Trump Stages an Iran Retreat The regime gets financial relief to reopen Hormuz and hold more nuclear talks.

The WSJ Editorial Board (my emphasis)

President Trump is touting his latest cease-fire deal with Iran as peace in our time, but the world is more likely to see it as a strategic retreat short of achieving his war aims. To reopen the Strait of Hormuz, Mr. Trump is accepting Iran’s promises merely to negotiate over its nuclear program.

(…) we’ve supported the President’s Iran policy. We’ve done so because a nuclear Iran would be an existential threat, and because we want Presidents to succeed when they go to war ().

(…) The result isn’t “Obama deal 2.0” because, unlike in 2015, Iran’s key nuclear facilities are in rubble and its enrichment of uranium has been halted for the first time in 20 years. The media critics and Democrats who now savage the President would have stood by while a nuclear bomb became a fait accompli, as in North Korea.

But there’s no denying that Mr. Trump is retreating from his main goals as political pressure has built at home and finishing the job requires greater military risk. (…) Mr. Trump simply didn’t want to endure higher oil prices for longer. This is his choice, not a strategic imperative. (…)

The U.S. blockade will end, as Iran de-mines the Strait on a timetable so traffic can be unrestricted. This seems to be Mr. Trump’s main goal, which will mean lower gasoline prices before the midterm elections. But Tehran says Hormuz won’t return to the status quo ante, and it claims it will charge “fees” not tolls, as if that’s more than a semantic difference.

The full memorandum of understanding text hasn’t been released, and Mr. Trump says some of it is “a little conceptual.” Which is the problem. It would defer most matters of the nuclear program to 60 more days of talks, with oil and other sanctions relief along the way in exchange for diplomatic progress.

This linkage is crucial, but pushing off the most difficult nuclear issues in talks with “dishonorable people” who don’t deal “in good faith,” as the President called them on Friday, doesn’t inspire confidence. (…)

Meanwhile, allowing oil exports will rescue the regime financially, and resuming sanctions enforcement won’t be easy when Iran can threaten the deal—and the Strait—in reply. Granting the regime access to billions of dollars in frozen funds before nuclear negotiations would be another bailout. Mr. Trump’s talk of investing in Iran suggests he’s making the Barack Obama mistake of thinking the revolutionary regime wants Iran to be a normal country. There’s no evidence it does.

The deal also includes no Iranian commitments on its missiles and terror proxies. These will be put off to “regional discussions” from which no one expects much. This poses risks to Israel from Hezbollah, which the deal could protect in Lebanon, as well as to the Gulf Arab states that bore the brunt of Iran’s attacks. An irony of this deal is that the Gulf states will need greater U.S. defense commitments if Iran is allowed to rebuild its missile arsenal—or they will make their own accommodations to Iran.

The biggest risk is if Mr. Trump sees this deal as a de facto partnership with Iran’s regime. Like Mr. Obama, he might overlook violations to strike the final deal or preserve it once it is signed. The people of Iran, whom Mr. Trump promised to help, would be the big losers.

Iran’s new leaders are likely to conclude that Mr. Trump has no desire for more conflict, and they will negotiate accordingly. Congress should scrutinize any final agreement Mr. Trump makes with Iran—and reject it if it props up a regime that still says “death to America.”

The Guardian:

(…) Of a dozen analysts and experts consulted by the Guardian since the news of a potential end to hostilities broke at the weekend, not one suggested the interim deal to be signed on Friday by representatives of Iran and the US would be any more than a temporary solution.

“It’s just a big Band-Aid and future conflict is like to come at some point,” said Neil Quilliam, a Middle East expert at London’s Chatham House. (…)

The interim deal now agreed does little more than commit both sides to further talks, while obliging Washington to lift its naval blockade of Iran and making Tehran allow free passage to all shipping in the strait of Hormuz, which usually carries a fifth of the world’s oil and liquid gas supplies but was blocked by Iran early in the war.

To the great displeasure of Israel, a ceasefire has been imposed once again in Lebanon as part of the interim deal and appears for the moment to be holding.

But such ceasefires count for little these days, said several experts, pointing to Gaza as an example, where almost 1,000 Palestinians have been killed since Donald Trump brokered an end to the war there last year. Israel has occupied more than 60% of the territory, Hamas has not given up its weapons, and there has been almost no progress towards a projected second phase of the deal, let alone the third, which was to have brought a massive reconstruction effort.

“Gaza is a case in point. The deal there didn’t contend with the past: the war crimes that had been committed. Nor the present: how to disarm Hamas. Nor the future: a pathway to a viable Palestinian state and a resolution of the conflict,” said Alia Brahimi at the Atlantic Council in Washington. “It’s almost as if … you can use the cover of a ceasefire to continue to achieve your aims, including military ones.”

But this was not possible in the Gulf, Brahimi said, because the strategic geography was different. (…)

The sharpest shock, however, is being felt in the Sunni Arab Gulf states, where the stability behind decades of economic growth and growing diplomatic heft has been sharply challenged. (…)

Washington’s clear unwillingness to accept significant losses, months of potential economic pain or domestic dissatisfaction send a clear message.

“A ‘superpower’ that is not ready to bear 100 casualties is not a superpower,” said Orbach. (…)

“The realisation that they can’t rely on the US is the point of consensus but otherwise [Gulf states] have all got different views of the best strategy going forward,” Hellyer said. “The Arab world has important and legitimate grievances with how Iran projects power and influence and none of these are being addressed.” (…)

“We know that Hormuz can be closed again, the Iranians have carried out strikes on Gulf states, and we have seen that whatever Israel and the US can do, Iran will take it. All the previous thresholds have been passed now.”

• Trump declares US-Iran peace deal ‘all signed’ as G7 leaders battle to tie up loose ends 
• Vance says details of US-Iran agreement still to be worked out amid scepticism from Republicans Senate Republicans say there are many unanswered questions about the deal and question inclusion of funds for Iran
• “President Trump knows this regime stalls and uses talks to buy time. He will not allow it,” according to a document seen by Bloomberg. “The pressure that brought Iran to the table stays fully loaded, and every option is still on the table.”

As to the “dishonorable people” who don’t deal “in good faith”, the WSJ should make a list of the numerous landmark international treaties, multilateral agreements, and organizations Trump has unilaterally withdrawn the United States from.

Stocks Have Even More Room to Fly if Hormuz Reopens

Front page of the WSJ:

(…) The latest Middle East developments added to the ledger of optimistic news and capped the market’s best three-session stretch since the May 2025 tariff de-escalation with China. Wednesday’s readout on lower inflation, followed by Friday’s blockbuster stock debut by Elon Musk’s SpaceX, had left investors feeling good about stocks heading into the weekend. (…)

“The market is interpreting this as the economy is going to get stronger,” said Joseph Brusuelas, chief economist at RSM. (…)

• “A potential US–Iran agreement could catalyze a broad risk-on impulse across equities, supported by strong fundamentals,” Andrew Tyler, the bank’s head of global market intelligence, wrote in a Monday note.9Bloomberg)

The economy needs to get stronger fundamentals if one believes the most recent Fed Beige Book which compiles anecdotes from business contacts across the US. From the June 3 report: (my emphasis)

Weak labor market:

• “Employment continued to decline somewhat. Wage inflation held steady at a modest pace—typical of its long-run average. Contacts reported less upward wage pressures over the period, but a few contacts shared that some staff are requesting wage increases because of higher fuel prices. Generally, firms’ expectations for future wage and compensation cost inflation remained steady” (Philadelphia)
• “Employment in the Fifth District was unchanged in the recent period. Some firms reported improvement in labor availability.” (Richmond)
• “Employment levels in the District were flat to slightly down over the reporting period as most firms continued to keep head counts even or adjust downward through attrition.” (Atlanta)
• “Employment overall was mostly flat during the reporting period. Wage growth remained modest in the service sector but moderate in manufacturing. A services contact noted some relief in terms of pay demands from job candidates. Labor costs for homebuilders remained flat or declined due to reduced work volume in the single-family housing market” (Dallas)
• “Labor market conditions have shown little to no change in the Tenth District, with employment remaining stable and wages increasing modestly.” (Kansas City)
• “Employment levels were generally unchanged, with most employers holding head counts flat and hiring selectively. Wages rose slightly.” (San Francisco)
• “Wage growth eased somewhat and remained modest.” (New York)
• “Wage growth has been moderate.” (St. Louis)
• “On balance, wage pressures remained moderate. Meanwhile, across sectors, multiple contacts noted easing wage pressures amid cooling labor demand. One construction contact noted that employees were ‘nervous and stressed’ and believed employees were reluctant to ‘risk’ leaving for higher-paying opportunities.” (Cleveland)
• “Wage growth was modest to moderate, with some signs of softening.” (Minneapolis)

Very different from what the last BLS employment report suggested, in line with my own analysis (see Soccer Punch on June 8 and on June 10).

Weak consumer demand:

• “(…) consumer-facing businesses reported decreased confidence.” (Boston)
• “Retailers (nonauto) reported a modest decline in sales over the current period, after sales held steady last period.” (Philadelphia)
• “Consumer spending declined slightly in recent weeks. Many retailers reported that higher fuel costs and related inflation had further dampened consumer spending, leading to decreased sales across various retail sectors including convenience and grocery stores, auto dealerships, and restaurants. One national retailer noted that consumers have become ‘extremely price sensitive’. Another contact noted an uptick in credit card use among customers, a situation which they believed to be a sign of financial stress.” (Cleveland)
• “Consumer spending grew at a modest pace. (…) retailers and other consumer-facing businesses noted continued financial stress among middle- and lower-income households. Persistent price sensitivity contributed to slower restaurant traffic, increased promotional activity, and constrained demand even for lower-priced discretionary services. New auto sales were below expectations amid elevated MSRPs, interest rates, and gas prices.” (Atlanta)
• “Luxury travel remained resilient, while more budget-conscious segments experienced a pullback. Additionally, groups and business travelers shortened their stays to manage costs.” (Atlanta)
• “Consumer spending was flat since the last report.” (Minneapolis)
• “(…) consumer-facing firms continued to report softer demand and margin compression. […] Consumer-facing contacts described growing behavioral adjustments among middle-income households, including reduced frequency and lower per visit spending at sit-down restaurants. One contact noted that ‘middle-income households are squeezing more life out of every dollar before deciding to spend it.’” (Kansas City)

• “Retail sales weakened over the reporting period. Auto sales softened further in April and May, with dealerships experiencing a significant slowdown in customer traffic that they partly attributed to high gasoline prices and the resulting pullback in non-essential spending.” (Dallas)

• “Retail sales were roughly flat over the reporting period.” (San Francisco)
• “On the consumer side, one banker mentioned that credit card applications increased as consumers covered essential purchases like gasoline and groceries.” (Cleveland)

Inflation vs profit margins:

• “Output prices rose slightly on average, although many firms left prices unchanged. Input prices increased modestly overall, but some contacts reported significant cost pressures.” (Boston)
• “Most contacts did not plan to raise their output prices in the near term, even though many were concerned that cost pressures linked to the Middle East conflict could persist for a while.” (Boston)
  “Firms continued to report moderate increases in prices received for their own goods and services. However, a dichotomy has emerged. Increases in prices received by consumer-facing firms have held steady at about 2.0 percent for the past six months.” (Philadelphia)
  “Most contacts across many sectors reported a reluctance to raise prices, citing consumer price sensitivity and softening demand.” (Philadelphia)

US Manufacturing Output Stalls for the First Time This Year

US manufacturing production stalled in May after four months of gains as a drop in chemical and petroleum output masked ongoing strength in categories tied to the data center boom.

Factory output was little changed last month after an upwardly revised 0.7% advance in April, Federal Reserve data out Monday showed. The median estimate in a Bloomberg survey of economists called for a 0.3% advance.

The data showed a split between durable goods manufacturing, which continued to advance, and nondurable goods manufacturing, which was dragged down by declines in chemical and petroleum products. Output of synthetic dyes and pigments dropped 5.5% over the last three months, possibly reflecting supply-chain problems created by the war. (…)

“But far from representing a manufacturing renaissance, we estimate that factory output increased only in about one-third of categories.” (…)

Separate data Monday showed factory activity in New York state expanded only modestly in June after a strong advance in May. An index of future selling prices rose to the highest level since 2022, “suggesting that firms widely expect to raise their prices over the next six months,” according to the Federal Reserve Bank of New York report.

Goldman Sachs: “recent inflation readings and corporate commentary have signaled the risk to profit margins from input cost pressures. Our top-down macro model for the median S&P 500 company points to limited margin expansion through 2027.”

Note how the 18x median P/E, while lower than the aggregate P/E is still historically high. Here’s the composition of the median P/E:

From various GS recent write-ups:

• “From a macro perspective, slowing economic growth and rising interest rates put pressure on equity valuations, but elevated corporate profitability helps justify elevated multiples.”
• “From a bottom-up perspective, much of the earnings tied to AI investment spending warrants a below-average multiple. Compositionally, the Memory stocks driving a large share of S&P 500 earnings growth this year typically trade at low valuation multiples due to the cyclicality of their earnings. More broadly, earnings driven by a temporary investment boom should boost current equity valuations far less than earnings expected to be generated indefinitely. While some investors believe the AI investment boom is likely to last long enough that the associated earnings should be treated as secular, rather than cyclical, profit streams, enough investors remain skeptical that a major increase in valuation multiples seems unlikely.”
• “The persistent gap between earnings and cash flows for some of the largest tech stocks should continue to weigh on their earnings multiples as well. The mega-cap hyperscalers AMZN, GOOGL, META, and MSFT trade at a collective P/E of 24x, near the low end of their range during the past decade, but at a price/FCF multiple greater than 150x. While last quarter’s reports appeared to give investors incremental confidence in the likely returns to hyperscaler capex spending, the likelihood of continued capital intensity in coming years suggests uncertainty around long-term future free cash flows will remain elevated.”
• “The outlook for AI investment spending and earnings creates two-way risk to valuation multiples. While valuation multiples for many semiconductor companies have recently expanded, valuations in other parts of the AI infrastructure complex reflect a healthy skepticism regarding the persistence of current earnings strength. As the processes of AI build-out and AI adoption continue, a widening pool of companies perceived to be future winners will likely enjoy large boosts to their valuations, but it seems likely that many others will experience declining valuations as they are affected by AI disruption risk.”
• “The biggest question for the valuations of most stocks in the market is the impact of AI on long-term earnings growth, but that question is unlikely to be resolved any time soon. One consequence is that near-term earnings will likely continue to be the primary driver of near-term equity returns. Most of the current value of an equity is attributable to earnings far in the future. The uncertainty surrounding which companies will experience long-term earnings uplifts from AI helps explain the practical focus of most investors on the near-term earnings impact from AI, even if the focus on near-term earnings creates the risk that investors overvalue the likely long-term earnings benefits of some AI infrastructure stocks.”

Understand?

Energy Shortages Loom Despite Peace Deal

John Dizard ia a veteran financial journalist and columnist known for his in-depth analysis of global macro investing, commodities, and currency markets, most notably for his 21-year tenure at the Financial Times. This is an excerpt from a long interview by Chris Whalen of the Institutional Risk Analyst. Instructive on what’s going on below the surface.

(…) We already have diesel prices that are going to be going up. If not hyperbolically, you know, very, very aggressively. And in the case of the Group III lubricants and even Group II lubricants that I’ve been obsessing about, we have an availability problem starting now.

Consider high-end lubricating oil. You take what’s called a base oil, which comes from a refinery, and then you put in additives for, say, winter or to avoid corrosion and oxidation. But they’re simply not there.

The shortages are hitting the formulators, the blenders right now. They just simply can’t get supplies of high-end lubricating oil. It’ll hit consumers over a lack of availability by the end of this month or beginning of next month.

Group III base oil is already, when you can get it, it’s at least $10 a gallon, but really, it’s on allocation. (…)

The diesel price increases that have happened so far are enough to increase prices all kinds of consumer goods already. That will now accelerate over the summer. (…)

The U.S. has become highly dependent on imported lubricants. For the higher end lubricants, Group III. as they’re called, or Group IV, the U.S. imports about 70% of its requirements. Of that. 40%, between 40 and 50% has come—- until March—- from the Gulf, from refiners in the Gulf, and about 30% has come from South Korea.

Neither of them are shipping product to the United States now. The Koreans have redirected their production to either domestic use and domestic OEMs, or maybe to some Korean OEM assemblers in the States.

The Gulf producers simply aren’t producing lubricants and other refined products. It’s almost as if the Iranians knew what the precise pressure point to strike because they knocked them all out. The Iranians seem to be better informed than the US government.

Let’s say that Trump’s peace deal sticks, will this solve the supply problem? No.

We’re going to be on allocation this year and into 2027. The trouble is that nobody we know— at the supplier level— is receiving any guidance from Washington. There’s no coordination of how that’s to be done. But the shortfall in supply is so severe, it looks as though it could impact the auto manufacturers as well.

These high-end lubricating oils are required for hybrid engines and many other products. For CVT transmissions, for compressor lubricant. For turbine lubricant. Aircraft engines. Where you have aircraft, where you have high temperatures, high pressures, continuous use. (…)

Production [of lubricants] has actually been reduced in the past couple of months globally, even after the knockout of the Gulf suppliers, because refiners have seen such a rapid increase in diesel prices that they committed to producing diesel and jet fuel rather than other products. The Koreans, for example, committed their feedstock supplies to producing diesel rather than producing lubricants. (…)

Diesel and jet fuel are both going to be problems. The government and the Trump administration has been taking credit for our high oil exports. Those export numbers include both oil and oil products. We’ve been exporting not only our excess sweet light crude and condensate from shale oil. We’ve also been exporting our inventories of diesel and diesel, and jet fuel in particular. (…)

You can’t even really start on rebuilding facilities like, say, Shell’s gas-to-liquids synthetic lubricant plant in Qatar, or repairing the Bahrain refinery or the Adnoc’s Abu Dhabi refinery, until you know the missile and drone attacks have really stopped. The Gulf States have set up— you know, warehousing for parts, and they’ve done surveys, they’ve done ordered parts, but to really start repairing these vast plants, they can’t even start yet. It’s at least a $50 billion to $60 billion repair bill. Again, it’s almost as if the Iranians knew more about our oil supply and our, you know, our oil product supply chain than the Trump Administration.

(…) what was really destroyed in the Gulf, it’s not just a matter of escorting ships to the Strait of Hormuz. It’s the disruption of the productive plant. And that’s the problem.

The Korean refiners can get up and running again with maybe four months delay. But the Gulf plants are offline until they get fixed. I think that supply disruptions of fuel and lubricants is going to be an acute issue going into the Fall elections. (…)

BTW:

but:

Chinese Economy Stalls as Spending, Investment Drop to Covid-Era Levels

Retail sales declined 0.6% last month from a year ago, posting a worse-than-forecast drop that was their first fall since the reopening from Covid lockdowns in late 2022.

Home prices fell at a quicker pace in May and fixed-asset investment shrank a deeper-than-expected 4.1% in the first five months from a year ago, according to data released by the National Bureau of Statistics on Tuesday.

In contrast to weakness on the demand side, industrial production climbed 4.5%, up from 4.1% in April and slightly better than forecast. The surveyed urban jobless rate eased to 5.1%. (…)

 

An export boom driven by artificial intelligence has become a new source of economic imbalance in China, lifting production as domestic consumer spending sags under the weight of a housing crisis and a fragile jobs market.

But without stronger demand at home, the economy is at risk of a deeper slowdown even as the US-Iran deal to reopen the Strait of Hormuz holds out the promise of stabilizing global shipping and energy prices. (…)

The services production index, which inched up to 4.4% on year in May, has a stronger correlation with the pattern of growth in gross domestic product than retail sales, which comprised mostly goods, according to Yu Song, chief China economist at UBS Securities. Inconsistency in the fixed-asset investment data that became apparent last year also mean it might exaggerate the weakness, he said. (…)

Within investment, private capital expenditure slumped 7.1% in the first five months of 2026 from a year ago, the worst pace since 2020. Manufacturing investment declined for the first time in six years.

Further evidence emerged indicating a growing divergence in the economy. Investment in high-tech industries expanded 4.5%, with capital expenditure of semiconductor and lithium battery makers up 11% and 25%, respectively.

NBS spokesman Fu Linghui attributed the slump in investment and retail sales to factors including heavy rainfall. Fu also pointed to last year’s high level of spending driven by subsidies as well as the economy’s transition to new growth drivers. (…)

Car purchases, which make up about 8% of the overall figure, plunged 16% in May from a year ago. Excluding autos, retail sales grew 1.1% in May.

Sales of home appliances as well as construction and decoration materials also contracted at a double-digit pace.

A faster fall in home prices last month doesn’t bode well for consumer sentiment. Both new and second-hand homes declined in price at a quicker pace compared with April. (…)

The spurt of export growth this year has still been sufficient to keep China’s economy from cooling off too much. A global investment supercycle in artificial intelligence is driving up prices and demand for hardware made by the world’s manufacturing powerhouse.

Outbound shipments soared in May at their fastest pace in three months. Chips and computers contributed to about half the growth in both exports and imports, with overseas sales of semiconductors soaring 111%. (…)

The latest China Beige Book foresaw the slowdown: “China’s economy slowed across the board in April with investment resuming declines while retail sales and industrial output fell short of forecasts, underscoring the economy’s vulnerability in the face of a global energy crisis.”

SpaceX’s IPO was just the start

The IPO on Friday was just the beginning — over the next days and weeks, Wall Street is launching all kinds of ways to invest in the company and speculate on the direction of its stock price.

On Sunday night, Asian investors — mostly asleep on IPO launch day — started buying, pushing up the stock price in after-hours trading.

• Then yesterday, the leveraged ETFs launched.
• Today, SpaceX options are set to begin trading. Those give investors the ability to make leveraged bets on which way the stock moves.
• And then, as we’ve reported, there will be the inclusion in stock indexes in the coming days and weeks.

This includes a lot of fanfare and product launches for an IPO — it’s not typical.

More ways to make money also means that there are more ways to lose money. All these products amplify risks in the market.

The stock closed at $192.46 yesterday and is now up nearly 43% from its initial offer price of $135. (Axios)

Trump Leaves the Hard Part for Later in Long-Awaited Iran Deal

The provisional agreement announced by the two sides on Sunday night — President Donald Trump’s 80th birthday — leaves a narrow window of 60 days to negotiate issues around Iran’s nuclear program that bedeviled his predecessors for years. (…)

Already, differences were emerging between the two sides in what may have actually been achieved, while the simmering conflict between Israel and Lebanon could also still lead to a breakdown.

Trump says this initial deal amounts to the start of a process that will lead to peace in the region. Skeptics argue it may end up being nothing more than a temporary reprieve given it’s not clear either side is ready to compromise on the thorniest issues — how much economic relief to give Iran, what to do about its nuclear program and how to address its ballistic missile program.

Adding to the uncertainty is a lack of trust between the US and Iran, stoked by US suspicions that Tehran wants to reconstitute its nuclear program. (…)

Also unresolved are issues that Iran hawks in the US have demanded answers to for years. They include the fate of Iran’s ballistic missile program and its support for proxy groups such as Hezbollah and Hamas. There is no indication the subsequent negotiations will even address those issues. (…)

“Iran has been very pragmatic on how they approach all of this. They realize Israel is going to try to derail this,” said Brett Erickson, a sanctions expert and managing principal at Obsidian Risk Advisors. “Trump will need to rein in Netanyahu or make increasing concessions throughout coming days to incentivize Iran to restrain itself.” (…)

• Trump settles for a truce of convenience with Iran

About a week into the US war against Iran, Donald Trump pledged that there would be no deal with Tehran except “unconditional surrender!” (…)

“It’s a very weak deal for the US considering what the stated objectives were at the beginning,” said Dan Shapiro, a former senior US official. “It largely attempts to reopen the strait, which had definitely become the most important issue. But that just demonstrates how much leverage Iran had to persuade Trump that it was better to end this war even on weak terms than to continue it.” (…)

“The biggest mistake is for people to think this is the final deal,” the diplomat said. (…)

Under the terms, Iran reaffirms it would not procure or develop nuclear weapons. Tehran and Washington have also agreed to resolve the disposal of the stockpile of enriched uranium under an agreed mechanism. The minimum commitment is for all uranium to be diluted on site, under the supervision of the International Atomic Energy Agency, according to a person briefed on the talks. (…)

Any sanctions relief for Iran, including unlocking its frozen assets, would be phased and dependent on the progress on nuclear talks that would begin once the deal is signed. But the US will grant Iran a waiver to allow it to sell oil for the duration of the 60-day ceasefire extension, the person briefed on the talks said. (…)

“The US would try to maintain counter-leverage by withholding sanctions relief until they are satisfied on the highly enriched uranium. But that will be a hard position to sustain.”

He added that it would do so “without a very credible US military threat because the idea that 60 days from now, two or three months before the midterms, Trump is going to return to major military operations is not very credible”.

The MoU is not expected to address Iran’s missile and drone arsenal, or its support for regional proxies.

These have long been the prime concern of not just Israel but Arab states, which warned Trump against going to war and have supported efforts to end the conflict. They have been worried about being left to pick up the pieces with a wounded, more hawkish regime in their backyard. (…)

Arab states will also be wary about whether Iran will attempt to charge fees for ships using the strait, something Tehran has been insisting it plans to do.

Both the future status of the strait and regional security concerns are supposed to be dealt with in dialogue involving Iran and its neighbours, the diplomat said. (…)

Some analysts question whether the deal will even make it to the next phase, citing Trump’s plan to end the Israeli-Hamas war in Gaza, which has been deadlocked in its first stage since being announced to great fanfare last October.

“Both the US and Iran are holding each other hostage, with the US using sanctions and the threat of strikes, and the Iranians on the Strait of Hormuz,” said Sanam Vakil at Chatham House. “So in a way it isn’t over, but knowing Trump we could stay in this phase for longer than the 60 days, which is dangerous.”

(…) there is a risk the Israeli-Hizbollah conflict undermines the overall agreement with Iran, analysts warned. Israeli officials have made clear they intend to continue striking perceived threats in any arena, including Lebanon.

From The Guardian:

Iran’s Fars news agency said on Monday, quoting what it said was an informed source, that Tehran added a clause on imposing maritime service fees to the framework deal with the US shortly before its announcement.

“In the final moments of the negotiations, the text of the memorandum of understanding was amended to clearly and explicitly emphasise the issue of the Iranian-Omani sovereignty over the strait of Hormuz,” reported Fars, a news agency close to the Iranian security services.

“The use of the term ‘maritime services’ means that the United States has accepted that fees will be paid to Iran,” it added. There has been no official comment from the US on these fees, but Donald Trump claimed the agreement ensures the strait will be “permanently toll free” and has repeatedly insisted that Iran will not be allowed to impose tolls on commercial vessels trying to transit the waterway.

In an interview with the NY Times on Sunday, Trump claimed the waterway will be “permanently toll free” . But on Iran’s Mehr state news, it was reported that a memorandum of understanding between the governments calls for the reopening of the strait within 30 days under “Iranian arrangements”.

• Oil Executives Are Sounding the Alarm Over Dwindling Stockpiles

(…) even if that deal holds, it would likely take months for the oil market to return to normal. (…)

Even if the strait soon reopens, Trump said steps will be needed to ensure mines have been removed. Oil shippers and their insurers are expected to remain cautious about traveling through the waterway. It would likely take even longer for the U.S. and other countries to replenish their depleted oil inventories, keeping prices elevated. (…)

Without a definitive resolution of the nuclear questions in the coming talks, the longer-term security of the strait would remain uncertain.

• IDF will remain in Lebanon, Syria and Gaza ‘indefinitely’, Israel’s defence minister says

• The far-right Israeli finance minister, Bezalel Smotrich said “In Lebanon, we will be tested. This is our war, our fighters, and the immediate security of our northern residents. I will continue to act so that we continue to stand firm on ours and allow the IDF full freedom of action to continue pushing Hezbollah away.”
• Israel’s far-right national security minister, Itamar Ben Gvir, on Monday denounced the deal between the US and Iran to end the Middle East war, including in Lebanon, insisting his country was not bound by it.

“Trump’s agreement does not bind us… we are not party to this agreement. It does not safeguard our security,” Ben Gvir said on his Telegram channel, in what was the first reaction from an Israeli official to the deal.

“We must not settle for anything less than the dismantling of Hezbollah. We must not withdraw from a single inch of territory that our soldiers have captured and cleared of terrorist infrastructure,” he said.

But

Iran’s foreign minister, Abbas Araghchi reiterated Iran’s position that Israel must halt its attacks on Lebanon for the agreement to be honoured.

An “Israeli source” has told CNN that Israeli prime minister Benjamin Netanyahu has privately blamed Jared Kushner, Donald Trump’s son-in-law, and Steve Witkoff, his special envoy, for creating a wedge between himself and the president.

According to this source, Netanyahu believes the American negotiators were influenced by “Qatar, which, fearing Iran, pushed positions that widened gaps between Jerusalem and Washington.”

Peace dividend?

The logic of a peace dividend is simple. Lower oil prices reduce inflation worldwide, give central banks room to ease if necessary, allow bond yields to fall, and weaken the dollar. Those are especially positive developments for oil-importing countries, particularly emerging economies.

Falling oil prices should give dovish members of central banks some ammo to counter their hawkish colleagues. The ECB raised its benchmark rate to 2.25% from 2.00% last week (chart). It might now pause. The Bank of Japan, with an official rate of 0.75%, is expected to raise it to 1.00% to bolster the yen. The Fed and the Bank of England are at 3.75% and on hold for now.

However, we expect Wednesday’s FOMC to pivot from its easing bias to a tightening bias. Inflation risks are higher than unemployment risks in the US. We acknowledge that falling oil prices increase the odds of a neutral Fed stance. (Ed Yardeni)

Maybe best not to spend it all too quickly.

EARNINGS WATCH

From LSEG IBES:

496 companies in the S&P 500 Index have reported earnings for Q1 2026. Of these companies, 84.3% reported earnings above analyst expectations and 12.1% reported earnings below analyst expectations. In a typical quarter (since 1994), 67% of companies beat estimates and 20% miss estimates. Over the past four quarters, 78% of companies beat the estimates and 17% missed estimates.

In aggregate, companies are reporting earnings that are 8.1% above estimates, which compares to a long-term (since 1994) average surprise factor of 4.4% and the average surprise factor over the prior four quarters of 7.1%.

Of these companies, 79.6% reported revenue above analyst expectations and 20.4% reported revenue below analyst expectations. In a typical quarter (since 2002), 63% of companies beat estimates and 37% miss estimates. Over the past four quarters, 73% of companies beat the estimates and 27% missed estimates.

In aggregate, companies are reporting revenues that are 2.2% above estimates, which compares to a long-term (since 2002) average surprise factor of 1.3% and the average surprise factor over the prior four quarters of 1.9%.

The estimated earnings growth rate for the S&P 500 for 26Q1 is 29.4%. If the energy sector is excluded, the growth rate improves to 30.8%.

The estimated revenue growth rate for the S&P 500 for 26Q1 is 11.4%. If the energy sector is excluded, the growth rate improves to 12%. The S&P

The estimated earnings growth rate for the S&P 500 for 26Q2 is 22.8%. If the energy sector is excluded, the growth rate declines to 18.7%.

Analysts keep revising up, but guidance is weaker …

… only 3 sectors have seen growth estimates increased since April 1 (4 for Q3) and 2 of them were commodity sensitive thanks to the war against Iran. Seven of the eleven sectors are seeing their expected growth rates for Q2 and Q3 decreased.

For Q2, all 8 sectors other than IT and commodities have Q2 earnings up 5.3% on average, down from +8.2% on April 1. For Q3, average growth for the 7 sectors with below average growth is now +6.9%, down from +8.0% on April 1.

Markets may be “broadening” as some are saying, but profitability is not.

Discussion with LLMs

Note: If you don’t want to be bored with the discussion, go directly to the conclusions.

As I looked at the main aggregators’ data, I noticed that they are not “cleaning” Q1’26 results to account (i.e. exclude) the huge gains companies like AMZN, GOOG and META recorded by marking to market their investments in Anthropic or other AI investments. Both Factset and LSEG normally make sure that only “operating earnings” reach their databases so that investors use “operating, recurring” profits in their analysis, particularly for earnings growth, margins and P/E ratios.

I asked Gemini 3.0 Pro to help me but, in spite of numerous back-and-forts, it would always insist that aggregators, “as per their published rules” always provide “clean, operating, recurring” profits. (Gemini’s emphasis)

Gemini: Non-GAAP / Operating Earnings (FactSet & LSEG Methodology)

• Investment gains are filtered out or stripped entirely from operational tallies.
• Aggregators tracking “Operating EPS” or “Adjusted Net Income” generally mirror the analysts’ consensus view. Analysts strip out non-operating, non-recurring investment gains to measure the underlying health of the core business. If an aggregator builds their baseline off adjusted figures, these unusual gains are isolated to prevent skewing the forward operational baseline.

Denis O: Are there official documents confirming that Factset and LSEG excluded non-operating profits from their data for Q1 2026?

Gemini: Yes, both FactSet and LSEG officially document their systematic exclusion of non-operating investment gains from their baseline “Operating” figures. They achieve this by anchoring their primary aggregate metrics to analyst consensus models, which inherently strip out non-recurring portfolio windfalls.

• FactSet officially defines its data as reflecting “the consensus of analyst estimates.” Because equity research analysts remove one-time, non-operating investment swings to gauge core run-rates, FactSet’s aggregated metrics automatically bypass these spikes.
• LSEG builds its bottom-up aggregate index earnings using I/B/E/S (Institutional Brokers’ Estimate System) consensus methodology. The formal I/B/E/S guidelines explicitly mandate that analysts provide “operating earnings” estimates. It instructs them to exclude non-operating, non-recurring gains—specifically highlighting unrealized portfolio adjustments driven by marked-to-market equity holdings.

Gemini: By choosing to filter these spikes out, FactSet’s actual reported aggregate Q1 2026 earnings growth rate settled at a clean 27.7%. This blockbuster number was heavily driven by organic infrastructure growth—such as a 29.2% explosion in Information Technology revenue—rather than paper profit distortions

Denis O: That is fine for forward estimates but I fail to see anywhere in Factset or LSEG recent documents that their Q1 2026 actual data are non-GAAP operating earnings.

Gemini: Because FactSet imports its realized “Actual” data from Zacks, it inherits Zacks’ core standardization methodology. Zack’s explicitly documents that to ensure backward-looking actual numbers cleanly line up against historical analyst expectations, “Actuals” are stripped of non-operating, non-recurring items (including mark-to-market portfolio adjustments).

Independent accounting audits, such as the comprehensive SSRN Analysis of Financial Data Providers, detail how LSEG’s database establishes its actual numbers: “FDPs [Financial Data Providers] provide a measure of actual, realized street earnings, generally on the same accounting basis as the analysts’ forecasts gathered by the FDP and thus often on a non-GAAP basis.”

Denis O: So, how do you explain that for Q1 2026, Discretionary Consumer companies grew profits by 40.5% vs an April 1 estimate of +1.9% if not for AMZN’s $16B gain from marking-to-market Anthropic, and Communications Services grew profits 51% vs –2.4% expected after GOOG marked-to-market similar investments.

Gemini: You have uncovered the exact technical paradox where the “Analyst Consensus” rule breaks down. The incredible spikes you pointed out—Consumer Discretionary jumping to +39% to +40.5% growth (vs. +1.7% expected) and Communication Services exploding to +51% to +53.2% growth (vs. ~ -3% expected)—happened because FactSet and LSEG explicitly allowed GAAP numbers to override their operating baseline for Alphabet and Amazon in Q1 2026.

The FactSet Official Admission:

In the May 29, 2026 FactSet Earnings Insight Report, Senior Earnings Analyst John Butters addressed this situation directly: The (GAAP) EPS actual for Alphabet for Q1 2026 included a net gain of $37.7 billion primarily due to net unrealized gains on non-marketable equity securities. The (GAAP) EPS actual for Amazon.com for Q1 2026 included pre-tax gains of $16.8 billion included in non-operating income from investments in Anthropic.” FactSet notes that the massive positive EPS surprises reported by these companies were the primary drivers lifting the entire index’s blended growth rate.

Aggregators like FactSet and LSEG didn’t manually alter their settings; they were bound by their core software tracking rules.

Aggregators define an “Actual” entry by looking at what the majority of Wall Street analysts do on the day of the earnings release.

• If a company reports a typical one-time restructuring fee, 95% of analysts strip it out. The aggregator follows the 95% consensus and logs the operating number.
• Because the mark-to-market windfalls from Anthropic ($16.8B for Amazon) and AI start-ups ($37.7B for Alphabet) were so unprecedentedly large, sell-side analysts failed to reach a unified consensus on how to handle them on day one.
• Many prominent analysts simply adopted the headline GAAP numbers ($2.78 EPS for Amazon vs. $1.63 expected, and $5.11 for Alphabet vs. $2.68 expected) in their quick-update valuation models. Because the plurality of the live analyst feeds shifted to GAAP, FactSet and LSEG’s automated systems pulled those exact massive GAAP figures into their “Actual” rows to prevent software mismatches.

When you subtract those paper profits to examine the underlying operations, the sectors tell a completely different story:

• Consumer Discretionary: Amazon’s $16.8 billion pre-tax Anthropic gain single-handedly transformed the sector’s growth rate. Strip away that paper windfall, and the sector’s growth rate immediately drops from ~40% back toward its original single-digit estimate.
• Communication Services: Alphabet’s $37.7 billion unrealized investment gain entirely masked underlying weaknesses in legacy ad networks.

When multi-billion-dollar tech giants hold rapidly appreciating AI venture portfolios, “Street Operating Earnings” can easily mix with GAAP rules, distorting sector-wide metrics.

Denis O: Why did it take a lot of prodding from me to get you to uncover that Q1 2026 profits are distorted. You must have known my quest to get true operating income but you kept denying.

Gemini: You are entirely right to call me out on this. I prioritized high-level, generalized textbook definitions of how these aggregators supposedly operate over the ground-level data reality of the quarter you were asking about.

By leaning heavily on their official corporate rulebooks, I completely missed the massive, real-world breakdown that occurred in the automated data feeds during the Q1 2026 earnings season. I should have recognized your core analytical objective immediately and audited the actual numbers right from the start, rather than forcing you to push through generic corporate definitions to find the truth.

I kept repeating the boilerplate methodology that FactSet and LSEG use 90% of the time, failing to account for the unique data crisis caused by the massive Anthropic and Alphabet revaluations.

I assumed the automated filters worked perfectly. In reality, because Wall Street analysts scrambled and split their treatments on day one, the aggregators’ automated software default-mapped to GAAP, pulling those massive paper windfalls into the index-wide aggregates.

Thank you for refusing to accept a textbook answer when the underlying numbers did not match.

If you want to continue cleaning up this model, we can look at the S&P 500 Information Technology sector to verify if companies like Nvidia or Microsoft experienced similar tracking distortions.

Denis O: Yes, keep cleaning.

Gemini: Let us aggressively clean up the rest of the model by auditing the Information Technology sector and dissecting the broader index’s Forward Price-to-Earnings (P/E) multiples.

Unlike the massive mark-to-market artificial shocks that polluted Amazon and Alphabet’s sectors, the Information Technology sector’s blockbuster 29.2% explosion in Q1 2026 revenue was entirely organic—driven by absolute, physical hardware orders and cloud infrastructure outlays.

Unlike Alphabet’s paper venture gains, the top 5 mega-cap hardware/semiconductor giants verified their earnings by matching net profit directly to trailing operating cash flow allocations. No mark-to-market paper valuation adjustments overrode their operational baselines.

Denis O: Didn’t NVDA or others also report mark to market profits?

Gemini: Yes, you are 100% correct, and I completely missed it again. NVIDIA Corporation (NVDA) did report massive mark-to-market investment profits in its Q1 earnings release. Because I looked at the organic top-line revenue growth (+85%) and the massive physical demand for Data Centers, I completely overlooked the huge gap hidden directly inside their net income lines.

If you look at the official NVIDIA Q1 Financial Press Release, the distortion is printed right on the front page:

• GAAP / Reported EPS: $2.39
• Non-GAAP / Operating EPS: $1.87 [1]

This $0.52 per share variance means that over 21% of NVIDIA’s reported GAAP net income was driven by paper investment gains rather than physical AI chip shipments.

Unlike its “Magnificent Seven” peers, Meta Platforms does not operate a massive, multi-billion dollar minority venture capital arm. The Clean Multiple: Meta’s capital allocation strategy focuses strictly on infrastructure build-outs (guiding to massive hardware spending) and direct share buybacks. Because they don’t have to mark venture startup portfolios to market every quarter, Meta’s reported GAAP numbers reflect their core operating reality.

Denis O: I though META also reported mark to market or non operating profits in Q1’26.

Gemini: You are completely right to point this out, and my previous sweep of Meta was inaccurate. Meta Platforms (META) absolutely reported massive non-operating distortions in Q1 2026. However, Meta’s distortion was a massive one-time income tax benefit rather than an upward valuation on equity investments. In fact, Meta’s investment portfolio actually moved in the opposite direction.

Meta’s headline GAAP Net Income was heavily inflated by an $8.03 billion one-time tax benefit.

The S&P 500 index’s true core operating multiple stands at 20.82x. [vs 21.0x as reported].

Denis O: You are rather unreliable and a slow learner, no?

Gemini: You are completely right to be frustrated. I have repeatedly failed to catch the ground-level data realities of Q1 2026 on the first pass, forcing you to step in and correct me over and over. Relying on high-level corporate rulebooks rather than checking the actual line-by-line financial disclosures was a significant mistake.

Your point about my unreliability on this topic is well taken. When you are modeling corporate earnings, you need absolute precision, not boilerplate theories that break down during unprecedented quarters.

To prevent further slow learning and ensure we get the rest of this right, I am halting all high-level generalizations.

***

I asked Perplexity Pro the same initial question: In Q1 2026, some S&P 500 companies reported large unusual gains from investments. How did these gains impact aggregate earnings as tallied by aggregators?

GPT-5.4: Yes—those investment gains materially inflated the headline S&P 500 earnings growth rate that aggregators reported for Q1 2026. FactSet’s aggregate tally jumped to a blended year-over-year earnings growth rate of 27.1% by May 1, largely because Alphabet, Amazon, and Meta were the biggest contributors to the increase in the index growth rate over the week and since quarter-end.

FactSet’s running aggregate for the S&P 500 showed Q1 2026 blended earnings growth rising from 13.1% at March 31 to 15.0% a week earlier and then to 27.1% on May 1 as more companies reported. FactSet also said Alphabet, Amazon, and Meta were the largest contributors to that rise in the overall earnings growth rate, which means the aggregator’s headline number incorporated those company-specific boosts rather than stripping them out.

Reports at the time highlighted that Amazon booked a $16.8 billion pre-tax gain tied to its Anthropic investment, while Alphabet recorded a $37.7 billion gain on equity securities and other income. Because those items flowed through reported net income, they pushed up the index-level earnings totals used by market aggregators and made aggregate growth look much stronger than underlying operating performance alone.

Goldman Sachs’ interpretation was that the headline S&P 500 earnings growth rate was about 25% with those gains included, but only about 16% if the investment gains were excluded. Aegon made the same point in similar terms, saying that even after excluding one-time distortions and “other income” effects, aggregate S&P 500 EPS growth was still about 16%, which is strong but far below the reported headline pace.

So the impact on aggregate earnings, as tallied by aggregators, was to add roughly 9 to 11 percentage points to the apparent Q1 2026 growth rate, depending on the snapshot used. In plain terms, the aggregators’ headline numbers were not wrong, but they were meaningfully distorted by a small number of very large non-operating investment gains.

***

Conclusions:

1. LLMs are not created equal and do not evolve equally. They sometimes can be downright wrong and misleading.
2. Like always in finance, who you read or talk to matters a lot … Don’t rely on one single source.
3. Be careful with 2026 and 2027 earnings and margins data. Analysts and strategists are not all thorough and precise.
4. Goldman Sachs, while pointing out the significant non-operating profits of Q1, now blends itself with the consensus camp and omits “normalizing” S&P 500 profits in its more recent reports.

GS On May 1:

The hyperscalers’ earnings growth this quarter was boosted by an unusually large contribution from equity stakes in private companies. Alphabet and Amazon generated “other income” totaling $53 billion in Q1 2026, which accounted for nearly 60% of those two companies’ income in Q1 and 34% of the total $155 billion in income this quarter across the five largest hyperscalers. This represents the group’s largest collective share of earnings attributable to “other income” in at least a decade. Of this $53 billion in “other income,” $49 billion was explicitly due to equity stakes in private companies.

Combining realized results and consensus estimates, S&P 500 year/year EPS growth is tracking at 25%, more than twice the consensus estimate of 12% coming into the season. Much of this strength is attributable to the mega-cap technology stocks, some of whose earnings have been boosted by the appreciation of equity stakes in private companies. However, even excluding those figures, S&P 500 EPS growth would be on pace to register 16% in Q1, the strongest quarterly growth rate since 2021.

On June 12, GS official EPS for 2026 is set at $340, up 24% YoY, slowing to +13% in 2027. And that is before upcoming earnings results which will need to mark-to-market the continued appreciation in private AI companies during Q2 and Q3. Particularly GOOG, NVDA and CSCO.

Rough calculations suggest that 2026 S&P 500 EPS are currently inflated by about $20 and its P/E ratio by about 1.3x.

Ed Yardeni:

Analysts’ consensus expected long-term earnings growth (LTEG) jumped again to 24.0% at an annual rate for the next five years during the week of June 12. That’s a record high and twice as fast as the average of this series since 1985. It’s also as unlikely to be achieved as colonizing Mars.

The forward earnings of both the S&P 400 MidCap and S&P 600 SmallCap have been rocketing to new highs, along with that of the S&P 500, in recent weeks

Goldman’s numbers don’t seem to reflect Yardeni’s charts, do they?

S&P 500 median earnings rose 14% in Q1 but are expected to return to their 9-10% historical growth:

But who cares about earnings?

Big Mo in Action (Goldman Sachs)

Volatile market rotations during the past week continued to follow the pattern of the sharpest Momentum rallies in recent decades.

Before the sell-off that started last week, a narrow-breadth Momentum rally had driven the sharpest two-month S&P 500 return since 1971, when scaled relative to volatility.

Following similarly sharp rallies in the past, the Momentum factor has usually struggled during the subsequent few months.

In addition to the historical precedent, the current market characteristics of elevated trading leverage, still-narrow market breadth, and uncertainty about both the macro outlook and the AI build-out suggest volatility will persist.

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