“I fear not the man who has practiced 10,000 kicks once, but I fear the man who has practiced one kick 10,000 times.” - Bruce Lee

Good evening, 

The “fog of war,” as characterized by Fundstrat Head of Research Tom Lee, took the stock market on a wild ride this week.

The S&P 500 lost 2.1% this week to 6,368.85 points, down for five straight weeks, marking the longest losing streak since the seven-week long stretch ending in May 2022. The Nasdaq composite, meanwhile, entered correction territory, meaning that it has fallen 10% or more from a recent high. It was down 3.2% this week. 

This month, the S&P 500 is on track to decline 7.4%, its worst monthly performance since 2022. 

The week started off with high spirits after the president posted on Monday morning that he had a “very good and productive” conversation with Iran, reversing the declines noted by stock futures over the weekend from concerns about an amped-up war. And it didn’t matter to investors that Iran said it had no wind of such talks because at least it seemed like the president was considering an exit strategy. But as the week progressed, once again investors realized that it’s not so easy to exit the war. On Thursday, the president said he is pausing strikes to allow for negotiations. 

Though the whiplash is annoying, it’s a good reminder that the president cares about the stock market. 

“Today was a reminder that the Trump put comes into play,” Lee said on Monday. 

Lee highlighted that there’s still opportunities available in the market, despite all the red lately.  Tech stocks, for example, are trading at valuations last seen a decade ago, he said. 

“The entire premium that tech stocks have built up has been erased, and that to me, doesn’t make sense,” he said. “All this consistent earnings growth, increasing share of the economy, AI — all that’s been erased. I think that’s why the risk reward for tech is so good.”

Our Chart of the Week has more details: 

He recommends investors buy shares of the Magnificent Seven, which have been performing better than the broader market since the U.S.-Israeli strike on Iran. 

“AI rotation to ‘bullet makers’ is not the end of the Magnificent Seven,” he added. 

Head of Data Science “Tireless” Ken Xuan believes that the end of the war is near. One reason for that is because the president set a date of May 14-15 to meet with Chinese President Xi Jinping. 

“To me, that shows that probably the peak of the drama of conflict in the Middle East is behind us because now he has time to deal with Xi,” Xuan said during our weekly huddle. 

Still, it’s becoming clearer that the impact on the energy markets from the war will take months to resolve. That means that the worry of higher oil prices feeding into inflation might remain a concern for longer than expected, which could change the calculus of the Federal Reserve’s next move. As it is, the Fed is struggling to balance its dual mandate of maximum employment and price stability. They will get a fresh look at the state of the labor market on Friday with the release of the March nonfarm payrolls report. 

Some market participants now believe that the Fed will hike interest rates this year. Xuan doesn’t have that in his base case. 

“I strongly disagree with the consensus that the Fed will hike,” Xuan said. “The best way to understand what the Fed is doing is to understand that they’re talking hawkishly to kind of anchor those long-term inflation expectations.”

Head of Technical Strategy Mark Newton is paying attention to the opposite signs in the market. He pointed out that expectations for where five-year interest rates would be in five years from now have declined, while 1-year break-even inflation rate has surged, suggesting that “the implication is that the Fed will come in to squash inflation by hiking.”

Newton also doesn’t believe that markets are through the worst of the sell-off, in apparent contrast to Xuan and Lee. One big reason for that is because the sentiment hasn’t worsened all that much in the stock market when looking at the JP Morgan Global Equity Sentiment Indicator and the American Association of Individual Investors’ sentiment survey. 

“The bears certainly have cropped up, but the bullish levels are not really showing capitulation,” he said. “My thinking is we need to see some bulls capitulate, and that would be more indicative of a potential low.”

As for buying the dip, he’s still not convinced this is a good time. 

“I think we probably have one more shoe to drop, and if that happens in the next few weeks, I'd be inclined to say, ‘OK, hold your nose and buy,’” he said. “I think we're getting close. I just don't sense that we're there just yet.”

He said that the S&P 500 might not have much support until the 6,230-6,300 area over the next couple of weeks. That level would likely represent a very attractive risk-reward area for equities for the next month.

Elsewhere

The Pentagon is officially making Palantir its primary AI provider after a major dispute with Anthropic over weaponization ethics. While Palantir’s Maven system is already used for identifying battlefield targets, its new status as a "program of record" fast-tracks its use across the entire military. Anthropic’s fallout with the Pentagon led it to being called a "supply chain risk," pushing the company to pursue an injunction stopping the use of the designation. Ironically, Maven actually uses Anthropic’s tech to function, creating a complicated knot for the military to untangle.

According to BlackRock Chief Executive Larry Fink, we are entering an era where staying on the sidelines of the market is no longer just a missed opportunity—it's a risk to one's financial future. He describes AI as the most significant technology since the computer, but warns it will exacerbate inequality. “There’s a real risk artificial intelligence could widen wealth inequality if ownership does not broaden alongside it,” he wrote in his annual shareholder letter.

New Gallup polling reveals a stark decline in American confidence, with only 28% of the public feeling positive about the job market—a massive drop from the 70% seen in 2022. As the White House deals with the economic fallout of the war in Iran, the data shows that while most people believe it’s a terrible time to find work, over half of the workforce is still hunting for better opportunities out of necessity.

Intercontinental Exchange, owner of the NYSE, announced a $600 million investment in Polymarket, continuing the intersection between financial and prediction markets. Though the deal announcement does not provide a valuation estimate, the investment is seen as opening up a potential avenue for stock exchange operator to diversify its revenue stream.

Pernod Ricard and Brown-Forman are in merger discussions. Alcoholic beverage companies are facing slowing sales as consumers cut down on their drinking, so perhaps it makes sense for two struggling giants to merge and seek greater scale. Pernod's brands include Absolut vodka and Jameson whisky, while Brown Forman's offerings include Jack Daniel's whiskeys and Herradura tequila.

And finally: In a historic first-of-its-kind ruling, a Los Angeles jury has found Meta and Google’s YouTube liable for the mental health harms caused by their addictive platform designs. The case was brought by a 20-year-old woman, who argued that features like infinite scrolling and autoplay hooked her as a child, leading to severe depression and body dysmorphia. The jury awarded a total of $6 million—split between $3 million in compensatory damages and $3 million in punitive damages—with Meta ordered to pay 70% of the total. This verdict is being hailed as a "Big Tobacco moment" for tech, potentially opening the floodgates for thousands of similar lawsuits aimed at how social media is engineered.