The Market Mosaic 4.26.26
Synchronized Rally Ignites Surge in Alternative Allocations.
👋Welcome back to The Market Mosaic, where I gauge the stock market’s next move by looking at macro, technicals, and market internals. I’ll also highlight trade ideas using this analysis.
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Now for this week’s issue…
Uncertainty continues to hang over the Middle East as the U.S. and Iran have yet to announce any major breakthrough in peace talks. At the same time, the flow of energy products flowing through the Strait of Hormuz remains stalled.
Investors also have to contend with a pending leadership change at the Federal Reserve. Kevin Warsh, who is the nominee to replace Fed Chair Jerome Powell, answered questions at his confirmation hearing before the Senate this week.
Warsh pledged to change the way the central bank communicates with the public, while dodging questions on the path of interest rates. The path to chair the Fed also became clearer following a decision by the Department of Justice to drop its investigation into Powell.
Despite the uncertain outlook for energy-driven inflation and monetary policy, investors are rushing back into the stock market. The S&P 500 is holding near record highs over the 7,100 level (chart below).
Semiconductor stocks in particular are leading the way higher, with an ETF tracking the sector posting 18 daily consecutive gains in a row. Intel’s stock had it single best daily gain since 1987 and jumped past the dot-com peak in 2000.
With the S&P back to making record highs, extended market valuations are a cause for concern. But forward earnings estimates are surging higher, providing a key catalyst to keep the rally intact for now.
This week, let’s look at the unusual move in earnings estimates looking ahead and why that’s becoming an important driver of the rally. We’ll also look at an alternative asset allocation portfolio having a banner year and why a big test could be waiting for Warsh.
The Chart Report
With the S&P 500 and Nasdaq back at record highs, that means valuations remain stretched above historical averages and that earnings growth will be critical to support gains in the indexes going forward. While there is significant uncertainty from the ongoing war in the Middle East and surging energy prices, forward earnings estimates are doing something peculiar. Earnings revisions for 2026 are now up approximately 4% since the start of the year (green line in the chart below), which compares to the typical revision that drifts lower based on historical data. With the first quarter reporting season about to pick up, it will be crucial to monitor forward earnings estimates for any changes in trend since the start of the year.
While the surge in the S&P 500 is catching many investors by surprise, the index is following a familiar path following geopolitical conflict. The chart below plots the performance of the S&P leading up to major geopolitical events and the forward returns following conflict. A drawdown just after the emergence of a conflict is typically resolved quickly to the upside. The blue line shows the current path for the S&P following the Iran war, with the index closely tracking historical precedent.
The recovery in the S&P 500 and surge in commodity prices is sending one asset allocation model to its best return since 1933. A “permanent portfolio” consisting of an equal allocation to stocks, bonds, commodities, and cash is currently tracking an annualized gain of 26% this year (chart below). The synchronized rally across various assets classes along with relatively high rates across the yield curve is delivering a boost to the alternative asset allocation, which is having its third best ever relative performance to the traditional 60/40 portfolio of stocks and bonds.
Kevin Warsh was on Capitol Hill for confirmation hearings as part of his nomination to be the next Fed chair. But a major obstacle in his way to the position resided with the Department of Justice and their ongoing investigation into current chair Jerome Powell. But news broke this week that the investigation will be dropped, which clears the way for Warsh to take control. New Fed chairs have a history of being greeted with market volatility. The chart below shows maximum drawdowns for periods following new Fed chairs taking office. The average drawdown is 20% during the year following a new Fed chair.
Heard in the Hub
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Here’s a quick recap of recent alerts, market updates, and educational posts:
The easy money rally has run its course.
The median S&P 500 stock remains in correction.
How to use liquidity to evaluate trading environments.
The price action in Bitcoin is a warning on the outlook.
The fundamental metrics favoring this energy stock setup.
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Trade Idea
YPF SA (YPF)
Massive basing structure going back over a year and recently testing the high end of the range. Series of smaller pullbacks underway since December with the stock forming a MACD hook. I’m watching for a move over $49.
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