The S&P 500 is once again trading around record highs. Yardeni raised his year-end target to 8,250 points, HSBC lifted its target to 7,650 and RBC moved to 7,900. The analyst chorus is getting louder and more bullish by the week. Earnings carry the story: more than 84% of reporting S&P 500 companies are beating estimates, well above the ten-year average.
Beneath the surface, however, a different picture is taking shape. Brent is trading around $107, Iran and the US are stuck in what a senior energy advisor described as "a frozen conflict", and the Strait of Hormuz remains effectively closed. Trump rejected the Iranian counterproposal as "garbage" and stated that the ceasefire is "on life support". These are not the ingredients of a clean rally. And yet equities keep climbing, carried by the belief that things will work out.
That belief carries a price. And that price is becoming more visible in the corners of the market that have no room for optimism.
A rally feeding itself
What we are seeing right now is not a broad macro rally. It is a concentrated move driven by a handful of themes: AI infrastructure, defense and energy producers. Semiconductors remain the engine, with hyperscaler capex stepping higher and multi-year commitments extending into 2027. Defense is benefiting from a multi-year spending cycle. Energy companies are monetising higher oil prices.
But underneath that leadership, breadth is narrowing. Consumer discretionary is lagging, commercial real estate is guiding cautiously, utilities and REITs are feeling the weight of rate sensitivity. The index level masks the reality that an ever smaller group of names is doing the heavy lifting.
That is not unsustainable in itself. Markets can live with narrow leadership longer than many investors expect. But it makes the system more fragile. The moment one of those three pillars stumbles, AI capex that falters, a surprise in defense spending, or oil moving the other way, there is little left to fall back on.
Earnings revisions, for what it is worth, are still coming in above expectations. Yardeni raised his 2026 EPS forecast from $310 to $330. That is a fundamental argument, not a sentiment argument. It is real. The question is how long it stays real if energy and rates keep pushing in the same direction.
Inflation refuses to step aside
April CPI came in at 3.8% year-over-year, above the expected 3.7% and clearly higher than the 3.3% reading in March. Energy accounted for 40% of the increase. Shelter and food contributed as well. The narrative of a steady decline towards the 2% target is under pressure.
The Fed has now held rates at 3.50%-3.75% for three consecutive meetings. Markets are pricing close to a 98% probability that rates remain unchanged in June. The debate has actually shifted: where investors entered 2026 expecting two to four rate cuts, the conversation now openly considers whether the Fed under Kevin Warsh might need to hike again. Goldman Sachs pushed its rate cuts out to December 2026 and March 2027.
This is a meaningful shift. Higher rates mean tighter financial conditions, higher refinancing costs and more sensitive valuations. The bond market has been pricing this for some time: long-dated yields in both the US and the UK have moved to levels not seen in years.
At the same time, the dollar is surprisingly strong. Despite all the talk of de-dollarisation, global stress still pulls dollar liquidity in. Rising yields, strong dollar, persistent geopolitical risk, that is not a balanced cocktail for risk assets over the medium term.
The oil paradox
Something strange is happening in the oil market. When the Strait of Hormuz was closed, roughly 14 million barrels per day disappeared from the system, according to the IEA the largest supply disruption in history. Analysts expected oil to trade at $150 or higher at the outset of the conflict. Today Brent trades around $107.
The math does not add up on paper. On the supply side, around 8 million barrels have been recovered through SPR releases, inventory draws and alternative routing. On the demand side, around 4 million barrels have fallen away through more expensive fuel. The bottom line still shows a 2 million barrel shortfall per day. And yet the price does not adjust higher.
The answer lies in speculative positioning. A large part of the market is unwilling to sit high because it assumes Trump will end the conflict quickly. The ExxonMobil CEO warned last week that the market has not absorbed the full impact yet: tankers that were in transit when the conflict broke out have now been discharged, inventories are running low, and once those buffers are depleted, the price has to adjust.
In other words, the market is pricing in an outcome that does not yet exist. If that outcome does not materialise, the price move is not gradual but abrupt. Saudi Aramco CEO Amin Nasser stated on Monday that the oil market will only normalise in 2027 if the Strait of Hormuz remains closed beyond mid-June. That is not a marginal risk, that is the current baseline.
Political pressure amplifies the problem
Trump has now rejected the Iranian counteroffer and declared that the blockade remains in place until a nuclear deal is signed. At the same time, his approval rating is under pressure and the midterm elections are slowly moving into view. That is a combination that rarely produces caution.
The option of a military reopening of the strait is on the table. Former NATO commander Stavridis estimates the cost at a billion dollars per week and notes that it would require significant resources, including troops on the ground. That changes the story entirely. A reopening by force is not a resolution, it is a new escalation with unpredictable outcomes.
China plays its own role. The upcoming meeting between Trump and Xi could be the catalyst for a breakthrough, or an additional complicating factor. Beijing has, for the first time, legally permitted domestic companies to ignore American sanctions. That is an instrument that can serve as both leverage and a negotiating chip.
What all these pieces share is that they do not produce linear outcomes. They are binary situations: a deal brings immediate relief, no deal brings significant acceleration. Markets struggle with binary.
Where this leaves markets
Equities are trading as if the worst is behind us. The bond market is trading as if the worst is still ahead. Oil sits in between, caught between speculative hope and physical reality. Three markets, three different stories, and not one of them adjusting to the others.
Such divergence can persist for a while. But the longer it lasts, the larger the adjustment when one of the three is forced into motion. Right now, it is the bond market that is imposing the strictest discipline. Rising long-end yields, a strong dollar and sticky inflation are signals that risk assets will eventually have to acknowledge.
Forward-looking analyst targets create a dynamic of their own. When Wall Street prices towards 8,000 or 8,250, an expectation pattern emerges that feeds itself until reality catches up. And reality, in the form of a 3.8% CPI, a Fed that is not moving and a Strait that remains closed, moves more slowly than price.
This is not a market that rewards conviction. It is a market where positioning matters more than direction. The room for error is narrow, the potential move on the wrong positioning is wide. Move with attention and stick to discipline. Don't force anything for the sake of forcing it.
