- Trump rejected a counterproposal from Iran.
- The US tech sector has performed better than expected, with AI optimism still intact.
- Experts believe headline inflation will jump from 3.3% to 3.7%.
US equities hit fresh record highs on Monday amid optimism over a solid earnings season. The new high came despite ongoing tensions in the Middle East and stalled negotiations. Meanwhile, traders are cautiously awaiting the US consumer inflation report and the vote on the Fed Chair nomination later on Tuesday.
The S&P 500 soared to new highs on Monday, continuing a rally that has puzzled many amid ongoing geopolitical tensions. Stocks have gained despite the uncertainty surrounding the war in Iran. Ideally, the war should have hurt risk appetite, sending equities lower. At the same time, the rally in oil prices and subsequent inflation concerns should prompt investors to seek safer assets like bonds.
Over the weekend, Trump rejected a counterproposal from Iran, saying he did not like it. This came after Iran rejected a US peace proposal. Negotiations have stalled as the two countries battle over the opening of the Strait of Hormuz, an end to the US blockade on Iranian ports and Iran’s nuclear program.
Analysts, however, have pointed to robust earnings reports from US companies as the reason for this rally. Notably, the tech sector has performed better than expected, with AI optimism still intact. Reports from the Magnificent Seven have shown solid growth in the sector, with analysts saying the AI bubble will not burst any time soon.
Meanwhile, market participants are also watching incoming economic data for clues about the state of the economy. Equities rallied on Friday after the US released a positive employment report. The economy added 115,000 new jobs in April, above the estimate of 65,000. A strong labor sector shows the economy is growing and consumers have money in their pockets to spend, which is bullish for stocks.
US inflation estimates (Source: Federal Reserve Bank of New York)
However, if inflation is also rising, the Fed is forced to tighten monetary policy. High borrowing costs are detrimental to businesses and would therefore weigh on equities. Traders will assess the CPI report coming out later in the day. Experts believe headline inflation will jump from 3.3% to 3.7%. They will also pay attention to the Fed Chair nomination, which will usher in a new leader for the central bank.
