GME) CEO Ryan Cohen told the Wall Street Journal that the retail chain that had once focused on gamers but had pivoted toward keepsakes and collectibles in recent years, had built up an approximate 5% stake in eBay (EBAY) . Cohen also said that GameStop had made a $125 per share (about $56 billion) bid in cash and equity for eBay. The Journal is reporting that GameStop had delivered an offer letter to eBay on Sunday to eBay Chairman Paul Pressler.

Take it from a kid who looks at balance sheets, a lot of balance sheets: GameStop is in much better financial condition than you think it is if you haven't been following. As of January, the company had more than $9 billion in cash on its balance sheet and absolutely no short-term debt. The company does have more than $4 billion in longer-term paper on the books. If Cohen thinks he can do this solely through the use of some of that cash and the issuance of stock, he probably can. That said, this probably will not be a good morning to own GME. EBAY shares on the other hand, will obviously be hot.

Not So Surprising

Spirit Airlines (FLYYQ) shut down operations over the weekend after bondholders rejected an 11th hour bailout proposal from the Trump administration that would have given the federal government a 90% stake in the airlines and priority ahead of other debtholders in the event of a liquidation. About 17,000 direct and indirect Spirit employees are now newly unemployed. Who else is under pressure?

While I do not love the financial position that Frontier Group (ULCC) might be in, there is no doubt that Frontier's balance sheet is in better shape than Spirit's. The loss of a competitor for the lower end of the consumer aviation market could mean an increased share of that market for Frontier. This could provide a short-term, tradable move in Frontier's share price. I would not think that this makes Frontier long-term investable. If it were, one of the larger, higher-end airlines would already be working on acquiring their operation.

AI Alert!

Treasury Sec. Scott Bessent appeared on Fox News on Sunday and told viewers that U.S. banks, cyber-security and AI-capable companies are currently strengthening their existing defenses against emerging, nefarious artificial intelligence threats, Bessent fears that AI tools would be used to penetrate bank accounts and other critical financial infrastructure. Bessent stated “We’re going to make sure that things stay safe.” What could possibly go wrong?

The Past Week...

Broader equity markets moved moderately higher last week as investors digested a number of better-than-expected corporate earnings reports and a split decision at the Federal Reserve bank. The Fed's Federal Open Market Committee kept its target range for the Fed Funds Rate at 3.5% to 3.75% on Wednesday for a third straight meeting. There were, however, four dissents from the official statement, which were the most at any one meeting since 1992.

Away from central banking, the UAE announces its exit from both OPEC and OPEC+ following a strategic policy review that made clear a need for increased flexibility in the management of oil production. Finally, Apple (AAPL) , Amazon (AMZN) , Alphabet (GOOGL) , Meta Platforms (META) and Microsoft (MSFT) all reported earnings that largely beat Wall Street, making it clear that heavy spending on artificial intelligence-focused infrastructure and capacity is paying off and will continue.

Week Ahead

What matters moving forward...

- The Situation in Iran: This remains the most important item under the microscope, especially now that the U.S. will try to re-open the Strait of Hormuz to global commerce without a peace plan with Iran in place.

- Macro: This is April jobs week. The dominant macroeconomic release this week will be the twin April labor market survey results to be published by the Bureau of Labor Statistics this Friday. There's not a lot else out there. The ISM Service sector PMI for April will hit the tape on Tuesday morning and the monthly ADP report on private sector payrolls is due Wednesday morning. Other than that, it will be quiet until Friday. The University of Michigan will release its initial survey on Consumer Sentiment this Friday after the BLS report.

- The Federal Reserve: The Fed will be out in force this week. Apparently, someone left the cage door open, and all of the critters are escaping. I currently have 11 Fed speakers on my radar for the week, led off by NY Fed Pres John "Lightning Bolt" Williams this afternoon. The headliners will be Fed Governors Bowman and Waller who will both speak Friday night after the close of business.

- Earnings: First-quarter earnings season is moving toward its later stages. That said, this will be another very heavy earnings, perhaps less full of high-profile reports compared to last week. Reporting on Monday afternoon will be Palantir technologies (PLTR) , followed by Advanced Micro Devices (AMD) on Tuesday evening. Then, on Wednesday morning, CVS Health (CVS) , Uber Technologies (UBER) and the Walt Disney Company (DIS) will all go to the tape with their numbers. Finally, McDonald's (MCD) , CoreWeave (CRWV) and Rocket Lab (RKLB) will all post their results on Thursday.

The Week That Was...

U.S. financial markets, for the most part, posted a fifth consecutive winning week over the past five business days:

- The S&P 500 gained 0.29% on Friday and 0.91% for the week.

- The Nasdaq Composite added 0.89% on Friday and 1.12% for the week.

- The Nasdaq 100 tacked on 0.94% on Friday and 1.49% for the week.

- The Russell 2000 gained 0.46% on Friday and 0.93% for the week.

- The S&P Small Cap 600 gained 0.2% on Friday and 0.82% for the week.

- The S&P Midcap 400 added very little on Friday but lost 0.04% for the week.

- The Dow Transports lost 0.94% on Friday and 1.41% for the week.

- The Philly Semis gained 0.87% on Friday and 0.78% for the week.

- The KBW Bank Index surrendered 0.63% on Friday and 1.04% for the week.

On Friday, just three of the 11 S&P sector SPDR exchange-traded funds closed out the session in the green. The winners were led by Technology (XLK) , while Energy (XLE) and the Industrials (XLI) led the losers.

For the week, nine of the eleven S&P sector SPDR ETFs closed out the session in the green. The winners for the week were easily led by Energy (XLE) while the Materials (XLB) rode in the caboose.

Earnings

As of May 1st, according to FactSet, for the first quarter, Wall Street now expects to see year over year blended (results & expectations) earnings growth for the S&P 500 of 27.1%, up from 15.1% last week, and up from 11.6% more than a month ago. This is a stunning increase in just one week's time and underscore just how powerful AI-related corporate profitability is becoming. Wall Street also sees revenue growth of 11.1%, up from 10.3% a week ago. With 63% of the S&P 500 having reported, 84% of companies have beaten earnings expectations, while 81% have beaten sales projections.

For the full year of 2026, the street now looks for earnings growth of 20.6%, up from 18.6% last week, and up from 14.7% more than a month back, on revenue growth of 9.7%, up from 9.5% last week and up from 7.7% more than a month ago. The outlook for the second quarter also continues to improve quite dramatically. Second quarter earnings growth is now estimated at 21.3%.

At the moment, the communication services and technology sectors are projected to have grown earnings a jaw-dropping 53.2% and 50% for the first quarter, respectively. Two sectors, health care and energy are projected to have suffered a first-quarter earnings contraction.

Valuation

Still using data provided by FactSet, the S&P 500 ended last week trading at 20.9-times 12 months' forward-looking earnings, even with last week, but still down from 21.6-times more than a month prior. This is above the five-year average of 19.9 times for the index as well as being well above its ten-year average of 18.9 times.

The S&P 500 also ended last week trading at 28.5 times trailing 12 months' earnings, up from 28.1-times one week ago, and above levels that the index reached more than a month ago. This also stands well above the five-year (24.6 times) and ten-year (23.3 times) averages for the index.

Nine of the eleven sectors are now trading above their five-year average valuations, led by the discretionaries (27.5 times), the industrials (25.6 times) and technology (23.8 times). Only technology and health care closed out last week undervalued relative to their five-year norms.

Fed Funds Futures

Fed Funds futures trading in Chicago are currently pricing in a 97% probability for no change to be made to the target range for the Fed Funds Rate at the next FOMC policy meeting on June 17. Of course, Kevin Warsh will be running the central bank by then, but Jerome Powell will still have a say. There are no rate hikes priced in at any point in the future looking out towards year's end 2027.

That said, there are still no rate cuts priced in for calendar year 2026. In fact, no cuts are priced into these markets until December of 2027. Understand though, that we can expect that everything will change several times over, as the year progresses, especially as the midterm elections approach.

Economics

(All Times Eastern)

10:00 - Factory Orders (Mar): Expecting 0.5% m/m, Last 0.0% m/m.

The Fed

(All Times Eastern)

12:50 - Speaker: New York Fed Pres. John Williams.

Today's Earnings Highlights

(Consensus EPS Expectations)

Before the Open: (TSN) (.78)

After the Close: FANG (3.75), (MATX) (1.61), (ON) (.61), (PLTR) (.28)

At the time of publication, Guilfoyle was long AMZN, AMD, PLTR, RKLB equity.