Well, let's get to the big story breakdown.
We are seeing a market rally for equities and oil plunge as Iran's foreign minister declares on quote that the passage for all commercial vessels through the Strait of Hormuz is completely open for the remaining period of the ceasefire in Lebanon and Trump just reacted on Truth Social with a celebratory.
And not surprisingly, we are seeing oil futures plunge.
The June contract for WTI is sliding by about 9% and Brent is down by about 9% this morning.
And joining me as we discuss what's happening is Matt Orton, Chief Market Strategist at Raymond James Investment Management.
Great to have you on the show.
Who knew that this is what we'd be talking about on this Friday morning.
But here we are, and the markets are set to rally in terms of equities, and this does come on the heels of the record close for the Nasdaq as well as the S&P.
Do you think this will hold?
Hey, good morning, Rey.
It's always nice to get good news on a Friday before the market opens.
And I, I do think there's going to be durability to this because we've already seen the markets rally into what was expected to be just an extension of the ceasefire.
So the fact that I think even more uncertainty and more of the worst left tail scenarios being taken off the table.
I think that bodes very well for the market to really start to react to what matters the most, which is earnings season.
And the earnings that we've had so far from a lot of the banks and capital market companies that reported this week have been quite strong, and we're going to start to move into regionals next week and technology companies the week after.
I think the setup is very, very constructive, where if the fundamentals come in good, as I'm expecting, I think that the rally will also continue to hold.
Yes, and a lot of areas that we're keeping our eyes on this earnings season.
We did hear from the big banks this week and one word that did really stand out to me was that word resiliency when it comes to the US economy.
So given that we heard this announcement from Iran this morning and we are seeing oil prices pull back, does it ease your concerns regarding inflation?
You know, Rami, I think that's the one question that we're going to see play out as we do hear from company management teams is what is the impact of the cost, the increases in costs that we may have seen as a result of the energy spike on their business, and is there any durability to that?
Because while, you know, non-core inflation did jump, I think what we've heard from a lot of the Fed speakers is that They're looking through it or they're hoping to be able to look through it.
And so now that we have this good news coming out of Iran and that we're seeing oil prices finally start to ease and hopefully more sustainably ease, I think there will be validity to that.
And so I think that keeps the Fed with the ability to cut rates later on this year, and I think that'll help keep the anchored inflation expectations that we've seen firmly.
Place to allow the Fed to also continue that easing cycle.
So again, I think it's going to be idiosyncratic at the company level, but again, that's another reason why I continue to really like technology companies and especially those that are associated with the big CapE investments that continue to happen because they're largely exempt from a lot of the issues and the increases that we've had from energy over the past month.
And I'm glad that you brought up tech because tech has been snapped up over the last few weeks and is setting up the Nasdaq 100 for its best winning streak since 2017.
We will have to keep an eye on where we open this morning and where we close on this Friday, but the real test is imminent with six of the 7 reporting over the next two weeks.
Do you think this rally has the earnings power to actually sustain itself.
I do, Ray.
I think that we will see really strong earnings from these companies.
We saw it last quarter too, and really the market negatively reacted to the large CapE increases that came from the likes of Alphabet and Amazon.
But Amazon has finally started to rally, and I expect, given especially what Andy Jasse wrote in his annual shareholder letter, I think we should expect that we're going to get some monetization from the spending these companies are making.
And as a result of that, That should feed through not only to the earnings, but also the profit margins of these companies.
So I think that's going to be what investors are really looking for when you start to get earnings reports, as well as especially from the down chain semiconductor companies, how well is the supply demand function going to continue the backlogs for them and can they execute on the backlogs.
Have without perhaps having to make significant investments and erode those margins.
So that's what I'm looking for, but I'm still very optimistic on the complex as a whole, and I do think names like an Amazon and Alphabet, those are two of my favorite names just because their businesses are so well diversified and they do have the ability to really push their profit margins, which is, I think, what investors are looking for right now.
Yes, and Matt, finally, before I let you go, you've been highlighting opportunities across tech, but you're also pointing out this massive historical divergence that we've been seeing between semis and software.
So can you tell us why AI cap beneficiaries, the hardware makers, are still your preferred play when it comes to the sustainable revenue growth in the long term.
Yeah, I think the challenge with software right now, while it's a, it's too hard to call a bottom, it looks like that might be taking place right now, but I can, I know what amount of money is actually being spent and invested in the semiconductor complex, and that makes it a lot more attractive than trying to guess which software companies may or may not be most adversely affected.
Because of artificial intelligence, I do think, Remy, that the market has overreacted overall to the impact of software and AI, and you're seeing a number of software companies form joint ventures with the big LLM providers.
But to me, if you, if you want to look at software, cybersecurity, I think, is the place to look because those are companies, large CTOs are not going to be outsourcing cyber.
Cybersecurity to startups or to large language models, they want entrenched enterprise players to do it.
So that might be the area in software to perhaps look for bottom fishing, but the durability on the semiconductor side and the fact that we can see continued increases in capex that benefit them, that's why you've seen that rally extend so far and why I think it can continue to extend going forward.
And very quickly, Matt, since US stock futures are set to open higher by at least 0.8%, we are currently looking at the S&P 500 set to open around the 7130 level.
But in the short term, what levels are you paying attention to?
So I, I'm paying attention to in the short term, really, if the S&P 500 does start to fall back, if it fills in maybe some of the gaps that it has from a technical perspective, if we can hold on to say 6900, 6850, and then rally off of that, should there be a pullback, I think that's a very healthy sign for the market overall.
Price target coming into this year was 7750.
I haven't changed that through all of this geopolitical turmoil over the past couple of weeks because the earnings story hasn't changed.
And as long as that remains in place, I think dips are viable and investors should be focusing on buying long term secular growth winners when they're given the opportunity to do so.
Well Matt, we will have to leave it there for today, but as always, great talking to you.
Thank you so much for joining us on this Friday morning.
Thanks.
