Will Missiles Speak Louder Than Words as Peace Talks Continue?

Zero dark-thirty. Tuesday morning coming off of a three-day weekend. Front-month Crude is trading lower. Treasury debt securities are trading higher (yields lower). Equity index futures are trading higher as well. Off the overnight highs though. A number of news services are reporting that the U.S. has conducted military strikes on Iranian missile launch sites as well as on Iranian speed boats that were said to be laying mines in the Strait of Hormuz.

The U.S. Navy has announced the sinking of two Iranian Islamic Revolutionary Guard vessels attempting to lay those mines. Iranian forces fired surface to air missiles at U.S. forces who then took out said missile launchers near Bandar Abbas. Capt. Tim Hawkins, a spokesperson for CENTCOM (U.S. Central Command) said “U.S. forces conducted self-defense strikes in southern Iran today to protect our troops from threats from Iranian forces. Targets included missile launch sites and Iranian boats attempting to emplace mines.”

U.S. Pres. Donald Trump had indicated earlier on Monday that negotiations meant to deliver a meaningful cease-fire had indeed been productive. But the president did warn yet again that he was willing to order more increased offensive military strikes against Iran. The president also expanded the scope of the American diplomatic effort, seeking not only a peace deal but also a broader pact that would normalize relations between Israel and the Middle East at large.

Speaking early on Tuesday morning, U.S. Sec. of State Marco Rubio commented, “We’ll see if we can make progress. I think it’s a lot of talking back and forth going on about specific language in the initial document.” Rubio added, the president expressed his desire to make it. He’s either going to make a good deal or no deal. The straits have to be open; they’re going to open one way or another.”

Hmm… Now to get the Revolutionary Guard to surrender their nuclear ambitions.

Broader Ambitions….

Pres. Trump has said that he has spoken with leadership representing Saudi Arabia, Qatar, Pakistan, Turkey, Egypt and Jordan about joining the Abraham Accords and normalizing relations with Israel. The president posted to social media, “I stated that, after all the work done by the United States to try and pull this very complex puzzle together, it should be mandatory that all of these Countries, at a minimum, simultaneously, sign onto the Abraham Accords.”

Trump added, “It may be possible that one or two have a reason for not doing so, and that will be accepted, but most should be ready, willing, and able to make this Settlement with Iran a far more Historic Event than it would, otherwise, be.”

The Abraham Accords, for those wondering, are a set of agreements targeting normalized diplomatic ties between Arab nations and Israel, brokered by the U.S. during Pres. Trump’s first term in 2020. The UAE and Bahrain have already signed on to the accords. Pakistan appears to have already rejected this latest proposal.

Bow Your Heads…

Let me tell you a little story about a man that I have never met. A number of years ago, I read in a magazine article, a tale of extraordinary heroism displayed by one man, and thought to myself just how many true heroes die far away from any fanfare committing incredible acts of selfless service that can only come from a deep well of personal courage. I remember thinking that I can’t possibly learn of every single instance where one gave all for another, but I can certainly make sure that I never forget the name of U.S. Marine Corps 2LT. Mike Thomas. Long-time readers have read this name before. I have made it my mission over a number of years to ensure that Mike Thomas is never forgotten.

Lt. Thomas, a resident of small-town Pawnee, Oklahoma was born in January of 1943. Twenty-five years later, Thomas would find himself in the unfortunate position of being a small unit leader at the Khe Sanh combat base at Quang Tri Province, South Vietnam. As mid-January faded into late January 1968, the base came under regular mortar and rocket fire. That base had come under the persistent siege of a greatly superior numerical force. Lt. Thomas’ unit had been hit particularly hard on the date of Jan. 20, 1968. We like to make fun of second lieutenants because they are usually inexperienced. Nobody will ever have fun at the expense of this second lieutenant. Thomas exposed himself to danger, by carrying six wounded Marines to safety on his back, one by one. Some folks might have considered that to be enough. Thomas, however, went back to look for two more Marines that he knew were out there. Somewhere. Lt. Thomas never came back.

I have no personal connection to Lt. Mike Thomas, other than a feeling of respect, admiration, and quiet awe. I do not know and have never known his family. I am sure that they wept. I am sure that they still weep. I can only imagine that a posthumous award of the Navy Cross for extraordinary heroism is little consolation for an empty hole in a parent’s heart, or a sibling’s heart that now spans more than half of a century. In connection to large, catastrophic events… we often use the term “Never Forget.” Then we somehow manage to go about our business.

Sometimes, Hell visits a very small place in the middle of nowhere, and one will rise above natural fear out of love for his fellow man. One comes home in a box, so that six others will not. There are perhaps thousands of silent heroes out there. Find one. Remember them for life. Pray for a family that suffers eternally. The name of Michael H. Thomas, 2LT USMC can be found at the Vietnam Veterans Memorial in Washington, DC. Panel 34E, Line 92, among 58,317 of his lost brothers and sisters. Always Faithful.

The Past Week…

The major U.S. equity indexes ended last week higher, despite having to navigate volatile market swings tied to oil prices and Treasury yields as Nvidia (NVDA) provided the corporate headlines with another monumental earnings release. As the S&P 500 posted an eighth consecutive winning week, domestic markets spent the past week reacting to U.S. / Iran related headlines. The yield on the U.S. 30-year bond apexed above 5.18%, which was the highest level (or lowest price) for that series in almost 20 years.

The market experienced a positive shift as the week wound down as optimism over a potential peace deal or at least a lasting ceasefire between Washington and Tehran and the reopening of the Strait of Hormuz increased. U.S. (and global) markets also had to adjust to the swearing in of Kevin Warsh as Chair of the Federal Reserve bank on Friday. Simultaneously, Stephen Miran dropped off of the Fed’s Board of Governors as Jerome Powell dropped from the Chair to Board member. Hence, the president did not gain an ally in terms of headcount across the seven-member group.

Week Ahead

What matters moving forward as markets enter a holiday shortened four-day workweek…

• The Geopolitical: There will obviously be an increased level of headline risk associated with the situation in the Strait of Hormuz and the tone of negotiations between the U.S. and Iran as the week gets under way. I don’t know how much else matters to markets at this point other than the ability of the U.S. to deprive Iran of the ability to deliver a nuclear threat and the ability of the U.S. to reopen the region to safe transport of commercial maritime vessels.
• Macro: This will be a very heavy four-day week in terms of the amount of domestic macroeconomic data that will hit the tape. The headline-level data will be published this Thursday as April PCE inflation numbers, April durable goods orders, and April new home sales all will leave their marks. In addition, investors will get a look at March home prices on Monday as well as the results for the Conference Board’s May survey on consumer sentiment.
• The Federal Reserve: The Fed will be out in public again this week, but not overwhelmingly so. The headliners will be Vice Chair Philip Jefferson on Tuesday evening and Fed Gov. Michelle Bowman on Friday morning. Other speakers this week who hold policy voting rights this year include Dallas fed Pres Lorie Logan, NY Fed Pres. John Williams, and Philadelphia
  Fed Pres Anna Paulson.
• Earnings: First-quarter earnings season is closing in on its final stages. This will not be a very heavy earnings week. However, there will be several headline-level names that will release their posting quarterly numbers this week. On Tuesday evening, Zscaler (ZS) will post their results. Come Wednesday, we’ll hear from Dick’s Sporting Goods (DKS), Marvell Technology (MRVL), Salesforce (CRM) and Snowflake (SNOW). On Thursday, Dollar Tree (DLTR), Costco (COST), Dell Technology (DELL) and MongoDB (MDB) will all go to the tape.

The Week That Was…

Keep on rockin’. The S&P 500 posted an eighth consecutive winning week over the past five trading sessions. Unlike the week prior, last week’s positivity was felt broadly across the equity market landscape….

• The S&P 500 rallied 0.37% on Friday to close up 0.88% for the week.
• The Nasdaq Composite gained 0.19% on Friday to add 0.45% for the week.
• The Nasdaq 100 added 0.42% on Friday and a nice 1.22% for the week.
• The Russell 2000 took 0.91% on Friday and an impressive 2.72% for the week.
• The S&P Small Cap 600 gained 0.83% on Friday and a nifty 2.54% for the week.
• The S&P Midcap 400 gained 0.84% on Friday and 1.76% for the week.
• The Dow Transports gained 0.79% on Friday and a beefy 3.15% for the week.
• The Philly Semis rallied 1.99% on Friday and soared 5.3% for the week.
• The KBW Bank Index added 0.49% on Friday and a nice 3.35% for the week. On Friday, 10 of the 11 S&P sector SPDR ETFs closed out the session in the green. communication services (XLC) was the sole loser. The winners were led by health care (XLV), technology (XLK) and utilities (XLU) as the defensives outperformed the cyclical sectors.
  For the week, nine of the eleven S&P sector SPDR ETFs closed out the session in the green. The defensive sectors were again, the outperformers, which could be a warning sign. The two growth sectors remained bifurcated as technology rallied and communication services had a rough period.

Earnings

As of May 21, 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 28.4%, up from 27.7% last week, and up sharply from 11.6% two months ago. This is a stunning increase in valuation experienced by our marketplace through this reporting season and underscores just how powerful a force AI-related profitability has become. Wall Street also sees revenue growth of 11.5%, up from 11.4% a week ago. With 94% 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 22.1%, up from 21.5% last week, and up from 14.7% two months ago, on revenue growth of 10.4%, up from 10.3% last week and up from 7.7% a rough eight weeks ago. The outlook for the second quarter is also very positive. Second quarter S&P 500 earnings growth is now estimated at 21%, up from 20.5% last week.
At the moment, Technology and the Communication Services sectors are projected to have grown Q1 earnings a jaw-dropping 53.4% and 48.9% for the first quarter, respectively. Just one sector, Health Care is currently projected to have suffered a Q1 earnings contraction (-3.2%).

Fun Fact

This quote is straight from last week’s FactSet Earnings Insight…

“The “Magnificent 7” companies reported actual earnings growth of 63.2% for the first quarter, which is the highest earnings growth rate reported by these seven companies since Q2 2021 (89.2%). On the other hand, the blended earnings growth rate for the other 493 S&P 500 companies for Q1 is 17.4%, which is also the highest earnings growth rate reported by this group of companies since Q4 2021 (32.3%).”

Valuation

Still using data provided by FactSet, the S&P 500 ended last week trading at 21.1 times twelve months’ forward-looking earnings, down from 21.4 times last week, and down from 21.6 times about eight weeks ago. 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 28.0 times trailing twelve months’ earnings, down from 28.3 times one week ago, but above levels that the index reached seven weeks back. This also stands well above the five-year (24.6 times) and ten-year (23.3 times) averages for the index.

Eight of the 11 sectors are now trading at or above their five-year average valuations, led by the Discretionaries (26.9 times), technology (25.1 times) and the industrials (24.6 times). Technology, the utilities (17.9 times), health care (17.2 times) and the materials (17.3 times) all closed out last week undervalued relative to or even with their five-year norms.

Fed Funds Futures

Fed Funds futures trading in Chicago are currently pricing in a 98% probability for no change to be made to the current target range (3.5% to 3.75) for the Fed Funds Rate at the next FOMC policy meeting on June 17th. As we know, Kevin Warsh is now running the central bank, but Jerome Powell still has a say, and probably some loyalists. There are no rate cuts fully priced in at any point in the future looking out towards year’s end 2027. That said, there is now a rate hike priced (64% probability) in as early as January 2027.

Economics

(All Times Eastern)

09:00 – Case-Shiller HPI (Mar): Expecting 1.0% y/y, Last 0.9% y/y.

09:00 – FHFA HPI (Mar): Expecting 0.1% m/m, Last 0.0% m/m.

10:00 – CB Consumer Confidence (May): Expecting 92.0, Last 92.8.

10:30 – Dallas Fed Manufacturing Index (May): Expecting -1, Last -2.3.

The Fed

(All Times Eastern)

No public appearances scheduled.

Today’s Earnings Highlights

(Consensus EPS Expectations)

Before the Open: AZO (36.22)

After the Close: ZS (1.01)

At the time of publication, Guilfoyle had no position in any security mentioned.