The market can't make up its mind. On the one hand, investors are impressed by corporate earnings — roughly 80% of S&P 500 companies that have reported for Q1 beat profit estimates. On the other hand, it is becoming clear that the end of the Middle East conflict is not on the horizon as it seemed a week ago. Donald Trump has ordered strikes on any ships laying mines in the Strait of Hormuz, and Israel is prepared to escalate.

Fear has not disappeared, and it showed up in the selling of yesterday's leaders. The Magnificent Seven, which led the S&P 500 to new record highs, are now being actively sold. Investors need only the smallest pretext to exit long positions: Tesla's jump in AI spending to $25 billion — three times its 2026 level — knocked the stock down 3.6%. Microsoft slipped on voluntary buyback reports, Meta fell on layoff news, and IBM disappointed investors with updated revenue guidance.

S&P 500 dynamics

A report showing the PMI rising to a three-month high of 52 in April did not rescue the market. That print outperformed European and Asian peers and briefly returned the narrative of US exceptionalism. There is an active inventory buildup by industrial firms, a pattern also seen ahead of the large tariffs the White House put in place on Liberation Day of America in April 2025. That episode showed the pickup in business activity can be transitory.

Investors were more alarmed by the PMI price subindex jumping to an 11-month high. That suggests accelerating inflation. The Fed may be forced to keep interest rates high — or even raise them — at the expense of growth. Don't count on a central bank safety net even if GDP starts to cool significantly. That's bad news for US equities.

Donald Trump is doing his best to prop up stocks, flagging any signal of de-escalation. He said the ceasefire between Israel and Lebanon will be extended for three weeks and the White House will do whatever it can to get Beirut to settle the Hezbollah issue.

In my view, retail investors' buy-the-dip strategy remains working, but the market is increasingly skeptical about a quick end to the geopolitical conflict. As a result, yesterday's leaders — the Magnificent Seven — are the first to be sold, and investors are seizing any excuse to initiate shorts.

Technically, the S&P 500 printed a bar with a long lower shadow on the daily chart. That pattern normally signals bear weakness and provides a basis for buying off the high near 7,145. However, failure by bulls to consolidate above that level would flip the picture. Selling on breaks of the support levels at 7,100 and 7,060 would then be the appropriate short-term strategy.