After nine consecutive weeks of gains, the market finally took a breather.
The S&P 500 fell 2.6%, led by weakness in the Magnificent Seven and large-cap technology stocks. Yet beneath the headlines, the damage wasn't nearly as severe as it appeared. The equal-weight S&P 500 was down only about 0.5%, suggesting this was more a pause in the AI-driven rally than a broad market breakdown.
The bigger story isn't what happened last week.
It's what investors continue to assume will happen next.
AI Is Still Carrying the Market
The American economy remains surprisingly resilient.
Economic growth is tracking near 3%, consumer spending remains solid, and corporate earnings continue to exceed expectations. Much of that strength traces back to one theme:
Artificial Intelligence.
According to the report, AI-related companies generated nearly two-thirds of first-quarter earnings growth and delivered profit growth exceeding 50%. Since the March lows, technology stocks have surged 44%, with semiconductor companies up more than 60%.
That's extraordinary.
It's also a reminder of how dependent this market has become on one dominant narrative.
Inflation Is Refusing to Cooperate
While investors celebrate AI and strong earnings, inflation continues to send warning signals.
Manufacturing activity reached its highest level since 2022, but so did concerns about rising prices. Add severe drought conditions, fertilizer shortages, and elevated energy costs, and the ingredients for higher food inflation are beginning to emerge.
This matters because the market still expects the Federal Reserve to remain relatively accommodative.
That assumption may be tested.
Bond Yields Are Becoming the Story
One statistic caught my attention.
Historically, when the 2-year Treasury yield moves above the Fed Funds Rate, the Fed's next move has often been a rate hike. That relationship has now reappeared.
Meanwhile, the report highlights another risk: a move in the 10-year Treasury yield toward 5%.
That level would force investors to reassess stock valuations, particularly among high-growth companies that have benefited from abundant liquidity.
Markets Still Believe a Deal Is Coming
For nearly a month, policymakers have suggested a U.S.-Iran agreement is close.
Yet no agreement has materialized.
Despite that, investors continue to price markets as though the Strait of Hormuz will reopen soon and energy supplies will normalize.
Maybe they're right.
But the longer the delay continues, the greater the risk that expectations and reality begin to diverge.
My Perspective
The economy remains stronger than many expected.
Corporate profits are healthy. Employment remains solid. AI investment continues to drive growth.
But there is an important difference between a strong economy and a low-risk market.
Today, investors appear highly focused on potential returns and less focused on potential risks.
That's usually not a problem until it becomes one.
Bottom Line
The economy remains resilient.
Earnings remain strong.
AI continues to dominate market leadership.
At the same time:
Inflation remains stubborn.
Bond yields are creeping higher.
Investors are counting on a geopolitical resolution that has yet to arrive.
The bull market is still intact.
But the longer expectations remain elevated, the more sensitive markets become to disappointment.
About Gary Hager
Gary K. Hager, CFP®, CBEC, CTFA is the founder of Integrated Wealth Management. He advises business owners and families on exit planning, estate strategies, asset protection, and long-term wealth structuring.