Preview of this week: Changes in the US-Iran agreement, core PCE in April may see the largest increase in over two years. Can the US stock market continue its eight-day rise and overcome the double challenge of "inflation + geopolitics"?

In the resonance of strong earnings reports and the artificial intelligence (AI) craze, the US stock market entered the last week of May. However, just a day after news broke that both the US and Iran had "basically agreed" on a memorandum to reopen the Strait of Hormuz, President Trump publicly warned US negotiators "not to rush into a deal" over the weekend, casting uncertainty over the situation of GEO Group Inc while negotiations continue. Meanwhile, the most important inflation indicator for the Federal Reserve - the April PCE price index - will be released this Thursday, and with the impact of the Iran conflict, the market generally expects this data to continue climbing, presenting the most severe macroeconomic test for the US stock market, which has been rising for eight consecutive weeks. Iran Negotiations: Variability after "Basic Agreement" Signals regarding US-Iran negotiations have fluctuated several times in the past week, leading to a cycle of "hope-disappointment" in the market. Last Saturday, US President Trump stated on social media that a memorandum of understanding on peace was "basically complete," with final details to be announced soon, including extending the ceasefire, negotiating the Iranian nuclear program within a 60-day timeframe, reopening the Strait of Hormuz, and lifting the US blockade on Iranian ports. Pakistan, as a mediator, also expressed optimism about recent negotiations. Earlier, US Secretary of State Pompeo also suggested progress made in the past 48 hours could lead to "completely open and toll-free" passage through the Strait of Hormuz. However, the situation turned cold abruptly on Sunday. Trump publicly warned US negotiators on social media "not to rush into a deal," cautioning that both sides must proceed cautiously and not make any mistakes. He emphasized that the US blockade on Iranian ports will remain "fully effective until an agreement is reached, certified, and signed". Iran, on the other hand, expressed objections to the claim of "basic agreement." Iranian Foreign Ministry spokesperson Baqai disputed this, saying that Iran is working on a "framework agreement" covering key issues necessary to end the war, and that discussions on details will take place within a reasonable period of 30 to 60 days to reach a final agreement. Baqai stressed that the nuclear issue is not on the current negotiation agenda, and Tehran's current core concern is to "end the war on all fronts, including Lebanon". It has been reported that the proposed draft agreement has caused a split within the US Republican Party, with some Republicans openly criticizing its leniency towards Iran. Senator Ted Cruz publicly stated that it would be a "disastrous mistake"; Senate Armed Services Committee Chairman Roger Wicker said that a 60-day ceasefire would mean all the gains of the "Maximum Pressure Campaign" would be lost. However, Congressman Mike Lauler believes that the US government has successfully "forced the remnants of the Iranian regime to engage in real negotiations". UAE President's Foreign Affairs Advisor Garcesh, in an interview on May 22, assessed the likelihood of a US-Iran agreement on the Strait of Hormuz at "50%" and bluntly stated that the Strait of Hormuz must return to its original status as an international waterway, reflecting deep anxiety among Gulf countries about the situation. The Strait of Hormuz carries about 20% of global oil and liquefied natural gas shipments and has been effectively closed since the US launched a major strike against Iran on February 28, leading to a surge in oil prices. The market is currently in a "see it to believe it" wait-and-see attitude, with investors who have been burned by buying on rumors of agreements and then reversing course becoming more cautious. US stocks up for eight weeks in a row, profit drivers still on but macro pressures emerging Despite facing multiple headwinds such as rising inflation, surging US bond yields, and continued conflict in the Middle East, the three major US indices posted gains last week. As of the close of last Friday, the S&P 500 closed at 7,473.47, up 0.9% for the week, achieving eight consecutive weeks of gains, tying the record for the longest consecutive gain since the end of 2023; the Dow Jones Industrial Average rose 2.1% to 50,579.70, reaching a new closing high, with the 51,000 mark within sight; the Nasdaq Composite Index closed at 26,343.97, up 0.5% for the week. Memorial Day in the US is on Monday, May 25th, so the US stock market will be closed for the day. The fundamental support for this round of gains lies in strong corporate earnings. According to FactSet data, S&P 500 companies saw a year-over-year profit growth rate of about 27.7% in the first quarter, with about 84% of companies outperforming market expectations, expected to achieve the highest "beat rate" since the second quarter of 2021. Ameriprise's chief market strategist, Sagleyben, pointed out that strong corporate earnings have allowed investors to temporarily overlook negative factors such as rising US bond yields, oil prices, and the conflict in the Middle East, but now that the earnings season is basically over, investors are stepping out of it, and the macro environment is beginning to take a more central role. Plante Moran Financial Advisors' CIO Bell warned that "the continuing rise in inflation concerns is challenging the bond market, and if this situation continues for a while, it could set a realistic ceiling on stock market gains." Against the backdrop of improving earnings, the market's confidence in AI-related spending remains strong. The latest earnings report from NVIDIA Corporation (NVDA.US) last week once again exceeded market expectations, driving up stock prices of multiple partner companies. Edward Jones investment strategy analyst Wei said, "NVIDIA Corporation's performance further strengthens market confidence in strong AI-related spending." At the same time, UBS Group AG's global wealth management has raised its year-end target for the S&P 500 index from 7,500 to 7,900, believing that the core "bull market drivers" remain intact, but also pointing out that oil prices and interest rates are still major pressure points. PCE Inflation Outlook: 4% is in sight, rate hike expectations rising The most anticipated economic data this week is undoubtedly the US April PCE price index, which will be released on Thursday, May 28th. As the official inflation anchor established by the Federal Reserve since 2012, the trend of the PCE will directly impact market expectations for the rate path. The market generally expects the April PCE price index to rise by 3.9% year-on-year. This would put the inflation rate more than one percentage point higher than in February, marking the largest two-month cumulative increase since the end of 2021. Even excluding the highly volatile energy and food prices, the so-called core PCE index could also accelerate to 3.3% in April, the fastest pace since the end of 2023. Previous releases of April CPI and PPI data exceeded expectations, and although this rebound in inflation has been driven by energy prices, signs of inflation spreading to more areas have already appeared: significant increases in food prices in April, upstream costs such as fertilizers transmitting to the agriculture sector; airfare prices rising for two consecutive months, airlines continuing to pass on fuel costs to consumers; a surge in demand for AI-related products causing global shortages of storage chips, pushing up prices of personal computers and related hardware components, further exacerbating sticky inflation. According to the latest survey of economists, it is currently expected that the second-quarter PCE price index in the US will rise by 3.9% year-on-year, higher than the 3.6% predicted last month, and economists have raised their annual inflation expectations for the third time in a row. The continued uptick in inflation expectations has substantially changed the market's pricing of Federal Reserve policy. Futures markets have begun to factor in the possibility of a rate hike by the Fed this year, whereas at the beginning of the year, the market was betting on a path of rate cuts. The minutes of the Federal Open Market Committee's April policy meeting showed that most officials emphasized that if the inflation rate remains above 2%, it may be appropriate to take some form of monetary tightening. Federal Reserve Governor Waller publicly stated last Friday that he supported sending a clear signal - that the central bank's next interest rate action, whether it be a rate hike or a rate cut, is equally possible. Over the next week, several Fed officials, including John Williams, Philip Jefferson, Neil Kashkari, and Alberto Mussalem, are scheduled to speak, and investors will closely watch their remarks to assess whether policymakers are concerned about the long-term inflation outlook amid ongoing supply chain constraints due to the conflict in the Middle East. A recent survey showed that nearly 85% of economists interviewed predict that interest rates will remain unchanged at least until the third quarter of this year, whereas a month ago, over two-thirds of those surveyed expected at least one rate cut this year. Nomura Securities has abandoned its forecast for rate cuts this year, noting that recent data and Federal Reserve statements do not support further easing of policy, while price pressures from the Iran conflict and shortages of storage chips are also adding to the mix. Reports indicate that the market is currently pricing in about a 58% probability of at least a 25-basis-point rate hike by the Federal Reserve this year. However, nearly 86% of the economists surveyed believe that the energy-driven inflation pressure currently being experienced is temporary, although this assessment is now being challenged. Wilmington Trust's chief economist, Tilly, said, "It's like history repeating itself. The Fed and the market are worried that soaring energy prices will lead to inflation, just as they were worried last year that tariffs would push up inflation." Some economists have warned that with frequent political conflicts and supply chain disruptions in the global economy in recent years, similar inflation fluctuations may become more normalized. In addition to the PCE price data, the US Bureau of Economic Analysis will also release personal income and spending data this week. These data will provide an initial observation of household demand in the early part of the second quarter. Economists expect real spending adjusted for inflation to grow moderately, while nominal income growth is expected to slow down. Ending with a focus on consumer trends, AI theme remains hot The earnings season is entering its final stages. After the market close on Wednesday, Marvell Technology, Inc. (MRVL.US) in the red-hot semiconductor sector will report its earnings, with a stock price that has surged 120% since the beginning of the year, analysts expecting a 26% year-on-year increase in revenue from its data center infrastructure business. Salesforce, Inc. (CRM.US), which has not fully benefited from this year's AI craze, will also report its performance on the same day. Thursday will see the market's focus shift to the consumer sector, as retail giants such as Costco Wholesale (COST.US), Dell Technologies, Inc. Class C (DELL.US), Dollar Tree, Inc. (DLTR.US), Best Buy Co., Inc. (BBY.US), and Gap (GPS.US) will issue their report cards. Against the backdrop of high oil prices eroding consumer purchasing power, investors will closely watch for structural changes in consumer spending. Additionally, during the earnings season, the trend of large tech companies driving layoffs with AI remains noteworthy. Unlike in other industries where layoffs are justified by "reducing costs and improving efficiency," this round of tech giants' layoffs has been framed as an innovative move towards leading the "next generation". Meta's CEO Zuckerberg - who received enthusiastic applause from investors in 2023 for his "Year of Efficiency" - now defines the company's large-scale layoffs as a move to lead the "next generation" of innovation. Executives at cloud service provider Cloudflare (NET.US) have also claimed that "the way we work has fundamentally changed". Historical experience has shown that cost reductions in the tech industry often receive positive feedback from the market, but when layoffs from the tech industry spread to a broader economic sector, the comprehensive impact on consumer spending and the job market will be a variable that the market cannot ignore in the long term.