If someone had said two months ago that the Strait of Hormuz would be closed through the end of April, Wall Street analysts would have immediately sketched a bearish scenario for US equities. In fact, the S&P 500 has repeatedly set new record highs and is behaving as if the Middle East conflict were over — unlike other markets that are signaling trouble ahead for the global economy. Just look at Brent trading above $120 per barrel.

Oil and S&P 500 performance

Investors seem to be shrugging off the oil crisis. They are buying into strong corporate results and loading up on market leaders. The Magnificent Seven have rallied by more than 20% from the March lows. Their earnings are expected to rise by about 19% in Q1 and 25% in Q2 — numbers that swell the army of bulls. An AAII survey shows retail bullishness in the equity market has outnumbered bears for the first time since February 12.

Everyone talks about FOMO — Fear of Missing Out — but it is really greed. No one wants to be the only one not making money when everyone else is profiting.

However, when the market is deaf to bad news and bullish positioning is stretched, there is a real risk that some negative headline will finally trigger disappointment. That's what happened with OpenAI — the Wall Street Journal reported it missed revenue and user forecasts, and related names such as Oracle, CoreWeave, and SoftBank came under pressure. If even the Magnificent Seven disappoint, the S&P 500 risks stepping off a cliff.

While equities largely ignore the Middle East factor, the Fed cannot. Jerome Powell says the US labor market has stabilized and inflation has not peaked. Because of the geopolitical shock, FOMC officials cannot confidently forecast what comes next — so the best policy is to keep the federal funds rate at a comfortable level.

Market projections for Fed rates

Powell's comments, together with the rise in dissenters to four — a level not seen since 1992 — led futures markets to cut the odds of Fed easing and raise the chance of further tightening. That pushed Treasury yields higher and forced the S&P 500 to pull back.

Kevin Warsh's narrow Senate confirmation (13-11) is less market-moving than Powell's intention to remain on the Fed's board after May 15 as a governor. That outcome could complicate a new Fed chair's ability to execute the overhaul he has been promising, or to deliver on President Donald Trump's wish for interest rate cuts.

Technically, the S&P 500 printed two consecutive doji bars on the daily chart, indicating a sign of uncertainty. The battle for fair value at 7,130 is not over. Resume buying the broad index only above 7,150. Building short positions would become appropriate below 7,105.