U.S. stocks enter the final week of May, buoyed by strong corporate earnings and enthusiasm for artificial intelligence (AI). However, uncertainty over geopolitical tensions persists. Just one day after reports over the weekend indicated that the U.S. and Iran had "largely agreed" on a memorandum aimed at reopening the Strait of Hormuz, former President Donald Trump publicly cautioned U.S. negotiators "not to rush into a deal." Meanwhile, the Federal Reserve's preferred inflation gauge—the April PCE price index—is set for release this Thursday. Amid the ongoing conflict in Iran, market expectations are that the data will continue to climb, posing the most significant macroeconomic test for U.S. stocks, which have risen for eight consecutive weeks.
**Iran Negotiations: New Complications After "Substantial Agreement"** Signals surrounding U.S.-Iran peace talks have fluctuated repeatedly over the past week, subjecting markets to cycles of hope and disappointment. On Saturday, former U.S. President Donald Trump stated on social media that a memorandum of understanding on peace had "largely completed negotiations," with final details to be finalized and announced soon. He indicated the agreement would include an extended ceasefire, negotiations on Iran's nuclear program within a 60-day effective period, the reopening of the Strait of Hormuz, and the lifting of U.S. blockades on Iranian ports. Pakistan, acting as a mediator, also expressed optimism about recent talks leading to a positive outcome. Previously, U.S. Secretary of State Marco Rubio hinted that progress made in the past 48 hours could lead to a "fully open and toll-free" Strait of Hormuz.
However, the situation cooled abruptly on Sunday. Trump publicly warned U.S. negotiators on social media "not to rush into a deal," emphasizing that "both sides must proceed calmly, get it right, and leave no room for error." He also stressed that U.S. blockades on Iranian ports would remain "fully effective until the agreement is reached, certified, and signed." Iran disputed the notion of a "substantial agreement." Iranian Foreign Ministry spokesperson Nasser Kanaani stated that Tehran is advancing a "framework agreement" covering the main issues needed to end the war, with details to be discussed and a final agreement reached within a reasonable period of 30 to 60 days. Kanaani emphasized that nuclear issues are not part of the current negotiations, and Tehran's immediate core concern is "ending the war on all fronts, including Lebanon."
Reports suggest the proposed draft has sparked division within the U.S. Republican Party, with some Republicans publicly criticizing it as too lenient toward Iran. Senator Ted Cruz called it a "disastrous mistake," while Senate Armed Services Committee Chairman Roger Wicker stated that a 60-day ceasefire would mean "all gains from 'Operation Fury' would be lost." However, Representative Mike Lawler argued that the U.S. administration had successfully "forced the remnants of the Iranian regime into genuine negotiations." In a May 22 interview, UAE Presidential Advisor for Foreign Affairs Anwar Gargash assessed the likelihood of a U.S.-Iran agreement on the Strait of Hormuz at "50%" and bluntly stated that "the Strait of Hormuz must return to its original status as an international waterway," reflecting deep anxiety among Gulf states.
The Strait of Hormuz handles approximately 20% of global oil and liquefied natural gas shipments. Since the U.S.-Israel large-scale strikes on Iran on February 28 and the full outbreak of conflict, the strait has been effectively blockaded, driving up oil prices. The market currently maintains a "wait-and-see" attitude, with investors who were previously burned by buying on agreement rumors and subsequent reversals becoming more cautious.
**Eight-Week Rally for U.S. Stocks: Earnings Drive Persists, but Macro Pressures Mount** Despite headwinds such as rising inflation, climbing U.S. Treasury yields, and the ongoing Middle East conflict, the three major U.S. stock indices recorded gains last week. As of Friday's close, the S&P 500 index rose 0.9% for the week to 7,473.47, marking its eighth consecutive weekly advance—matching the longest winning streak since late 2023. The Dow Jones Industrial Average climbed 2.1% to 50,579.70, setting another record closing high, with the 51,000-point level within sight. The Nasdaq Composite Index gained 0.5% to 26,343.97. U.S. markets are closed on Monday, May 25, for Memorial Day.
The fundamental support for this rally lies in robust corporate earnings. According to FactSet data, first-quarter earnings for S&P 500 components grew approximately 27.7% year-over-year, with about 84% of companies exceeding market expectations—potentially the highest "beat rate" since the second quarter of 2021. Ameriprise Chief Market Strategist Anthony Saglimbene noted that strong corporate earnings have allowed investors to temporarily overlook negative factors such as Treasury yields, oil prices, and the Middle East conflict, but "earnings season is largely over now." Investors are moving past the earnings season, and the macroeconomic environment is taking center stage.
Plante Moran Financial Advisors Chief Investment Officer Jim Baird warned, "Persistent inflation concerns are challenging the bond market. If this continues for some time, it could impose a realistic ceiling on the stock market's upside." Against the backdrop of favorable earnings, market confidence in AI-related spending remains strong. NVIDIA's (NVDA) earnings last week again exceeded expectations, driving sharp gains in shares of several partners. Edward Jones Investment Strategist Angelo Kourkafas said, "NVIDIA's results further reinforce confidence that AI-related spending remains robust."
Meanwhile, UBS Global Wealth Management has raised its year-end 2026 target for the S&P 500 from 7,500 to 7,900, citing intact core "bull market drivers" but noting that oil prices and interest rates remain key pressure points.
**PCE Inflation Preview: 4% Within Reach, Rate Hike Expectations Rise** The most closely watched economic data this week is undoubtedly the U.S. April PCE price index, set for release on Thursday, May 28. As the Fed's official inflation anchor since 2012, the PCE trend will directly influence market judgments on the interest rate path. Market consensus expects the April PCE price index to surge 3.9% year-over-year. This would push inflation more than one percentage point above February's level, marking the largest two-month cumulative increase since late 2021. Even excluding volatile energy and food prices, the so-called core PCE index may accelerate to 3.3% in April, the fastest pace since late 2023.
Previously released April CPI and PPI data both exceeded expectations. Although the current inflation rebound is primarily driven by energy prices, signs of inflation spreading to more areas are emerging: April food price increases expanded noticeably, with upstream costs like fertilizers transmitting to the agricultural sector; airfare prices rose for two consecutive months as airlines continue to pass on fuel costs to consumers; explosive growth in AI-related demand has led to tight global memory chip supply, pushing up prices for personal computers and related hardware components, further increasing inflation stickiness.
According to the latest survey of economists, the U.S. second-quarter PCE price index is now expected to rise 3.9% year-over-year, up from last month's forecast of 3.6%. Economists have raised their full-year inflation expectations for the third consecutive time. The sustained rise in inflation expectations has materially altered market pricing for Fed policy. Futures markets have begun pricing in the possibility of a Fed rate hike this year, whereas at the start of the year, markets were betting on a continued easing path. Minutes from the Fed's April monetary policy meeting showed that most participants emphasized that if inflation remains persistently above 2%, some monetary tightening may be appropriate.
Fed Governor Christopher Waller stated on Friday that he supports clearly communicating that the central bank's next interest rate move is equally likely to be a hike or a cut. In the coming week, several Fed officials, including John Williams, Philip Jefferson, Neel Kashkari, and Alberto Musalem, are scheduled to speak. Investors will closely monitor their remarks to gauge policymakers' concerns about long-term inflation prospects amid ongoing supply chain constraints due to the Middle East conflict.
A latest survey shows that nearly 85% of responding economists predict interest rates will remain unchanged at least through the third quarter of this year, whereas a month ago, more than two-thirds still expected at least one rate cut this year. Nomura has abandoned its call for a rate cut this year, noting that recent data and Fed communications do not support policy easing, while price pressures from the Iran conflict and memory chip shortages are adding to inflationary pressures. Reports indicate that market pricing for at least a 25-basis-point Fed rate hike this year has reached about 58%.
However, nearly 86% of responding economists believe the current energy-driven inflation pressure is temporary, but this view faces challenges. Wilmington Trust Chief Economist Luke Tilley said, "It's like history repeating itself. The Fed and markets worry that surging energy prices will trigger inflation, just as last year they feared tariffs would push up inflation." Some economists warn that with frequent global geopolitical conflicts and supply chain shocks in recent years, similar inflation shocks may become more normalized.
In addition to PCE price data, the Bureau of Economic Analysis report this week will also release personal spending and income figures. These data will provide an initial look at household demand at the start of the second quarter. Economists expect inflation-adjusted real spending to grow modestly, while nominal personal income growth may slow.
**Earnings Season Wraps Up with Focus on Consumer Trends, AI Theme Remains Hot** Earnings season is entering its final stages. After the U.S. market closes on Wednesday, the red-hot semiconductor sector will see earnings from Marvell Technology (MRVL), whose shares have surged 120% year-to-date and are closely watched by the market. Analysts expect its data center infrastructure business revenue to grow 26% year-over-year. Salesforce (CRM), which has not fully benefited from this year's AI boom, will also report earnings on the same day.
Thursday's market focus will shift to the consumer sector, with retailers including Costco (COST), Dell Technologies (DELL), Dollar Tree (DLTR), Best Buy (BBY), and Gap (GAP) set to report results. Against the backdrop of persistently high oil prices eroding consumer purchasing power, investors will closely observe structural changes in consumer spending.
Additionally, the trend of AI-driven layoffs at large tech companies during earnings season warrants attention. Unlike previous cycles where companies won investor favor by cutting costs under the banner of "efficiency improvements," this round of tech giant layoffs is being framed as an "innovation" narrative. Meta (META) CEO Mark Zuckerberg—who won investors' warmest applause in 2023 with his "year of efficiency"—now defines his massive layoffs as an innovative move leading the "next generation." Cloud service provider Cloudflare (NET) executives also claim that "the way of work has fundamentally changed."
Historical experience shows that cost-cutting in the tech industry often receives positive market feedback. However, when layoffs spread from the tech sector to the broader economy, their combined impact on consumer spending and the job market will be a variable the market cannot ignore for long.
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