S&P 500: a market in an alternative reality

SP500

Key zone: 7,000 - 7,100

Buy: 7,200 (on strong positive fundamentals); target 7,350-7,500; StopLoss 7,150

Sell: 7,000 (upon a decisive break above the 7,050 level); target 6,800; StopLoss 7,070

Global markets are currently operating under two conflicting logics. The first is reflected in oil, currencies, and fixed income. The second — in equities. And as practice shows, mistakes are more often caused not by a lack of information, but by a narrow view of the market.

• Brent crude has settled above $126, reaching a four-year high;
• yields on 30-year U.S. Treasuries have returned to 5%, with similar levels seen in UK 10-year gilts;
• the Japanese yen has weakened to 160 per dollar.

The argument for an alternative narrative is low volatility: the VIX index is holding near 18, even below pre-crisis levels seen before tensions around the Strait of Hormuz escalated. This comes amid reports of U.S. preparations for potential escalation and Iran’s refusal to reopen the strait for shipping.

According to Goldman Sachs estimates, current oil flows through Hormuz are only about 4% of normal levels. Meanwhile, Polymarket assigns a 52% probability to the strait reopening before the end of June. Just two months ago, such a combination would have triggered a major sell-off.

However, since March 30, the S&P 500 has gained 13%, while bond and commodity markets continue pricing in an inflationary scenario:

• 2-year U.S. Treasury yields rose 11 bps in a single day — the biggest jump in six months;
• markets have almost fully ruled out Fed rate cuts this year;
• the ECB has shifted expectations toward three rate hikes starting in June;
• the latest FOMC meeting showed a rare split (4 vs 8), unseen since 1992.

Central banks are tightening rhetoric due to inflation, with energy prices remaining the key driver.

Another layer of uncertainty is the leadership transition at the Fed. Outgoing Chair Powell claims non-interference in committee decisions, but markets remain skeptical. A potential new chair, Kevin Warsh, would likely face limited room for rate cuts, complicating the political agenda ahead of elections.

Yet equities operate under a different paradigm. The logic is simple: if inflation persists, companies capable of rapidly passing higher costs onto consumers will benefit. This appears to be the scenario currently priced into S&P 500 valuations — not a quick end to the military conflict.

The geopolitical backdrop remains largely unchanged. Today marks the final day the U.S. president can continue military operations without Congressional approval. The likelihood of such approval is minimal, suggesting markets may anticipate an announcement of operational completion — at least in informational terms.

The equity market is ignoring traditional risk signals and pricing in sustained inflation alongside stable corporate earnings. This creates an “alternative reality” effect, where growth continues despite fundamental contradictions.

In the short term, potential de-escalation around Iran may support markets. However, the divergence between classic macro indicators and equity performance remains a key source of risk.

So we act wisely and avoid unnecessary risks.

Profits to y’all!