Fed's hawkish stance regains market recognition! Barclays: Oil prices and AI risks still make it hard to say U.S. stocks have fully stabilized.

Notice that the market's understanding of the Fed's determination to fight inflation has become clearer, which gives investors a reason to be bullish; however, oil prices and AI-related risks still prevent investors from going all in. The Fed successfully rebuilt its credibility last week, with hawkish signals showing it is not behind the curve while stopping short of signaling an aggressive rate-hike cycle. Although this was initially enough to calm the market, sentiment remained tense on Fridaythe 10-year Treasury yield once again tested 5%, and the S&P 500 fluctuated between gains and losses. Although oil prices have pulled back somewhat, Brent crude is still trading above $100 a barrel. Barclays strategists led by Emmanuel Cau said: "Until energy-related inflationary pressures ease, it is hard to see rates and the stock market fully stabilize. Still, the positive development is that the Fed's independence and credibility have been reaffirmed, which provides clarity on its policy reaction function." The Fed's decision can be seen as a "clearing the fog" event. Investors' cautious shift before the policy meeting shows they are far from complacentthere are clear signs that they have reduced exposure while increasing hedges. Friday's large quarterly options expiration also largely reset options positioning. Manish Kabra, strategist at France's Industrial Bank, said: "With strong earnings growth, controlled credit spreads, and a subdued VIX, U.S. equity fundamentals remain supportive, which keeps us constructive on the S&P 500 beyond short-term volatility." The yield curve remains a key signal, and as long as inversion is avoided, Kabra expects the benchmark index to reach 8,000 by year-end, albeit with some volatility along the way. Although the prospect of a year-end rally remains very much alive, the path to it may not be smooth. Diesel prices are signaling higher inflation ahead; unless the Iran war can be resolved quickly and thereby significantly lower oil prices, central banks may have no choice but to turn more hawkish. Diesel Prices and Inflation According to swap market pricing, there will be three more rate hikes by the end of July. All eyes will be on a potential "bond shock"the 10-year yield breaking above 5% is making Treasuries increasingly attractive. However, as long as economic and earnings growth remain resilient, investors may still be reluctant to leave the stock market and instead continue to broaden their risk exposure. The Bank of America strategist team led by Jared Woodard has become more cautious, saying that given expectations for slower earnings growth next year, current positioning is still too bullish. They said that projected growth of 10%15% in 2027 means the ISM manufacturing index needs to stay above 53. They said "it is not yet time to rotate into defensive sectors, but quality, value, and yield-oriented assets look more prudent." The market has become more skeptical about AI spending and the future returns on that investment. This casts a shadow over the earnings outlook across the entire AI beneficiary chain. At the same time, rotation is occurring within the technology sectorsoftware is strengthening again, while semiconductors have largely stalled over the past two months and become increasingly volatile. U.S. Stocks and Earnings Expectations Diverge S&P 500 valuations have fallen sharply, and the benchmark index is currently trading only slightly above its long-term average. Although this "de-rating" stems more from a sharp upward revision in earnings expectations, the recent pullback shows that investors are unwilling to pay a premium for growthwhether at the index level or the sector level. If cautious sentiment persists in the short term, an earnings season that beats expectations in a few weeks could revive market sentiment and risk appetite. Daniela Hathorn, senior market analyst at Capital.com, said: "This resilience shows that investors are distinguishing between 'high rates driven by persistent inflation' and 'a growth outlook undermined by deteriorating fundamentals.' For now, the latter has not yet become the dominant concern."