Can’t Stop

Can’t stop, addicted to the shindig
Chop Top, he says I’m gonna win big

“Can’t Stop”, Red Hot Chili Peppers

The path of the market in 2026 has felt a lot like the opening seconds of Red Hot Chili Peppers’ 2003 music video for “Can’t Stop”: a rapid run through a narrow, winding tube where you can’t see what twists and turns are coming next (the music video’s tube run eventually ends with a closeup of Anthony Kiedis’ bespectacled face and we’re not quite sure what the market equivalent of that would be).

The equity trading since the March lows has certainly had the pumped-up energy of someone who has listened to “Can’t Stop” as a hype song on repeat (“this life IS more than just a read through!”), with a stellar 17% rally off of the March lows for the S&P 500. This rally has been boosted by a 63% jump in the SOX semiconductor index in that time, compared to a less than 9% rise in the Equal Weight S&P 500.

After a move of this magnitude, it is helpful to take a step back and look at the balance or risks and opportunities in the market. To do this, we like to make a ledger of what we like and don’t like about equity markets at this juncture.

The table below shows our “Equity Market Ledger”, outlining the things that we like and don’t like about the market (all with data as of 5/7/26). Below the table we discuss our conclusions from this exercise (with a big one being that “Can’t Stop” becomes an imperative for AI capex spending in order to keep this semiconductor upcycle going). Lastly, keep an eye out for our Monday Charts next week, where we will present corresponding charts to these points.

Equity Market Ledger

What We Like

• Clear uptrend with momentum for the S&P 500 (SPX), with global markets in an uptrend as well (the ACWI at all-time highs)
• Institutional positioning is still neutral (Deutsche Bank Consolidated Equity Positioning in the 53^rd percentile), suggesting there is still room for investors to have to “chase” this market higher
• Strong earnings growth and positive earnings revisions for SPX
  • 2026 now at $335 (revised higher by 8% YTD), +21% YoY
  • 2027 now at $382 (revised higher by 8% YTD), +14% YoY
• Falling high yield spreads show bond market calm/confidence (or complacency)
• Liquidity appears abundant and financial conditions are easy: strong credit demand (oversubscribed deals despite record issuance) rallies in speculative areas (junky equities, crypto) show risk appetite is strong, but note that this is a risk as well
• Positive economic surprises and stable US aggregate economic data (such as Friday’s 115k Nonfarm Payrolls print for April and a stable 4.3% unemployment rate)

What We Don’t Like

• Overbought and Complacent: the S&P 500 (SPX) is technically overbought and with put/call ratios (what investors are willing to pay for downside protection vs. upside optionality) low, there are signs of complacency
• Narrow Price Action: only 53% of the S&P 500 (SPX) are above their 50-day moving average, while over 30% of the names in the SPX are below their March 30^th level when the overall index bottomed. The Equal Weight S&P 500 is at new YTD relative lows.
• Signs of Excess in Leadership: semiconductors (SOX) are at a record 15% weight in the SPX and have driven the bulk of the upside in the index YTD. The SOX is now trading at 57% above its 200-day moving average, the most extended since early 2000. Semiconductor ETF flows and option volume have shown speculative euphoria has taken hold (which we also see in leadership from low quality, junky portions of the equity market as well)
• Narrow Earnings Contribution: the semiconductors over 100% EPS growth is contributing an outsized amount to total EPS growth in 2026, while Magnificent 7 earnings growth continues to outpace the 493 (boosted by some one-time items)
• Coming Net Equity Issuance:
• Mid-term election year seasonality is typically a headwind for market returns
• Fading cyclicals outside of tech, such as Financials and Consumer Discretionary, do not point to a broad, robust market or economy
• Clear pressure on lower income cohorts (which have a lower weight in aggregate data), based on company commentary from companies such as McDonald’s, Whirlpool, Planet Fitness, and more (while some higher income focused companies are still reporting strong demand), as real wage growth slows to nearly 0% (wage growth after inflation)
• U.S. gasoline prices still elevated at $4.55, despite Iran peace optimism
• Limited path for Fed accommodation given resilient labor market and sticky inflation statistics

Our conclusion from weighing these likes and dislikes is that the market remains in a strong uptrend, but that uptrend has been driven by a narrow set of names that are showing signs of speculative excess. The narrow leadership is coming primarily from the semiconductor industry, the largest weighted industry in the S&P 500, which is experiencing a price melt-up (that 64% in just over a month) amidst an earnings boom (earnings are expected to grow by 91% in 2026).

We think that this semiconductor dominance eventually makes the S&P 500 more cyclical and more fragile (we will write more about this dynamic next week in a study about margins), mostly to any news that could challenge the dominant narrative of continued extraordinary AI spending (hence the “Can’t Stop imperative for AI capex), but it is difficult to determine when this turn in cyclical sentiment could happen given the current boom in earnings.

We would not be surprised to see some digestion of the recent powerful moves given the overbought conditions, but markets are clearly in hyped up, “Can’t Stop” party mode, supported by the dominant uptrend and earnings boom (even though it is narrow). There are signs of complacency and excessive risk taking, but this is primarily in retail portions of the market, which contrasts with the still-neutral positioning of institutional investors.

U.S. economic data is not giving markets a reason to stall at this time, while the data (stable jobs and sticky inflation) does get the Fed to stall in its pursuit of rate cuts.

We summarize this environment as “respect the trend, but don’t ignore the risks”, which we think argues for the balance that is needed to embrace the uptrend but not get overly extended by chasing speculative excess.

IMPORTANT DISCLOSURES