The Catalyst: A U.S.-Iran Agreement
Markets are extending the gains seen late last week, driven by news that broke over the weekend regarding an agreement between the United States and Iran. The development was first signaled publicly by the prime minister of Pakistan, who posted about it on Twitter/X before broader confirmation. A formal signing of the deal is anticipated by Friday.
Even though the prior trading week was quite volatile — particularly early on — all four major U.S. indices finished higher. The S&P 500 rose 7%, the NASDAQ gained over 2%, and the Russell climbed more than 3.8%. The weekend news is squarely positive for markets, pushing money back into risk-on assets.
How Much Was Already Priced In?
A central question now is how much of this good news was already baked into markets. The S&P 500 was set to open only about one percent below its recent all-time highs. Throughout the prior week, the prevailing daily narrative had been reassuring: that the situation would resolve, that the Strait of Hormuz would reopen, and that crude oil would fall back down — all positive for equities.
The counterfactual is instructive. Had the Strait of Hormuz actually closed, with energy prices rallying across the globe and inflation starting to rise as a result, a reasonable expectation would have been a 5% to 10% pullback in the S&P 500. That pullback never materialized, which strongly suggests markets had already discounted a favorable outcome. Determining exactly how much was pre-priced is the next question investors must answer.
Crude Oil: Falling, But Not Instantly
Crude oil traded below $80 a barrel overnight, dipping below $79 — the first time it had done so since mid-April (April 17th). This decline materially eases the job of the incoming Fed chair, Kevin Warsh, by relieving the inflationary pressure that energy prices had been generating.
The view is that conditions will return to normal, but the off-ramp will not be especially speedy, which is why prices still sit around the $80 level rather than collapsing immediately. Several factors will stretch out the timeline:
- Refilling strategic reserves. Many countries have depleted their strategic petroleum reserves and will need to refill them. The speed at which the U.S. and other nations can replenish these reserves is a key variable. The hope that crude would pop back below $70 a barrel immediately upon the deal's signing on Friday is likely too optimistic; it will take more time than markets may have anticipated, though prices should eventually get there.
- Rising production. Global production is expected to start increasing once the situation stabilizes.
- New reserve capacity. Beyond refilling existing reserves, countries are likely to begin building additional strategic reserve facilities — new storage areas to hold more oil as a buffer against future geopolitical flare-ups. This precautionary stockpiling could actually lengthen the timeline for prices to fully normalize, because it sustains demand for oil even after the immediate crisis passes.
The benefit of falling crude is not only domestic. Overseas markets had been punished more severely than U.S. markets during the tensions, because those economies rely more heavily on the flow of crude through the Strait of Hormuz and saw their energy prices spike higher. As a result, there is now a large bounce-back in global equities, especially in countries dependent on that flow of oil.
Semiconductors Surge
With the return of the risk-on trade, the semiconductor sector jumped off to the races. Names and sectors that had been negatively impacted by geopolitical risk are rebounding. Several firms issued bullish calls:
- Morgan Stanley raised price targets on Western Digital and Seagate.
- TD Cowen issued a positive note on Micron.
AMD and Intel had already shown a nice bounce late last week. Many chip-related names proved relatively resilient through the turmoil, including SanDisk, Micron, Western Digital, Seagate Technology, and semiconductor-equipment makers such as ASML and Lam Research.
Nvidia as the Next Opportunity
Nvidia stands out as a name worth watching. It settled Friday down more than 13% from its recent highs, hitting the key $200-per-share level, and settled around $205, with shares set to open just below $209. Despite its strong growth rate, Nvidia had been lagging its competitors in the recent run. Yet on a valuation basis its multiple is relatively low compared with Intel and AMD. Given that combination of a depressed valuation and a high growth rate, Nvidia may be the next stock to attract bullish analyst calls and a potential resurgence.
SpaceX Goes Public
SpaceX shares gained more ground in the pre-market. The hype is being fueled by weekend commentary from Elon Musk, who projected that the company could see a trillion dollars in revenue by 2030, and over a trillion dollars by 2031 (an initial misstatement of "a billion" was corrected to "a trillion").
The stock surged 19.2% on its first day of trading on Friday, with the full first day of trading completing today, and shares trading above $170. The options market is expected to begin trading potentially as soon as tomorrow morning — notably faster than the typical couple of weeks most newly public names wait before options become available. This early options availability could pique additional interest in the name, though it might also draw some volume away from the underlying stock itself.
The trading volume underscores intense investor demand. SpaceX traded over 10 million shares in the pre-market. For context, the heaviest pre-market volume names are typically Nvidia, Apple, and AMD — yet Nvidia had traded only about 3.3 million shares, meaning SpaceX's volume was more than triple Nvidia's. SpaceX is likely to remain at the forefront of investor attention for a while.
Merger Activity: Fox Acquires Roku
In a deal evoking the old "Merger Monday" tradition, Fox is acquiring Roku — a multi-billion-dollar transaction reflecting the shifting media landscape. The key terms and considerations:
- Price and value. The deal values Roku at $160 per share, representing a $22 billion enterprise value.
- Deal structure. It is a cash-and-stock transaction. Fox will pay $96 in cash plus 0.9693 shares of Fox Class A common stock. Based on a reference price of $66.03, the stock component is valued at roughly $64 per Roku share.
- Muted price reaction. The stock had been trading around $145 before the announcement. Although the deal is valued at $160, Roku only got a modest pop rather than the larger move one would expect for a takeover target.
- Analyst skepticism. A JP Morgan analyst was skeptical that Roku's founder and CEO, Anthony Wood, would sell out. Roku also received a downgrade over the weekend out of a separate firm.
- Deal certainty. The transaction has been approved by both boards, a positive sign. There is a $1.24 billion breakup fee if the deal does not go through.
- Regulatory risk. If completed, the combined entity would be the third-biggest network by viewer eyeballs, which could raise regulatory concerns. That said, the Paramount–Warner Bros. Discovery deal recently went through, indicating regulators have been allowing M&A activity in this space. Regulators will likely have something to say about the Fox-Roku combination. On balance, the deal is a clear benefit for Roku.
The Week Ahead
The calendar is heavy with economic data and a key central bank decision:
- Regional manufacturing data from the Empire State and Philly Fed surveys.
- Retail sales, expected to be up about 0.5%. This figure reflects that, even with inflation present, the consumer is still spending. The number may come in a little lighter because crude oil was above $100 a barrel just a couple of weeks ago, creating inflationary headwinds for consumers.
- Housing data, including starts and permits.
- The Federal Reserve meeting on Wednesday. No rate change is expected at this decision. Even after the U.S.-Iran resolution, there remains roughly a 50% expectation of a rate hike by the end of December. However, if crude oil prices continue to fall, that will likely dent expectations for any rate movement.
Warsh's Easier Task
Falling crude makes the job of incoming Fed chair Kevin Warsh considerably easier heading into his first press conference Wednesday afternoon. With inflationary pressure easing, he does not have to project as much concern about inflation. He can frame the recent inflation spike as a one-time blip, arguing that crude oil prices will come down fast, that this will immediately help inflation, and that month-over-month inflation numbers will fall quickly — a narrative that helps reset concerns about inflation and potential rate hikes.
He also does not need to dwell much on the labor market. With a 4.3% unemployment rate — essentially full employment — and positive non-farm payroll data over the last few months, jobs are a benefit rather than a worry for him.
With earnings season essentially over, the focus this week falls squarely on the economic data and the Fed meeting.