Fullconductors

Crude: Higher for Longer

Soundbite: Diesel and jet fuel futures hit new highs, and back-month crude is perilously close to new highs. We have clearly broadened out from a one-dimensional market moving just on oil, but are earnings prospects good enough for investors to completely look through bad energy scenarios? Bulls point to a drop in consumption that is not driven by high prices, but by a lack of supply that is constraining consumption, which is positive for the demand outlook. Yet we are concerned that the U.S. perspective is only temporarily shielded from the Gulf supply contraction. Refinery limits could push gas prices up into the summer demand spike.

Goldman just upped their year-end Brent and WTI forecasts on lower Gulf production. Supply shocks are historically met with increased spare capacity from the UAE and Saudi, but their oil is trapped, resulting in an exceptionally severe inventory draw. The consensus is that once the Straits of Hormuz reopens, it will only be a matter of months for supply to recover. Equity markets have adopted this view, but any delays could push oil higher for a longer period than current stock investors anticipate. To add fuel to the fire, sustained high energy prices would likely prompt the Fed to discuss rate hike scenarios.

Putting numbers to this: the total supply loss was 14.5 million barrels per day (mb/d), creating a reversal from a pre-war 2 mb/d surplus to a 10 mb/d deficit forecast to last through June. While Goldman believes that at least three-quarters of that supply deficit clears up by December, keeping Brent around $100, they point out that supply shocks could also resolve themselves through demand destruction if the conflict continues. Under that setting, their Brent forecast is $120. We would add that the Pentagon has said it will take up to six months to completely remove Iranian mines from the Strait, an operation that cannot begin until there is a peaceful resolution.

Oil analysts seem to be converging on the view that a reopening is likely in the next few months, but all warn that significant delays pose a risk. These extended delays physically damage the wells, generating a vicious circle where the longer production is offline, the slower the recovery process. Equity bulls are hopeful that damage to oil fields is nowhere as bad as it is for natural gas, and that the Saudis and the UAE will replenish the deficit. Yet questions remain given the sheer size of the current supply shock.

At the risk of getting too far in the weeds, JP Morgan concluded that “when shut-ins exceed demand by 6x, it’s a structural supply crisis and not a cyclical adjustment.” Morgan’s base outlook is quite similar to Goldman’s, but shut-ins (oil wells that are forced closed by damage) have exceeded their 2 mb/d demand loss figure by six times. This creates an urgent need for a supply rebound that may not be coming fast enough to justify our current high stock valuations.

Color us skeptical. Have we simply put the enormous supply shock in the rear-view mirror, and is that all there is?

Semiconductors: To the Moon

Soundbite: As of Friday’s close, the SOX semiconductor index has been up every day in April, a record streak to yet another all-time high, up 40% in less than a month and registering a gain of 150% since last year. This could signal a broad-based manufacturing boom, but the current move has been driven by data center demand and the AI theme shifting into turbo drive thanks to the growing acceptance of agentic coding including Claude. Average ETF flows were literally off the charts last month as NAAIM institutional exposure and AAII retail sentiment both approached their January highs that coincided with the previous all-time equity index highs. It is imperative to understand that the risk-return landscape has inverted since the JP Morgan collar lows of March 30. Tech weights, especially semiconductors, are beyond full, making for a very top-heavy index.

Importantly, this buying climax coincides with the seasonal peak of the second-year presidential stock market cycle. Adding to a potential selloff, month-end pension rebalancing is slated to bring $23 billion of equity supply, one of the largest programs in recent years. The question is not whether this rocket rally retraces (given that volatility-target funds and CTAs have completed the bulk of their buying), but what happens after the retrace. A three-wave bounce that fails to make new highs then breaks below the prior low is problematic. An impulsive bounce suggests new highs are likely.

Against this background, earnings breadth is strong as analysts’ profit expectations continue to notch higher. This sets up a positive playbook resulting in new highs for both semiconductors and the broad indices, assuming energy prices stay at reasonable levels to cap inflation expectations and support consumption and employment. However, we cannot ignore that semiconductors are now almost 15% of U.S. stock market capitalization, twice their share at the peak of the tech bubble. High concentrations are unstable and tend to not play out well.

Bulls would describe this as a regime shift, while we believe investors have merely pushed valuations to a right-tail extreme. If we are correct, then value will be found after a mean-reversion selloff. We are on the lookout.

Europe Is Keen on US Midterms

Soundbite: The pendulum started in motion with Mark Carney’s speech about the rupture across the global world order. The Canadian Prime Minister discussed the need to create new networks of alliances to avoid overdependence on the U.S. or China. The question now is whether we can recover from this loss of trust. Our allies are already forging security and trade deals that could become long-term relationships. Reading between the lines from European leaders’ statements, we believe they are not ready to completely dissolve the generations-old relationship with the U.S., but they are watching the Midterm elections closely to see if America will set itself straight from their perspective.

We are concerned that if Congress remains split, falling short of a resounding blue wave, many European countries could accelerate efforts to distance themselves from the U.S. That is why the Midterm elections are pivotal, perhaps more so for the state of our alliances than for America itself.

Polling is conforming to historical patterns, suggesting Democrats regain the House. There are questions regarding the Senate, however, as Democrats must hold their current incumbency while also taking four seats in traditional red states. If Republicans retain the Senate, tariff and foreign policy could remain intact. Unfortunately, those are the areas in which our longtime partners seek reform.

While domestic investors may look at gridlock as positive for risk assets, we are afraid such thinking is shortsighted and superficial. If global investors and trading partners continue to lose confidence in the reliability of U.S. policy, we risk wider trade and budget deficits. These changes will not come overnight, but as we look back in a year’s time, the shifts should be apparent.

This will not be easy for Republicans who are fighting a sour mood; polling on the cost of living is a major headache, and as we wrote earlier, energy prices could stay elevated into the midterms. However, the party does have an enormous financial advantage, with $600 million raised to help shape their message and re-energize their base. The GOP could succeed by turning elections into targeted attacks on individual Democratic candidates to avoid a blanket vote against Trump. Despite the huge financial leverage they enjoy nationally, Republicans may be at a disadvantage in key midterm contests because those localized financial advantages may favor the Dems in key races.

It is far from a clear picture, but the outcome has severe global consequences.

What to Look for This Week

(All times E.S.T.)

1. Wednesday, April 29 at 2:00 p.m. The Federal Open Market Committee announces no rate change, but more importantly, at 2:30 p.m. is Chair Powell’s last press conference. No data can change their decision, and the latest inflation data will come out the following day. Thursday, April 30 at 8:30 a.m., March Personal Consumption Expenditure Price Index will be released. We will see if the March data matches the recent string of 0.4% monthly increases, which it has registered for each of the last three months, a 10-month high.
2. Tuesday, April 28 at 8:15 a.m. ADP Weekly Employment Change for the week ending April 11. The series has not only been rising for the past five weeks but has been accelerating. Later on Tuesday at 10:00 a.m., Conference Board Consumer Confidence for April. That series has also been firming year-to-date. 
3. Friday, May 1 at 10:00 a.m. Multivariate Core Trend Inflation estimate for March. This is the best overall inflation gauge for the Fed from our perspective, far better than Kevin Warsh’s median inflation approach. The degree of diffusion of oil prices into other areas will be seen in the NY Fed’s measure of the PCE price index components. This indicator from the New York Fed measures trend inflation by determining whether inflation dynamics are dominated by a broad-based trend, or whether an increase is expected to be short lived because it is only concentrated in a few sectors.

FOMC Voters Speaking: The big news is Chair Powell’s last press conference on Wednesday, April 29. No Fed speakers pre-FOMC thanks to the blackout period, but the first FOMC voter set to speak is NY Fed President John Willimams just the day before the Friday, May 8 Nonfarm Payroll report. The next FOMC meeting after this week is not scheduled until June 16-17, which should be Kevin Warsh’s maiden meeting as incoming Chair. Also: Monday, April 27 at 11:00 p.m. BoJ rate decision is announced, expected to hold at 0.75%. The Bank of Canada has a similar announcement at 8:45 a.m. on Wednesday, Fed Day. The ECB announces at 8:45 a.m. on Thursday. Of the three, we will watch the BoJ for signs of its next hike, and we will be looking at the ECB’s report regarding the staff view of energy’s evolving impact.

Earnings: Wednesday, April 29 afternoon jubilee: MSFT, AMZN, GOOG, and META on Wednesday after market. Tuesday, April 28 after market, Visa Inc. (V) reports earnings and will provide a look into consumption. Corning Incorporated (GLW) reports before market on Tuesday, and optics stocks have been on a tear. GLW has quadrupled in a year, but some analysts are wary due to valuation, so we will take note of the tone if there is any disappointing news voiced on the earnings call. Thursday, April 30, Mastercard Incorporated (MA) reports before market as a follow-up to Visa, as does Caterpillar Inc. (CAT) for perspective on global capex. After market, Apple Inc. (AAPL) reports on Thursday. Friday, May 1 before market Exxon Mobil Corporation (XOM) could discuss the energy outlook.

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By Peter Corey

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