U.S. stocks have shown signs of overheating after a rapid short-term rise, with potential profit-taking pressure emerging amid high-level volatility. Both the S&P 500 and the technology-heavy Nasdaq Composite closed the week at record highs for the third consecutive session. On the Middle East front, a two-week ceasefire between the U.S. and Iran is nearing its deadline. Whether the two sides can reach a peace agreement will test the sustainability of the recent rebound, with the security of shipping through the Strait of Hormuz remaining a key factor. It remains to be seen whether the ceasefire will be extended beyond April 21.

Growing Expectations for Fed Rate Cuts Several economic indicators were released in the U.S. over the past week. Among the most closely watched was the Producer Price Index (PPI), a measure of upstream costs for final-demand goods and services. On a seasonally adjusted basis, PPI rose 0.5% month-over-month, matching February’s pace, and increased 4% year-over-year—the largest annual gain since February 2023. As anticipated, energy was the primary driver of the increase, while falling food prices and stable service costs helped cushion the impact of rising oil prices. The NFIB Small Business Optimism Index fell 3.0 points to 95.8 in March, hitting an 11-month low. Surveyed businesses cited rising uncertainty, soaring energy costs, and pessimism about profit prospects. The U.S. labor market remained stable, with seasonally adjusted initial jobless claims falling by 11,000 to 207,000. So far this year, claims have stayed at the lower end of the 201,000–230,000 range. Although layoffs remain low, Middle East tensions may be dampening hiring. The latest Fed Beige Book noted that "several districts reported increased demand for temporary or contract workers as businesses remained cautious about committing to permanent hires." The Atlanta Fed’s GDPNow model maintained its latest forecast for first-quarter GDP growth at 1.3%, unchanged from last Friday. Bob Schwartz, senior economist at Oxford Economics, commented that rising energy prices are pushing up inflation, and some of this pressure may spill over into core inflation in the coming months. However, he noted that for this inflationary shock to intensify, it would need to become embedded in higher inflation expectations—which appears unlikely at this stage. He added that inflation expectations remain stable and trend productivity growth remains strong, providing a buffer for the economy. Deutsche Bank projected that, influenced by energy prices, core CPI and core PCE for the fourth quarter of last year would reach 2.7% and 2.9%, respectively. A prolonged oil price shock would pose upside risks to inflation, while further cooling in housing-related inflation and a faster fade in tariff effects would exert downward pressure. Reflecting falling oil prices and shifting inflation expectations, market expectations for Fed monetary policy have tilted toward a higher likelihood of rate cuts. Federal funds rate pricing now implies a 48.5% chance of a cut in October (up from 10%) and a 66% probability in December (up from 26%). Schwartz noted that the economic impact of the Middle East situation depends on two factors: whether the current agreement can be extended beyond the initial 10-day period, and how quickly shipping traffic returns to normal levels. He emphasized that the first point is far from certain and expressed caution regarding a rapid normalization of Strait of Hormuz traffic.

Can the Rally Continue? Last week, the S&P 500 and Nasdaq Composite erased all losses incurred since the onset of Middle East tensions and climbed to new all-time highs, reflecting growing investor optimism. Notably, the S&P 500 has surged more than 12% from its recent low on March 30, marking a remarkable rebound. The Nasdaq Composite has risen for 13 consecutive sessions—its longest winning streak since 1992. Sector performance was mostly positive. According to Dow Jones Market Data, the technology sector led gains among the S&P 500’s 11 sectors, soaring 8.1% for the week. Consumer discretionary and communication services followed with increases of 6.6% and 6.3%, respectively. Real estate and financials also performed strongly, both rising more than 3%, while industrials and healthcare posted modest gains. Four sectors declined, with energy leading losses at 3.5%. Utilities fell 1.7%, and materials and consumer staples also edged lower. The situation in the Strait of Hormuz remains a focal point for markets. Some strategists remain cautious about a full normalization. Doug Bice, global equity strategist at Wells Fargo Investment Institute, noted that in the near term, markets are focused on the free flow of oil but advised maintaining caution, emphasizing that everything still depends on the progress of negotiations. In its market outlook, Charles Schwab noted that despite lingering uncertainty surrounding Middle East tensions, oil prices, and their potential economic impact, markets appear to have concluded that the conflict is over and any oil price shock will be short-lived. However, the firm suggested that markets may have risen too far, too fast, or may be overly optimistic about the smooth resumption of shipping through the Strait of Hormuz. Looking ahead to next week, the firm acknowledged that short-term overbought conditions do not necessarily prevent further gains or even more extreme overbought levels. Still, historical experience suggests that some caution is warranted—especially given the Nasdaq’s longest winning streak in over 30 years. Based on this assessment, a degree of mean reversion is expected at some point next week. Markets could experience a minor pullback due to profit-taking triggered by negative news from Iran, or see post-earnings selling pressure following results from some key companies.