Yes, it was predictable. The funny thing is that there is always a pivotal moment that delivers the “uh huh” moment to investors. Last week, that moment came with inflation numbers from major economies, while oil prices kept rising due to the lack of progress in Iran peace talks.

And this Monday, bond stress remains in the headlines, as US crude traded above $108pb earlier in the session, with upside risks remaining dominant as the prolonged Middle East conflict leads to a record decline in global oil reserves.

The Japanese 10-year yield hit 2.80% before bouncing lower, while the Nikkei sold off another 1% following Friday’s sharp 2% retreat, also dragging major US and European indices lower. Tech stocks took a hit simply because they have been carrying the latest rally on their shoulders.

In China, the latest economic data looked particularly bleak, with an unexpected fall in investment, an unexpected slowdown in industrial production, and a worrying decline in retail sales growth to near-zero in April, mostly due to a 15% plunge in car sales. The weakness was largely explained by heavy disruptions linked to the Iran war.

This morning, futures are in the red and the bearish mood is justified: rising inflation fuels hawkish central bank expectations, reinforces the outlook for higher rates, and weighs on valuations. This makes sense.

What didn’t make sense was major indices rallying to ATH levels while investors KNEW inflation was going to become a problem as Middle East tensions dragged on. But strong AI earnings and solid guidance outweighed the risks, while CEOs of non-tech companies increasingly warned that the energy crisis was starting to eat into consumers’ purchasing power.

Now, this setup has been in place for more than two months, and central bankers have already expressed their views on what’s coming.

The European Central Bank (ECB) is expected to hike rates as soon as next month, while some hawkish voices are also growing louder at the Bank od Japan (BoJ). The Bank of England (BoE) is on slippery ground, with gilt yields also pressured by the political earthquake there. I wouldn’t touch sterling nor UK gilts at this moment. There is too much political uncertainty, making the fiscal policy path highly uncertain in a country where growth and productivity are both notably under pressure.

In the US, there has been a major shift: the probability of a December rate hike is now priced in at more than 50%. Activity in Federal Reserve (Fed) funds futures is now pricing in a 25bp+ rate hike for this December at above 50%. That’s a major shift for a Fed that was, until recently, expected to keep rates steady.

Remember, before the Iran war started, markets expected the Fed to CUT interest rates this year. The White House even chose Kevin Warsh partly because he was seen as someone who could help deliver lower rates if he were to become the next Fed chair. Today, markets are pricing a more than 50% chance of a December rate HIKE instead.

That’s not great news when equity prices are flirting with ATH levels and valuations already look stretched.

A correction is inevitable!

The Nasdaq 100 PE ratio is above 38 today, meaning that a correction would actually be healthy to bring valuations back to a more reasonable — and down-to-earth — level.

If the Nasdaq 100 PE ratio were to move back toward its historical range — somewhere around 25x to 30x earnings — it would likely imply a meaningful pullback in equity prices unless earnings growth accelerates fast enough to justify current valuations.

How meaningful? Pure maths suggests that a move from 38x PE to 30x PE would imply roughly a 20–22% correction if earnings expectations remain unchanged. Assuming earnings continue to grow, however, a correction of 10–15% may be more reasonable. That would bring the Nasdaq 100 toward the 23.6% Fibonacci retracement level of the rally from April 2025 to today, near 26’600, and potentially toward 25’200, near the current 200-DMA. In theory, such a retreat should not reverse the positive trend, which would remain intact above the 24’800 level, but it would take some air out of the rally and allow for a healthier path higher.

This week...

The focus will remain on Iran and the Strait of Hormuz, but also on UK inflation, FOMC meeting minutes, and flash PMI numbers across major economies.

On the earnings front, Nvidia is due to release earnings on Wednesday after the closing bell. Nvidia’s results have been one of the most important gauges of the health of the AI growth story. But that is no longer entirely the case. Nvidia chips are still considered the best in the market for training complex AI models, but running them also requires CPUs and memory chips. This is why memory chipmakers have increasingly taken over the rally, while traditional CPU makers and memory specialists like Intel and Micron have recently outperformed Nvidia, and Korean memory chipmakers continue to dominate headlines.

So I believe Nvidia earnings could temporarily divert investors’ attention away from geopolitical worries and soaring bond yields. But the bar is now set extremely high for Nvidia, and an earnings beat alone may not automatically trigger a positive market reaction.