It has been a good week for investors. The S&P is up 8% from its recent lows and the price of oil is down 20% from its recent highs. Wednesday’s ceasefire announcement was the catalyst for that move, even though it is fragile, and the initiation of peace talks is constructive. I want to explain why we have been constructive through this entire episode, and why our base case still involves an escalation before we get a resolution.
We have believed since the beginning of this Middle Eastern crisis that the outcome would be favorable for humanity and for investors, for one reason. This is ultimately about the price of oil, and the price of oil in the future is lower than the price of oil in the present. Global markets are trading in a state of backwardation. You can buy oil about 15 months forward at $55 a barrel, lower than it was before the crisis unfolded. Global inflation expectations are in backwardation as well, meaning future inflation is priced below present inflation. Those are two very strong signals. They can change, and we watch them closely.
The foundation of the investment philosophy here is global liquidity. It is rising and it has never been higher, and global equities always perform in that environment. That is why we are long and overweight technology, defense and the S&P 500. Add a global population that is generally getting wealthier as standards of living rise, and you have the conditions for corporate profitability to keep improving.
Execution and earnings still have to show up, and they are showing up. FactSet, which makes a living forecasting these things, has the S&P 500 growing earnings 12.6% in Q1. If that happens it will be the sixth consecutive quarter of double-digit earnings growth, which I am not sure has ever happened before. Technology sector revenue is forecast to rise 27% in the quarter, and technology earnings almost 45%. That is why I think investors should continue to think about buying dips in that sector. It is going to keep driving the global economy.
Now the uncomfortable part. Our base case is that this takes an escalation before it gets a resolution, and that escalation means controlling the flow of oil out of Iran and the flow of money that comes back in from those sales. That is a hard negotiation and it will not be a straight line. I could be wrong on the sequence. But if the trend in oil and in liquidity holds, my view is that the S&P 500 makes a new high this year.
