New Highs, Old Risks: Markets Rally Amid Geopolitical Whiplash

Executive Summary 

Most major U.S. stock indexes finished the week higher, with several hitting record highs, as some generally positive economic data, ongoing strength in artificial intelligence (AI)-linked stocks, and upbeat earnings results helped offset continued uncertainty surrounding the U.S.-Iran conflict. The technology-heavy Nasdaq Composite led gains, followed by the S&P 500 and Russell 2000 Indexes.  Optimism around AI helped the PHLX Semiconductor Index, or SOX, rise for 18 consecutive days through last week, up approximately 50% during that period of time.  Intel, Nvidia and AMD achieved all-time highs. 

Non-US Developed EAFE markets returned -2.7% with losses across geographies while EM markets returned +0.8% with gains in Korea (+4.1%) offset by losses in Brazil (-3.4%), India (-3.0%) and China (-1.7%). 

Corporate earnings were also in focus with the S&P 500 companies that had reported through Friday, generating a blended year-over-year earnings growth rate of 15.1%—on pace for a sixth consecutive quarter of double-digit growth. Investor attention largely remained centered on AI demand and related infrastructure spending, signs of resilient consumer demand, and companies’ ability to manage higher costs.  

Oil prices rose after two consecutive weeks of declines, and a measure of market volatility ticked up as investors responded to geopolitical developments during the week.  

Investment grade fixed income sectors had negative returns as rates rose across the curve. Municipals returns were flat and US IG returned +0.3%. High Yield bonds returned -0.2% as spreads widened 6bps while bank loans returned +0.3%. The U.S. dollar rose 0.4%. 

The 5-year breakeven inflation expectations fell 2bps to 2.60% (vs. low of 1.88% on Sept 10, 2024); 10-year breakeven inflation expectations rose 6bps to 2.42% (vs. recent low of 2.03% on Sept 10, 2024). For 2026, the market expects between 0 and 1 cut vs. the Fed’s guidance of 1 cut. At year-end 2026, the market expects the Fed Funds rate to be 3.54% vs. the Fed’s guidance of 3.25%-3.5%. 

Key Takeaways 

1. Week Defined by Geopolitical Whipsaw in Middle East 

The week was defined by geopolitical whipsaw as U.S.-Iran tensions swung between diplomatic progress and physical deterioration. The headline was constructive: Trump extended the ceasefire indefinitely. However, the U.S. naval blockade of Iranian ports remained in place, scheduled peace talks were canceled, and questions emerged about a potential Iranian leadership change. 

Why it matters: The diplomatic path forward remains open, but the physical confrontation has not been resolved, and the disruption to oil supply has not been removed. Both factors could continue to impact financial markets. 

2. Oil Prices Rise as Naval Blockade Remains in Place 

Crude oil surged more than +5% on the week, erasing a portion of the prior two weeks' decline, and Brent crude, the international benchmark, rose back above $100. The move was driven entirely by geopolitical developments, and the ceasefire extension did little to lower oil prices. On the economic side, March retail sales showed consumer spending held up despite rising energy costs, a sign of resilient demand. 

Why it matters: The two-week decline in oil prices has offered an encouraging signal that energy-driven inflation pressures might ease. That picture changed this week. The longer oil remains elevated, the greater the risk that energy costs begin to weigh on consumer spending, corporate profit margins, and broader economic activity. Oil prices are one of the most important variables to monitor in the coming months. 

3. S&P 500 Continues to Set New All-Time Highs 

Stocks reached new highs, but the pace of the rally slowed. The S&P 500 and Nasdaq both closed at fresh all-time highs mid-week, supported by the ceasefire extension and a solid start to first-quarter earnings season. Nearly 25% of S&P 500 companies have reported Q1 2026 results, with roughly 80% beating estimates. Even so, the market's appetite for additional risk appeared to pause. Volatility edged higher, and high-yield credit spreads were flat after three consecutive weeks of tightening, a sign that markets are digesting recent gains rather than pressing further. 

Why it matters: The rally remains intact, and the early earnings results are encouraging. However, the pause suggests that the market may need a clearer geopolitical signal, such as a geopolitical resolution or positive diplomatic development, before moving higher. 

4. Treasury Yields Reverse Higher as Oil Prices Rise 

The 2-year Treasury yield gave back nearly half of a three-week decline that had built on ceasefire optimism and falling oil prices. Two factors drove the reversal: the collapse of Iran peace talks and the Senate confirmation hearing for Fed Chair nominee Kevin Warsh, which added uncertainty around the future direction of Federal Reserve leadership. 

Why it matters: Last week's Fed policy forecast suggested the Fed could have room to cut rates later this year if oil prices continued to fall. This week, that conviction softened. With oil reversing higher and Fed leadership in transition, markets are weighing both inflation risk and institutional uncertainty heading into this week's Fed meeting.  We believe the Warsh transition is not an immediate catalyst for rate cuts. Warsh will likely use the holding period to restructure the Fed's communications apparatus before making any significant policy moves, which is a form of hawkishness relative to market expectations. 
 
Warsh is a catalyst for a smaller Fed footprint and an internal battle over the size of the balance sheet. That debate will create a fault line within the FOMC, driving a fractious disagreement over the pace of reduction and introducing a new source of policy uncertainty starting in 2027. A growing Fed balance sheet fueled a liquidity-driven tailwind for financial markets since 2010. If that trend is about to reverse, logic suggests structurally lower returns are ahead. 

5. This Week’s Calendar is Busy 

The main event is the Federal Reserve meeting, which will include Chair Powell's second-to-last press conference. The policy decision is widely expected to be a hold, but Powell's characterization of the inflation and growth outlook will be closely watched. The week also brings a cluster of earnings reports from major technology companies, including Microsoft, Alphabet, Meta, and Amazon, which will offer a window into the state of AI capital spending. Why it matters: The Fed meeting and tech earnings together make next week one of the more consequential on the calendar this quarter. How Powell frames the inflation picture, and whether leading technology companies confirm or temper expectations around AI investment, could set the tone for markets heading into May.