A Risk-On Day Built on Geopolitical Relief
Markets opened in a clearly risk-on posture, and the move makes fundamental sense. The catalyst was a weekend development between the United States and Iran that appears to have produced, at last, something like a peace deal. The specific terms of the agreement are not yet public, but the market reaction is justified regardless. The most important consequence is visible in the oil complex: oil futures are down, with WTI sitting around $80 a barrel and Brent crude also declining. Equity markets respond favorably to falling oil because the war has imposed significant consumer pressure, and seeing a light at the end of that tunnel is meaningful — especially with the Federal Reserve in focus this week.
The timing is notable because Kevin Warsh is taking the helm at the Fed for the first time. This kind of de-escalation news makes his job materially easier in his opening week. Lower oil and reduced geopolitical risk give incoming leadership more room to maneuver.
Oil Relief Is Real but Not Instant
A critical caveat tempers the optimism: relief in oil prices is not an immediate off-ramp. Even though prices are coming down now, the physical flow of oil cannot be redirected with the simple flip of a switch. The system absorbed a genuine supply shock, and unwinding it takes time. A useful analogy is that of a bowling ball working its way through the boa constrictor of the economy — the disruption moves through slowly and visibly.
This situation has now persisted for four months. Even under the best-case scenario, with oil continuing to fall, it will likely take at least another two months for the effects to filter through. The administration is presumably hoping that oil prices stabilize — and, more precisely, that inflation metrics normalize — by roughly the midterm time frame. The direction is positive and encouraging, which is exactly why markets are green this morning, but no one should expect an instantaneous correction.
The Inflation Risk: Watching the Core
Inflation has been stubborn, and recent data has shown an uptick across both CPI and PPI — numbers that are not pleasant to see. A good portion of that pressure has been energy-driven, and importantly, much of the energy inflation has been kept contained within PPI rather than being passed through to the consumer so far.
Is there still a risk of hot inflation for a while longer? Yes, certainly. The hope is that most of the inflationary push is behind us. During the worst stretch, oil was not merely at $100 a barrel but spiked at times to $115 and even $120, before retreating into the $90s. On that basis, the worst is likely behind us. Even so, it would not be surprising if it takes a fair amount of time for the improvement to work its way through the system.
The real concern is the distinction between headline and core inflation. So far, the inflationary pressure has been contained to the headline number — particularly on CPI and PCE. The genuine danger would be if it began to filter down into all of the core metrics. That is the scenario in which consumers would find themselves in more serious trouble.
What Clients Actually Worry About
What is the biggest worry among clients? Cost and inflation. Consumers have been under sustained pressure, and rising costs and inflation tend to be the number-one concern for retirees specifically. While investors naturally want growth and good upside, clients in the retirement phase of life place a high priority on protecting their downside. They need confidence that they can pay their bills month-to-month and keep their financial situation stable. For this population, the pressure of inflation and rising costs is an enormous concern.
What hedge are clients asking about? When it comes to risk mitigation, investors deploy many different strategies, but the fundamental approach favored here is owning quality companies at quality valuations. That combination delivers safety through diversification. These are the core attributes to look for when constructing a hedge, particularly for the retail investor who needs both stability and prudent exposure.
The Tech Sector: Valuations in Context
With the geopolitical off-ramp arriving sooner rather than later, tech is off to the races once again. The natural worry is that the sector emerges from this rally with valuations that are once again too high, especially across the big tech and mega-cap names. The answer depends heavily on where you look.
Nvidia is a compelling case. Despite its enormous size, it trades at roughly 20 times forward earnings — near its 10-year low forward multiple. Over the past decade, the low has been around 18.5 times. A company of Nvidia's caliber trading near the bottom of its own historical valuation range is genuinely attractive.
Microsoft trades at about 21 times forward earnings and sits near its 200-week moving average, which is a constructive technical indicator.
Meta has been somewhat beaten up in this marketplace and within the broader AI economy, yet it appears well positioned. The central issue weighing on Meta is the question of whether its spending is worth it, given how aggressively it is investing.
Nvidia: The Burden of Being a Heavyweight
A recurring observation about Nvidia is that, despite enormous underlying momentum, the stock has found it difficult to move — and part of the explanation is simply its scale. As a company approaching nearly $5 trillion in market capitalization, it is a heavyweight, and heavyweights are hard to move.
There is a structural dynamic at work as well. For Nvidia's price to move meaningfully higher, the move essentially requires a rerating of the company as a whole. Compounding this, hedge fund managers across Wall Street who need to establish a short position tend to pick the biggest, most obvious name in the game — and Nvidia is the easiest target. This persistent shorting pressure has helped keep Nvidia's valuation lower than its leadership would like. Over the long run, however, the outlook on the company is genuinely bullish.
Microsoft: Unfairly Caught in the SaaS Apocalypse
Microsoft got swept up in what amounts to a "SaaS apocalypse," and it was arguably caught up in that selloff unfairly. In a sense, Microsoft has become a victim of its own diversification, given the breadth of verticals across its business.
On the AI question specifically, Wall Street is worried about whether per-seat software costs will come down as a consequence of the AI economy. That concern likely fails to properly underwrite the value Microsoft holds in distribution at the enterprise layer. Microsoft is deeply ingrained in virtually every business. The output from its Build conference and keynote emphasized a steady shift toward the agentic side of computing. It is fair to criticize Copilot in that release, but the deeper strength is distribution. On that basis, Microsoft is poised to be a major winner over the long run in AI — particularly within the business and enterprise space.
AI as a Long-Term Disinflationary Force
How should a portfolio be positioned around the view that AI is a long-term disinflationary force? Thinking about disinflation leads first to the consumer side. An enormous amount of money has been spent in this economy building out data centers, yet the corresponding cost reductions have not yet materialized. Those reductions are expected to arrive once the agentic capabilities and the genuinely powerful reasoning abilities of these machines come fully online.
When you consider what that means for driving costs down and lifting productivity, it becomes easy to build a use case in which, looking forward into the future, AI ultimately drives costs down for consumers. The heavy upfront investment in compute and infrastructure is the price being paid now for a disinflationary payoff later — a dynamic that shapes both the macro outlook and the long-term investment case for the companies building that infrastructure.