As Hormuz Deal Collapses, Hope Fades on Market… And So Does Rationality

Hope is the Thing with Feathers
Hope is the thing with feathers
That perches in the soul,
And sings the tune without the words
And never stops at all
And sweetest in the gale is heard;
And sore must be the storm
That could abash the little bird
That kept so many warm.
I’ve heard it in the chillest land,
And on the strangest sea;
Yet, never, in extremity,
It asked a crumb of me.

– Emily Dickinson, 1861(written) 1891 (published)

Hope Fading?

For the moment, it seems. Domestic equity index futures are under pressure overnight into Monday morning. As I work through the zero-dark hours, crude oil is trading higher as U.S. Treasury debt securities are traded lower. The news? Should not really come as that much of a surprise.

U.S. Pres. Donald Trump has rejected the latest proposal from the regime in Iran to reopen the Strait of Hormuz and resume negotiations meant to put an end to hostilities in the region. The president even insinuated that the bombing of Iran could resume after the midterm elections.

That right there is part of the problem with humans having been replaced by AI and high-speed, keyword-reading algorithms up and down Wall Street. Markets acted well last week as expected sideline meetings between U.S. and Iranian counterparts in New York City the summit between Pres. Trump and Pres. Xi of mainland China were “priced in.”

Human traders might have shown some optimism, but would have had the common sense to remain somewhat skeptical. The robots? They buy every story at face value and just try to create momentum. Why is that? Simple. Momentum causes price overshoot. Price overshoot creates inefficiency in the process of price discovery. Inefficiencies create opportunity. Wish I could say that a faster market has been more efficient or more fair. In my opinion, the result has been just the opposite. Oh, your commissions are lower. That much is true. Your net basis though? Much more difficult to track vs. what it would have been (or should be) under the old and “antiquated” system, way back when price and pride mattered.

Where Are We Now?

As I can hear the coyotes outside, front-month WTI Crude trades above $95 per barrel, which is the highest level that we’ve seen that product trade at since, gasp, Thursday. Gold? That’s another matter. The yellow metal, as measured in the form of a front-month, continuous contract, is now trading at its lowest levels per ounce since very early August. OK. a more hawkish Fed, a tighter trajectory for monetary policy, literally a clown car full of Fed speakers on the docket this week. I get that.

In related news, the U.S. Dollar Index may be off of the recent highs, but it is still close enough to 10-week highs. The real story, though, as we all know, is borrowing costs. Treasury yields are back on the march as bond markets try to balance both an expected surge in economic growth and potentially relentless inflation. Yes, we know that inflation was much worse and interest rates were much higher when you were young. I know. I was there.

What matters though, is that this inflation and these rates are the toughest monetary environment that many young adults have ever encountered. They are the ones, not us, who we need to feel comfortable in starting new businesses, hiring their peers and in creating households. If the trajectory of not just policy, but of the fiscal and monetary environment does not free these “kids” up to feel like they can make these decisions, then it’s simple. They won’t. Oh, and let’s not cast blame on a younger generation for their inactivity.

It was our peers that created an artificial monetary environment, pressuring the cost to borrow solely as to skew the individual and social ability to assess risk. It was all of the quantitative easing and “operation twists” as well as the bloated Fed balance sheet and ridiculous growth in money supply that permitted artificially reduced interest rates, and a highly opaque sense of reality to socialize or even delay economic hardship.

Are not contraction and downturns part of the normal business cycle? We have tried to blot them from the scope of probability to the point of erasing them, almost from memory. Now, we have a generation or two of younger adults who are, really through environmental training, highly risk averse. Congratulations.

The Week Behind…

Last week was more about Pres. Trump than anything else. Markets moved optimistically on hopes that U.S. and Iranian leadership would talk on the sidelines as the president addressed the U.N. general assembly in New York. Markets also liked that the U.S. president hosted Pres. Xi of China later in the week. While that meeting was more about pomp than substance, there were no disasters and there are plans for more meetings. That does count for something.

The Week Ahead…

It’s September “jobs week,” gang. Those are always fun. Not. This Friday’s report from the Bureau of Labor Statistics is expected to show moderate job creation for September. August personal consumption expenditure price inflation will rear its ugly head on Wednesday as well, with personal income and personal spending for that month in tow. Actually, even with a very light earnings calendar, this week will come full of potential catalysts.

Catalysts…

1. Pres. Trump, Speaker Mike Johnson, and a number of tech CEOs are expected to meet on Tuesday to discuss concerns over the development of artificial intelligence.
2. On that note, OpenAI will hold its DevDay on Tuesday as well. CEO Sam Altamn is set to deliver a keynote address from the event.
3. MongoDD (MDB) will hold its investor day this Tuesday as well.
4. On Wednesday, both Cigna (CI) and Hewlett Packard Enterprise (HPE) will hold investor days.
5. I hope that the investing public is ready for a literal onslaught of fed speakers this week. With the August personal consumption expenditure data on the way as well as September employment survey results, the Fed will be out in the kind of numbers not seen in a very long time, since way before Kevin Warsh returned. Do they have something to say? If so, in the algorithmic, keyword reading world that we now live in, they will move markets. I am now tracking 23 public appearances to be made by our central bankers this week, which blows my mind as this group has taken a much lower profile over the past few months. We’ll have nine speakers to contend with on Tuesday alone and another six on Thursday. Just keep your helmets on, gang.
6. There are very few publicly traded companies set to report quarterly financial results this week. That said, there are a couple of real headliners out there. Micron Technology (MU), on Wednesday, is easily the highest profile name out there for the five days ahead. We’ll also hear from CarMax (KMX) on Tuesday morning and from Nike (NKE) on Thursday afternoon.

The Week That Was…

Equity markets, for the most part, struggled mid-week, but rallied enough early in the week and late in the week to post generally solid gains. The S&P 500 ended a two week losing streak and posted a third winning week in five. The Nasdaq Composite posted a fourth winning week in five and a seventh winning week in nine. This is how last week went for U.S. equities.

• The S&P 500 gained 0.51% on Friday and 1.21% for the week.
• The Nasdaq Composite added 0.48% on Friday and 2.06% for the week.
• The Nasdaq 100 tacked on 0.42% on Friday and an impressive 3.25% for the week.
• The Russell 2000 gained just 0.07% on Friday and lost 0.8% for the week.
• The S&P Small Cap 600 moved 0.33% higher on Friday, still losing 0.45% for the week.
• The S&P Midcap 400 gained 0.3% on Friday but lost 0.06% for the week.
• The Dow Transports added 0.49% on Friday but lost an ugly 2.52% for the week.
• The Philly Semis tacked on 1.41% higher on Friday, gaining a nice 6.27% for the week.
• The KBW Bank Index ran 1.11% on Friday but was down 1.8% for the week.

On Friday, eight of the 11 S&P sector SPDR ETFs closed out the session in the green, led higher by the industrials (XLI) and technology (XLK). Communication services (XLC) and energy (XLE) led the losers.

For the week, just five of the 11 S&P sector SPDR ETFs finished the period in the green. Tech was the big winner, followed by communication services as growth sectors stole the show. As bond proxies, the utilities (XLU) suffered large losses alongside bonds themselves.

Earnings

As of Sept. 25, according to FactSet, for the third quarter, Wall Street now sees an estimated year-over-year earnings growth rate for the S&P 500 of 29.1%, up from 28.9% last week. Wall Street also sees revenue growth of 12.1% up from 11.9% a week ago.

For the full year of 2026, the street now looks for earnings growth of 32%, up from 31.8% last week. This would come on revenue growth of 12.3%, up from 12.1% last week. The outlook for the fourth quarter is also very positive. Fourth quarter S&P 500 earnings growth is now estimated at 26.8% year over year, up from 26.5% last week. At the moment, the Energy, Technology, and Communication Services sectors are projected to have grown Q3 earnings by 111.4%, 63.5% and 51.3% respectively.

Valuation

Still using data provided by FactSet, the S&P 500 ended last week trading at 19.2-times 12 months’ forward-looking earnings, up from 19.1-times the week prior. This is still below the five-year average of 19.8-times for the index, but also just above its ten-year average of 19-times.

The S&P 500 also ended last week trading at 25.8-times trailing twelve months’ earnings, up from 25.5 times a week ago. This still stands well above both the five-year (24.4 times) and ten-year (23.6 times) averages for the index.

Currently, six of the 11 sectors are now trading below their five-year average valuations. Five sectors, led by the industrials (22.8 times) are trading at a premium to their five-year average valuation. The six “undervalued” sectors according to their historical averages over five years are the discretionaries, technology, the utilities, the REITs, the financials, and the materials.

Fed Funds Futures

Fed Funds futures trading in Chicago are now pricing in a 66% probability for a second straight quarter-percentage point rate hike to be made to the current target range (3.75% to 4%) for the Fed Funds Rate at the culmination of their Oct. 28 FOMC policy meeting. There is now a 64% likelihood priced in for a third quarter point rate hike as soon as Jan. 27 and a 60% probability priced in for a fourth quarter-point rate hike of the cycle as soon as March 17.

Economics (All Times Eastern)

10:30 – Dallas Fed Manufacturing Index (Sep): Expecting 1, Last 11.6.

The Fed (All Times Eastern)

08:15 – Speaker: Reserve Board Gov. Michelle Bowman.
1:25 p.m. – Speaker: Reserve Board Gov. Lisa Cook.
1:30 – Speaker: Richmond Fed Pres. Tom Barkin.

Today’s Earnings Highlights (Consensus EPS Expectations)

After the Close: MTN (-5.7)

At the time of publication, Guilfoyle was long MU equity.