U.S equities largely shrugged off a stream of often conflicting headlines around the Middle East conflict, as well as a more hawkish-than-expected Federal Reserve meeting, to post solid gains across most major indices. The technology-heavy Nasdaq Composite continued to lead, rising 1.12%, while the S&P 500 advanced 0.91% and the Dow Jones Industrial Average added 0.55%. In fixed income, bonds declined amid heavy issuance, as markets moved to price a more persistent inflation shock linked to the continued closure of the Strait of Hormuz. Across the Atlantic, the pan-European STOXX Europe 600 ended the week broadly flat, edging up 0.10%. Performance was mixed across the region, with Germany’s DAX gaining 0.68% and Italy’s FTSE MIB rising 1.24%, while France’s CAC 40 declined 0.53% and the UK’s FTSE 100 was little changed. In Asia, momentum softened, with Japan’s Nikkei 225 slipping 0.34% and Hong Kong’s Hang Seng falling 0.78%. Looking ahead, earnings season continues at a more measured pace, while attention turns to U.S. nonfarm payrolls next Friday. All of this unfolds against a backdrop of persistent geopolitical tension, with Washington and Tehran no closer to a resolution. As the “Sell in May” narrative comes back into focus, will markets begin to show early signs of fatigue?

A rally on Friday pushed the S&P 500 to a fifth consecutive week of gains — its longest winning streak since 2024 — and to a fresh record, even as the standoff between the U.S. and Iran persisted. The move built on a powerful advance the day before, when equities saw heavy inflows driven by month-end institutional rebalancing. Artificial intelligence beneficiaries were once again among the standout performers, with Intel and Qualcomm all posting double-digit gains on the week. By contrast, the highly anticipated mega-cap earnings releases delivered a more mixed picture. Alphabet and Amazon reached new highs, while Meta Platforms and Microsoft pulled back amid renewed concerns over capital expenditure, with Meta among the weakest performers, down 9.4% on the week. Earnings overall remain supportive, with roughly 82% of S&P 500 companies beating estimates so far this season, above last year’s pace. Yet Goldman Sachs notes that systematic flows from commodity trading advisors are likely to be net sellers of equities in the near term, regardless of the scenario. In Europe, equities stabilized after a volatile week that saw swings of roughly 2.6% from trough to peak, as central bank guidance helped stabilize sentiment. However, elevated oil prices and mixed earnings kept the recovery fragile. Goldman Sachs has raised its 2026 earnings growth forecast for the STOXX Europe 600 to 10%, up from 5%, though still below broader consensus, while Morgan Stanley expects earnings momentum to hold through the season, supported in part by resilience in the energy sector. Brent crude briefly reached a wartime high before pulling back on reports that Tehran had delivered a new proposal to Washington, signaling a willingness to engage in diplomacy under certain conditions. In fixed income, U.S. Treasuries declined across the curve, driven in part by the Federal Reserve’s decision to hold rates unchanged alongside a more divided tone, with three FOMC members dissenting against language suggesting the next move could be a cut. Long-end yields remain under particular scrutiny, with Bank of America strategists describing the 30-year Treasury yield near 5% as a “Maginot line” for markets. The dollar weakened over the week, though the move was largely driven by external factors, notably Japanese intervention in USD/JPY, which pushed the pair sharply lower after trading above the 160 level.

Taking a step back, messaging from both the Federal Reserve and the European Central Bank last week revealed growing divisions within their respective committees, underscoring a shift away from a clean disinflation narrative toward a more complex backdrop where supply shocks could keep rates higher for longer. Markets have begun to reflect that shift, dialing back expectations for cuts and, in some cases, repricing the path toward further tightening. At the same time, the U.S. economy continues to show resilience to the oil shock. Some sectors are even benefiting from the conflict, with trade data next week expected to show a surge in energy exports into April. Activity remains broadly stable, with services still in expansion territory despite some moderation in spending, and little evidence that higher gasoline prices are materially weighing on demand. The labor market also appears to be stabilizing, with payroll data due Friday expected to show modest job growth and only limited deterioration in the unemployment rate, suggesting underlying conditions remain firm. Taken together, the data reinforce the view that, once adjusted for productivity, inflationary pressures remain contained — leaving room for policy easing later in the year and helping to keep the rally alive.

In reality, last week made one thing clear: markets are no longer trading a single narrative, but a stack of them — choosing in real time which one to price. Equities pushed higher even as the ECB struck a more hawkish tone, the Fed delivered a more divided and uncertain message, and Japan intervened in the yen — all while the “NACHO” trade (“Not a Chance Hormuz Opens”) gained traction across energy markets. In any other week, any one of those would have dominated. This time, none did. That tells us that this is an equity story being driven by an AI cycle that, for now, is able to outrun everything else. But that does not make this a healthy rally. Leadership remains concentrated, with AI-adjacent names, semiconductors and mega- cap technology doing most of the heavy lifting. Goldman Sachs has already flagged narrow breadth as a key warning: when a handful of stocks carry the index while the median stock lags, momentum becomes more volatile and drawdowns sharper. Narrow leadership doesn’t kill a rally on its own, but it does make the path ahead more fragile.

In summary, this week did little to resolve the underlying tension between growth, inflation and policy. Instead, markets continued to push higher, reinforced by the latest wave of mega-cap earnings. There are clear signs that parts of the tech complex are beginning to monetize AI investment, but with companies committing to hundreds of billions in capex, the margin for error is rapidly shrinking. That fragility is also visible in performance pressure. Nomura highlights that many active managers remain underexposed to the names driving returns, forcing a continued rotation into momentum winners. Flows reported by EPFR Global are consistent with that pattern: equity funds drew $23 billion, led by the U.S., while defensives were sold and both cash and gold saw outflows. That dynamic can extend the rally beyond what fundamentals alone would justify — but it also raises the risk of sharper rotations if leadership begins to shift. Looking ahead, the next phase is about which narrative takes control. If the AI story continues to deliver, it can keep masking everything else. If it doesn’t, the market will be forced to confront the factors it has so far been willing to look through.