Last week's macroeconomic theme revolved entirely around the escalating war in the Middle East and its devastating effects on energy supply and inflation. As US and Israeli operations against Iran entered their fourth week, the closure of the Strait of Hormuz continued to cripple global supply chains. WTI crude oil prices have risen 90% since their December lows, and Brent oil surpassed $107, reigniting inflationary pressures. Markets have shifted to a pricing regime caught between growth hopes and shocking energy costs.
At the start of the week, a brief wave of optimism swept through the markets following social media posts suggesting President Trump had a very good and productive meeting with Iran. However, denials from the Iranian side and the rapid fading of diplomatic hopes reversed market sentiment. Trump's announcement of a temporary halt to attacks until Monday evening, April 6th, provided a brief respite, but market participants are pricing in this delay as a move to buy time for military buildup before a likely ground offensive beginning on April 5th.
In the midst of this geopolitical tension, the macroeconomic narrative has undergone a radical shift. While investors at the beginning of the year expected at least two interest rate cuts by 2026, these expectations have plummeted to zero as inflation, according to Truflation, has doubled from its February lows. The delicate balance between growth and inflation has been disrupted, and deflation expectations have given way to stagflation concerns. Investors' risk appetite is entirely on the defensive due to the heightened uncertainty and the ever-changing news flow.
Data released last week, while overshadowed by geopolitical shocks, highlighted signals of an economic slowdown. The US job market shows that the total number of employed people has stagnated, with no net job creation since April 2025. However, weekly jobless claims show no acute stress yet, and consumer confidence remains at historically low levels. Purchasing managers' index (PMI) data, however, shows an upward trend, confirming the mixed and contradictory picture presented by the data.
On the inflation front, the annual inflation rate has doubled compared to previous months due to the rally in oil prices. While optimistic interest rate cut scenarios priced in at the beginning of the year are now off the table, the rapid rise in expectations for a year-to-date break-even inflation rate is unsettling the markets. In light of this situation, a consensus is emerging in the market that the US Federal Reserve (Fed) may even raise interest rates this year. However, Fundstrat analyst Ken Xuan opposes this view, arguing that officials are only using hawkish verbal guidance to anchor long-term inflation expectations.
The Fed's balance sheet policy continues on a gradual expansion path despite shocks. Its balance sheet size has increased by $120 billion since its December low. If this pace is maintained throughout the year, it will correspond to an annual expansion of $420 billion, a figure that remains quite modest compared to the massive monetary expansions of the past. Markets are concerned that in the event of a potential economic collapse, the Fed's capacity to intervene will be much more limited than before due to increasing inflationary pressures.
US stock markets, at the epicenter of geopolitical turbulence, are directly reflecting the pessimism in pricing. The S&P 500 index (SPX) finished the week down 2.1% at 6,368.85 points, marking its longest losing streak since May 2022 and closing negative for the fifth consecutive week. The technology-heavy Nasdaq Composite index (IXIC), which took a much harder hit, officially entered correction territory, falling 3.2% weekly to 20,948.36 points. The S&P 500's 7.4% decline this month is dragging the index towards its worst monthly performance in four years.
From a technical perspective, it seems too early to say the market has reached a definitive bottom. According to Mark Newton, the short-term trend of the S&P 500 is gaining downward momentum, with the targeted support zone between 6,200 and 6,250. This critical support area stands out as a solid technical zone where the Ichimoku Cloud on the weekly charts, the peaks at 6,147 last February, and the 38.2% Fibonacci retracement levels converge. While momentum on the daily charts is approaching oversold regions, the weekly and monthly indicators are still quite far from these levels.
On the volatility front, the VIX index, which measures investor fear levels, remains high, while the MOVE index, which reflects bond market volatility, is challenging its peaks. Historical data suggests the MOVE index could reach its peak in April. Although investor sentiment is increasingly negative, technical analysts note that a true capitulation phase has not yet been reached in the market. While price movements show a parabolic downward trend, the deterioration in broad market participation suggests that the indices may remain under pressure for another one to two weeks.
The war environment and soaring energy prices are causing a historic divergence in sector rotation. As investors seek safe havens and supply cuts occur, the Energy sector (XLE) has seen a remarkable 11% gain, by far the best performance since the start of the war. Analysts emphasize that defensive sectors such as Infrastructure, Telecommunications, and Pharmaceuticals should be overweighted in portfolios until technology stocks show signs of stabilization. The possibility of a continued high interest rate environment is putting significant pressure on cyclical sectors.
On the other hand, Growth and Technology stocks, the undisputed leaders of recent years, are taking a heavy blow. The Fab Seven, representing the world's seven largest technology companies, have lost 15% of their value since the start of the war, while selling pressure on software stocks has turned into a virtual collapse. The massive valuations triggered by AI investments are undergoing a sharp normalization process in the face of rising capital costs and inflation expectations.
This sharp decline has led to the technology sector seeing its most attractive multiples in the last decade. Looking at forward price-to-earnings ratios, the valuation premium that technology stocks had built up compared to the S&P 500 as a whole over the last decade has been completely wiped out, with the multiple falling to 21.9x. While some strategists describe this as a once-in-a-generation opportunity, concerns that high interest rates will make it difficult for companies to manage their balance sheets continue to weigh on the sector.
Institutional opinions are deeply divided on the direction of the market, split between a defensive stance and a historical opportunity-seeking approach. Citi, advocating a consensus view, has adopted a wait-and-see policy to hedge against risks, reducing its global equity positions to a neutral level. Many investors are opting for cash or defensive assets, expecting inflation and interest rate shocks to erode margins in a high-valuation environment. BlackRock CEO Larry Fink, however, emphasizes the importance of staying in the market, stating that waiting is not only a missed opportunity but also a serious risk to one's financial future.
The strongest voice of the opposing view is Fundstrat strategist Tom Lee, who points to the overselling in the markets as having completely wiped out the ten-year premium on technology stocks, viewing this as a tremendous buying opportunity. Lee argues that the steady growth story and the momentum of AI have been ignored, valuations have become cheap, and management's market rescue mechanism will be activated. Ken Xuan, however, points to the diplomatic calendar, believing that the peak of geopolitical war dramas has already passed due to the planned talks in mid-May.
Mark Newton, offering a more cautious and technical perspective, emphasizes that pessimism has not yet reached a sufficient level. Noting that he hasn't yet seen complete panic and capitulation in individual investor sentiment surveys, Newton predicts that markets may take another hit towards the 6,200 level by early April before bottoming out. The scenario that cyclical stocks under inflationary pressure will suffer serious damage if interest rates remain high for an extended period remains the biggest point of contention among institutions.
This week's market calendar focuses on critical employment data that will test the resilience of the US economy amid inflationary pressures. The labor market figures to be released will be the most important driver for investors and central bank officials. Furthermore, military activity in the Middle East and expiring geopolitical ultimatums have the potential to create a much faster and more disruptive price movement than macroeconomic data. While this week's earnings calendar will be relatively quiet, it hosts a crucial indicator for understanding retail consumer demand and global supply chain pressures. Markets will be watching the sportswear giant, whose data reflects the impact of inflation on spending.
Markets are currently trading in a risk regime dominated by high volatility, reduced liquidity, and panic-driven settlements. Whether the geopolitical risk premium is fully reflected in prices remains uncertain, while the possibility of energy price shocks leaving lasting inflationary damage keeps market fears extremely alive. Risks:
Closure of the Strait of Hormuz: An extended blockade of the region, which accounts for a significant portion of global oil traffic, could push oil prices above $110, triggering a global inflation explosion.
Possibility of a Fed Rate Hike: Deterioration in inflation expectations could force the Fed to make a surprise rate hike instead of a cut, leading to continued collapse in technology stock valuations. Fertilizer and Food Crisis: With rising natural gas prices disrupting the supply of agricultural fertilizers like urea and phosphate, there's a risk of the shockwave spilling over into global food inflation. Questioning AI Spending: New compression algorithms reducing memory demand and high borrowing costs slowing down AI investment plans could bring an end to the rally in semiconductor stocks. Opportunities:
Valuation Collapse in Tech Giants: The complete wiping out of the price-to-earnings premium of giants like Apple, Microsoft, and Amazon over the last decade offers investors a rare chance to enter the system at cheap prices. Energy and Infrastructure Rotation: In a scenario of prolonged war and commodity shortages, oil and gas funds are expected to continue outperforming the rest of the market and generating returns. 6,200 Support Level: Potential for a short-lived but strong rebound rally driven by oversold conditions, if the S&P 500 index falls to the 6,200 point band, which is the 38.2% Fibonacci retracement level. Volatility (MOVE) Peak: The expected easing of risk assets is expected as the MOVE index, which measures bond market volatility, reaches its cyclical peak in April.
The current situation shows that markets are undergoing a serious stress test in a triangle of geopolitical warfare, rising inflation, and central bank impulsiveness. In this period, where sentimentality and leveraged trading greed are the biggest enemies, we are facing a market reality where a single headline can trigger sharp fluctuations in stocks. While debugging valuations is seen as a healthy correction, macroeconomic vulnerabilities strongly suggest that the picture could darken at any moment.
In light of all this data, an individual investor's current positioning should be based on a strategy balanced between defensive stance and selective opportunism. If the panic in the market deepens and volatility explodes, this will open a historic window of opportunity for long-term wealth building for those with cash reserves. However, since a complete market capitulation has not yet been seen, blindly buying large amounts at the bottom could lead to serious capital loss if the fluctuations continue.
Three main approaches stand out as an action plan:
First, a gradual buying strategy should be followed as support levels around 6200 are tested in broad market indices such as the SPX, which form the backbone of portfolios. Second, defensive stocks consisting of energy, infrastructure, and commodity producers should definitely be included in the portfolio to balance the risks of high-technology-heavy stocks. Third, and most importantly, a quality rotation should be completed towards high-quality balance sheets by staying away from weak companies that do not generate profit and have high debt ratios. This disciplined approach will protect the portfolio against the risk of the war spreading, while providing the opportunity to benefit from the undervalued multiples of technology stocks in the event of a possible peace announcement.
The information, comments and recommendations contained herein are not within the scope of investment consultancy. Investment consultancy services are provided within the framework of the investment consultancy agreement to be signed between brokerage firms, portfolio management companies, banks that do not accept deposits and customers. The comments in this article are only my personal comments and these comments may not be appropriate for your financial situation and risk return. For this reason, investments should not be made based on the information and comments in my articles.
