BlackRock Investment Institute Weekly FRESH MAY 18

Upgrade DM Equities OW Strategically; Downgrade HY to Neutral; Overweight Inflation-Linked Bonds

BII upgrades developed-market equities to overweight on a strategic five-year horizon, citing AI-driven earnings momentum as the dominant mega-force. MSCI U.S. 2026/2027 EPS upgrades over the past two quarters rank in the top five since 1988. Critically, the Mag-7 vs. rest-of-S&P 500 expected 2027 EPS-growth gap has compressed to just 3 percentage points from 31% in 2024 — the broadening Cembalest has been documenting is now in the consensus institutional allocation call. BII downgrades high yield to neutral (prefers equity risk via stocks), downgrades DM government bonds to underweight, and goes overweight inflation-linked bonds as inflation looks more persistent than priced. Brent remains near $105, more than 40% above pre-conflict levels; UST 10Y around 4.56% as cut bets fade.

Raymond James — Larry Adam (Weekly Headings, May 15)

Key Challenges Ahead for New Federal Reserve Leadership

CIO Larry Adam’s latest Weekly Headings frames key challenges for incoming Fed leadership as the Warsh-transition narrative dominates market conversation. The May 18 companion piece by Doug Drabik titled “Inflation Persists as the Fed Chair’s Term Expires” reinforces a sticky-inflation regime view for fixed income. Adam’s May 15 piece teases policy-credibility risks as Powell’s term winds down and Warsh succession dominates — directly relevant given Yardeni’s “Bond Vigilantes Welcome Warsh” June-hold/July-hike call and Kalshi’s >50% January hike odds. The May commentary stack (Five Takeaways Q1 Earnings May 8; Strong Fundamentals Offset Oil Headwinds May 1) leans constructive on fundamentals while flagging inflation/oil as the dominant macro overlay.

Schwab — Liz Ann Sonders / Kevin Gordon (~1h ago repost) FCI PARADOX

Financial Conditions Near Late-1990s Accommodative Levels — Despite 4.62% UST 10Y

Schwab’s Kevin Gordon (reposted by Liz Ann Sonders) flags that even with bond yields continuing to grind up at multi-year highs (US10Y ~4.60-4.62%), US financial conditions are near the accommodative levels last seen in the late 1990s. Implication: rising yields are not yet biting on credit spreads, equity valuations, or the dollar — leaving the Fed less reason to cut and arguably more cover to lean hawkish if oil-shock inflation persists. Reinforces the Yardeni / Kalshi narrative of June hold + potential July hike rather than the cut path priced earlier in the year. This is the institutional pre-condition that lets a credibility-hike narrative survive a Fed Chair handoff.

Ed Yardeni — Yardeni Research DOMINANT MACRO OVERLAY

“Bond Vigilantes Welcome Warsh” — June Hold + July HIKE Framework

Yardeni’s framework has crystallized into the dominant macro overlay across desk chat this morning: bond vigilantes are pricing in a Warsh-era credibility-restoring regime, with a June FOMC hold followed by a July HIKE. The proximate evidence sits in the curve: US10Y just printed a fresh 4.623% 15-month intraday high overnight; the JGB 30Y broke an all-time record (data back to 1999); Kalshi has flipped January Fed-hike odds above 50% from near-zero a week ago. The framework reads the curve’s refusal to validate the Iran-relief headline as a sign that the long-end is bidding for credibility, not duration. Atlanta GDPNow Q2 at 4.0% reinforces that the data side of the case is in place.

David Rosenberg — Rosenberg Research

Consumer Strain Bleeds Through — Comp Sales + Credit Stress Confirm

The supply-side hot-data narrative meets a demand-side stress signature. Home Depot beat on EPS pre-bell but missed on comparable sales (+0.6%) with an inventory build — the consumer slowdown is visible in the most rate-sensitive durable-goods print. NY Fed credit-card 90+ day delinquencies have surged +5.5 percentage points since Q3 2022 to a fresh cycle high on the Consumer Credit Panel/Equifax series. NAHB HMI sits at 37 (housing soft). The risk Rosenberg has long flagged — that the income statement of the consumer collapses before the macro nowcast does — is being printed in real time alongside the GDPNow upgrade.

JC Parets — All Star Charts 7,400 PIVOT

ES Sits on the 7,400 Pivot Into the Cash Open

All Star Charts flagged 7,400 as the operative ES pivot a week ago, and the cash open sits squarely on that number: futures last 7,399.50 (−0.35%) vs. Monday cash 7,418. A confirmed daily close below 7,400 puts Mancini’s 7,415 / 7,395 sequence in play and reactivates the bearish-divergence Krinsky breadth-warning catalogue; a reclaim through 7,418 with US10Y rolling under 4.55% would mean the Trump-postpone narrative is broadening into a relief rally rather than a one-day headline.

The Kobeissi Letter

US10Y “Flashing Red” / Korea Margin Debt All-Time HIGH

Kobeissi marks the US10Y at 4.623% as “flashing red,” with the JGB 30Y all-time high as the global-term-premium reset confirmation. The desk pairs that with a separate signal: Korean margin debt has exploded to a record $24.3 billion, +140% since the start of 2025 and +32% YTD — classic late-cycle euphoria in EM equity sitting alongside record US consumer credit stress. Two divergent risk indicators printing simultaneously is the high-conviction setup the desk has flagged repeatedly: leveraged retail and stressed consumer credit co-existing in the same tape.

Jonathan Krinsky — BTIG (via CNBC/ZeroHedge republish) FEATURED TECHNICAL ANALYST

Seven Breadth Warnings Still Live Even As ES Holds the 7,400 Pivot

Krinsky’s seven-warning breadth-divergence catalogue remains intact despite Monday’s rebound: cumulative advance-decline flattening, equal-weight underperformance, defensive-leadership rotation, intraday breadth deterioration, weakening new-high participation, weakening volume confirmation, and a heavily-stretched mega-cap concentration band. With ES sitting on the 7,400 pivot into the cash open, his framework reads the Trump-postpone bounce as a sellable rally rather than a reversal: until breadth confirms, the consumer and the curve are doing the heavy lifting against a thin leadership table. Cembalest’s 42-name 65-75% S&P EPS/rev/capex driver math is the structural offset.

Adam Mancini — Trader Mancini

Operative Downside Ladder: 7,440 / 7,415 / 7,395

Mancini’s 7,440 / 7,415 / 7,395 sequence remains the operative downside ladder for ES. With futures at 7,399.50 and cash 7,418, the tape is testing the third rung of the ladder pre-open; a clean break below 7,395 with US10Y above 4.65% would open 7,360 / 7,330. The upside extension above 7,500 needs either a CONFIRMED Iran-waiver headline (not just a postpone) or an explicitly dovish first Warsh-proxy remark from Williams/Waller/Bowman to compress the term-premium and let beta lift.

Walter Deemer (incl. Wayne Whaley reposts)

May 15-22 Calendar Pothole Now Day 2 — Tom McClellan Refutes Topping Condition

Wayne Whaley’s May 15-22 calendar pothole — the historically weak seasonal window the quant calendar has flagged repeatedly — is now in Day 2 (today is the second session of the band). The pothole framework gives traders explicit cover to stay defensive into the back half of the week. Counterpoint: Tom McClellan (reposted by Deemer) ran his indicator overnight and the read explicitly refutes a topping condition — consistent with the Cembalest broadening thesis and the BlackRock BII upgrade. Both signals can live together: defensive into the pothole, but no structural top print.

SentimentTrader — Jason Goepfert

Market Environment Composite: “Healthy But Precarious”

SentimentTrader’s eight-metric Market Environment Composite is currently flashing “healthy but precarious” per the firm’s standing framework. The healthy reading reflects supportive trend/breadth across most sub-components, but the “precarious” tag flags that several internals have rolled off cycle highs and a flip would be material. Given the Iran/oil/yield setup, this is the model to watch for confirmation of a regime change rather than relying on price alone.

BofA Fund Manager Survey (May)

Record Equity OW Since Jan 2022 — 40% Cite Second Inflation Wave as #1 Risk

FinancialJuice flags the BofA Fund Manager Survey shows a record equity overweight since January 2022, even as 40% of allocators now cite a second inflation wave as the number-one market risk. Walter Bloomberg adds that Kalshi is pricing 5.1% US inflation for 2026 — explicit divergence between consensus allocation and consensus risk. That divergence is the exact precondition for a violent rotation if the Warsh-era credibility-hike narrative gains traction.

BlackRock Investment Institute — Weekly (May 18)

Rotate to Strategic OW Developed Equities; Take Down Credit; OW Inflation-Linked

BII upgrades DM equities to overweight on a 5-year strategic horizon, downgrades high yield to neutral, keeps DM government bonds underweight, and overweights inflation-linked bonds. The allocation choice is unambiguous: equity risk over credit and duration. The MSCI U.S. 2026/2027 EPS-upgrade quarters rank top-five since 1988. Mag-7 vs. rest-of-S&P 500 expected 2027 EPS-growth gap has compressed to 3 ppts from 31% in 2024 — broadening is institutional. Tactical anchor pairs include long Taiwan/Korea (EM AI supply chain), long India (demographics), neutral HY, UW DM govt bonds. Inflation-linked bonds capture the “sticky inflation, hold-then-hike” regime cleanly.

Schwab — Kevin Gordon / Liz Ann Sonders

Bet on Continued Bear-Steepener; UW High-Quality Duration; Long Credit Relative to Rates

Gordon’s FCI paradox — yields at multi-year highs but Goldman Financial Conditions Index near accommodative late-1990s levels — implies the Fed has less than the perceived tightening pressure embedded. The Schwab desk implication: bet on a continued bear-steepener, underweight high-quality duration, and prefer credit risk relative to rates. That posture pairs naturally with the BlackRock OW-equities/UW-DM-govt-bonds call, and contrasts with the BofA Fund Manager Survey’s record equity OW into a second-inflation-wave risk profile.

Raymond James — Larry Adam & Doug Drabik (Fixed Income)

Sticky-Inflation Regime View — Prefer Short-Dated TIPS & Inflation-Linked Exposure

Drabik’s May 18 piece “Inflation Persists as the Fed Chair’s Term Expires” reinforces a sticky-inflation regime view for fixed-income investors, leaning short-dated TIPS and inflation-linked exposure rather than nominal duration. Adam’s May 15 Weekly Headings frames the policy-credibility risk around the Warsh transition — consistent with Yardeni’s “June hold + July HIKE” framework and the Kalshi flip in January hike odds.

Today’s Calendar — FinancialJuice Wrap

HD Pre-Bell · Empire State 8:30 ET · Waller 15:00 UTC · NVDA Wed AMC

The morning calendar opens with Home Depot Q1 earnings pre-bell (consensus $3.41 / $41.6B) — the print landed with an EPS beat but a comparable-sales miss at +0.6% and an inventory build, confirming the consumer-slowdown read. 8:30 AM ET delivers Empire State Manufacturing (prior 19.6, four-year high); NAHB HMI already in at 37. Fed Governor Waller speaks at 15:00 UTC — the highest-impact Fed speaker before Warsh’s Friday swearing-in. The marquee event is NVDA earnings Wednesday AMC (DA Davidson PT $300, Morgan Stanley PT $285). G7 Paris communique today sets policy tone; Bessent push on critical minerals expected.

FinancialJuice Hormuz / Qatar FM Read

Tanker Flows Still Constrained — Only 2 LNG Tankers Crossed Strait

Qatar Foreign Minister flagged that only two LNG tankers crossed the Strait of Hormuz overnight, with Qeshm Island explosions adding pressure on the corridor. The Trump-postpone-strike headline is a political-clock event, not a physical one — the tanker-flow constraint underlying Brent’s $110 print is intact. Watch for a Tasnim/ForexLive report on whether a US drafting of a temporary Iran sanctions waiver moves into the official channel; that would be the catalyst capable of breaking WTI back under $100 in one tape.

AP News — Wall Street Wrap

Pre-Market Tone — Stocks Lower, Oil Above $100, Yields at Highs

AP’s top headline confirms the tape posture: stocks lower, oil above $100, yields at multi-month highs — the Iran-and-Warsh tape pricing through even an overnight strike postponement. The wire pairs that with the China April retail sales miss (+0.2% YoY vs +2% est) as the second demand-side data point of the morning, alongside HD’s comp-sales miss. China’s industrial production was the dominant overnight Asian data point; the consumer print is what the equity desks are reading.

Bilello — Commodity Tally Since Iran War Start

WTI +60%, Jet Fuel +58%, Heating Oil +55%, Brent +50%

Bilello’s commodity scoreboard since the Iran war start: Sulfur +97%, WTI +60%, Jet Fuel +58%, Heating Oil +55%, EU Natural Gas +54%, Gasoline +52%, Diesel +52%, Brent +50%, Cotton +28%, Fertilizer +20%. This is the second-wave inflation story BII pivoted to overweight inflation-linked bonds on, and the BofA FMS “second inflation wave” risk that 40% of allocators now cite. Refiners (PSX, MPC, VLO, DK) supported by Kemp’s distillate-stocks thesis; integrated oils (XOM, CVX) remain the high-conviction expression.

Nick Timiraos — WSJ (@NickTimiraos, ~15h ago) NET-NEW

Warsh Sworn In Friday AT THE WHITE HOUSE — 1st Since Greenspan 1987

Kevin Warsh will be sworn in as Fed Chair on Friday at the White House — the first sitting-president-hosted Fed Chair ceremony since Reagan-Greenspan in 1987 (Bernanke 2006 was at the Eisenhower Executive Office Building, not the WH). The optics are the story. Combined with Kalshi’s January Fed-hike probability flipping above 50% from near-zero a week ago, and Yardeni’s “Bond Vigilantes Welcome Warsh” framework, the curve is unambiguously pricing politicization risk into the long end and into 2027 OIS.

Walter Bloomberg (@DeItaone) — ~8m ago

Kalshi Pricing 5.1% 2026 US Inflation — BofA FMS: 40% Cite Second Wave as #1 Risk

Real-time desk feed flags rising 2026 inflation expectations, corroborated by the BofA fund-manager survey calling a second wave the biggest market risk; reinforces Tuesday’s bear-steepening + Iran-driven energy spike narrative. Implication: lean defensive on duration (TLT) and long energy/commodities; watch breakevens (TIPS curve) for further widening if Kalshi 5%+ pricing persists.

The Kobeissi Letter — Korea Margin Debt & US Credit-Card Stress (~12h ago) DIVERGENCE

Korea Margin Debt RECORD $24.3B / NY Fed CC 90+ DPD Fresh Cycle HIGH

Two signals from the same desk in opposite directions. South Korea margin debt has exploded to a record $24.3 billion, up +140% since the start of 2025 and +32% YTD — classic late-cycle euphoria in EM equity. Simultaneously, US credit-card 90+ day delinquencies have surged +5.5 percentage points since Q3 2022 to a fresh cycle high on the NY Fed Consumer Credit Panel/Equifax series. Leveraged retail and stressed consumer credit are co-existing in the same tape; both are vulnerable to a duration shock.

Charlie Bilello — Commodity Tally Since Iran War Start (May 18) SCOREBOARD

Sulfur +97%, WTI +60%, Jet Fuel +58%, Brent +50%

Bilello’s tally of price changes since the Iran war start: Sulfur +97%, WTI +60%, Jet Fuel +58%, Heating Oil +55%, EU Natural Gas +54%, Gasoline +52%, Diesel +52%, Brent +50%, Cotton +28%, Fertilizer +20%. This is the second-wave inflation story BII pivoted on; Kalshi’s implied 2026 US inflation now sits at 5.1% per Walter Bloomberg, and the BofA FMS shows 40% citing a second inflation wave as the #1 market risk.

John Kemp — Energy Analyst (~3h ago)

NextEra-Dominion: Virginia Power Demand Grew 2x Florida’s 2010-23

Kemp quantifies the strategic prize in the $67B NextEra-Dominion all-stock merger: Virginia electricity consumption grew roughly twice as fast as Florida’s (NextEra’s home turf) from 2010 to 2023, driven explicitly by the Northern Virginia data-center cluster. The transaction is, in essence, a power-supply asset purchase for the AI build-out. Combined utility footprint: 110 GW of capacity, 10 million customers; enterprise value approximately $116B — the largest utility M&A on record.

Liz Ann Sonders / Kevin Gordon (Schwab, ~1h ago)

FCI Paradox — Late-1990s Accommodative Despite Multi-Year Yield Highs

Schwab’s Kevin Gordon (reposted by Liz Ann Sonders) flags that even with bond yields at multi-year highs (US10Y ~4.60%), US financial conditions are near late-1990s accommodative levels. Rising yields are not yet biting on credit spreads, equity valuations, or the dollar — leaving the Fed less reason to cut and arguably more cover to lean hawkish if inflation pressures persist. Reinforces the Yardeni / Kalshi June-hold/July-hike narrative.

Anthony Pompliano (@APompliano)

$657M BTC 24h Liquidations — Pushback on AI Bubble Narrative

Pompliano flagged $657M of total 24-hour BTC liquidations as the sub-$77K bleed continues; spot BTC ETFs printed −$1.04B on the week (breaking a 6-week inflow streak), ETH ETFs −$255M. Separately, Pompliano pushed back on the AI-bubble narrative, pointing to the BlackRock BII Mag-7-vs-rest 2027 EPS gap collapsing to 3 percentage points (from 31% in 2024) and Cembalest’s 42-name 65-75% S&P EPS/rev/capex driver math as evidence the AI capex stack is sustaining earnings power, not financing speculation.

Walter Deemer — Tom McClellan Repost

McClellan Indicator Refutes Topping Condition — Counter to Whaley Pothole

Tom McClellan ran his indicator overnight and the read explicitly refutes a topping condition — consistent with the Cembalest broadening thesis and the BlackRock BII upgrade. The print is a counter to the Wayne Whaley May 15-22 calendar pothole (now Day 2). Both signals can live together: defensive into the pothole, but no structural top print yet, leaving the Williams-style dovish Fed-proxy surprise the highest-asymmetry trade of the week.

OptionsHawk Morning Note

Next-Gen Geothermal IPO + SHAK Insider Buys

OptionsHawk’s free morning note highlights the Next-Gen Geothermal IPO (AI-power tell aligned with the NextEra-Dominion thesis) and an SHAK insider-buy cluster as the two single-stock items worth tracking pre-bell. The flow read is consistent with the rotation theme: energy-and-power up, consumer-discretionary cautious into HD’s comp-sales miss.

Atlanta Fed — GDPNow Q2 Tracking HOT NOWCAST

Q2 GDPNow 4.0% (May 14 Update) — PCE Nowcast 2.7%, Investment 10.2%

The Atlanta Fed’s GDPNow estimate for Q2 2026 real GDP growth stands at 4.0% SAAR as of the May 14 update, up from 3.8% on May 8 and 3.5% earlier in the cycle. After recent Census, BLS, NAR, and Treasury data, the model’s PCE-growth nowcast climbed to 2.7% and gross private domestic investment surged to 10.2% (from 9.2%). This is a meaningfully hot read versus consensus mid-2% prints and reinforces the inflation-stickiness narrative the bond vigilantes are punishing. Next GDPNow refresh is Thursday May 21; if industrial-production or housing-starts surprises soften, the model can revise lower.

NY Fed — Liberty Street Economics (May 14)

AI Adoption and the “K-Shape” Productivity Distribution

NY Fed researchers flag a widening K-shape in productivity outcomes from AI adoption: leading-edge adopters in software, finance, and professional services are pulling away from laggards in retail, traditional manufacturing, and small services. The implication is that aggregate productivity gains may be larger than headline TFP suggests, but that the distribution is uneven — reinforcing the institutional barbell case for long-quality AI execution and short unprofitable-tech. Aligns with BII Mag-7-vs-rest gap-compression thesis.

NY Fed Survey of Consumer Expectations — April Print

1-Year Inflation Expectations Rise to 3.6% — 12-Month High

The NY Fed’s Survey of Consumer Expectations shows 1-year ahead inflation expectations rising to 3.6%, a 12-month high. The household-side de-anchoring is small but the direction is what matters with Kalshi pricing 5.1% inflation for 2026 and the BofA FMS showing 40% of allocators citing a second wave as the #1 risk. The Fed cannot ignore household expectations drifting up at the same time the GDP nowcast prints 4.0% — this is the framing “June hold + July HIKE” lives in.

Chicago Fed — CFNAI March Read

CFNAI −0.20 in March — Below Trend But Not Recessionary

The Chicago Fed National Activity Index printed −0.20 in March, indicating economic activity ran below trend but not at recessionary levels. Paired with ISM Manufacturing 52.7 / Services 53.6 / Prices 84.6 (broadly expansionary with hot prices), NFIB SBOI 95.9 in April, and Conference Board LEI −0.6% in March (next print May 22), the composite read is “mid-cycle deceleration with hot prices” — the regime in which a credibility hike becomes both feasible and arguably warranted.

Moody’s Analytics — Mark Zandi

~50% Recession Odds — Iran-Driven Stagflation Tail Persists

Zandi’s most recent free commentary puts recession odds at roughly 50% on a 12-month forward basis, with the Iran-driven energy shock the dominant near-term risk to growth even as oil moderates from Monday’s intraday highs. Pairs with the consumer-credit-stress and HD comp-sales-miss signals to keep the demand-side risk in the binary against the bond-vigilante hawkish-supply-side thesis.

FOMC — Warsh First Full Week NET-NEW POLITICIZATION OPTIC

Confirmed 54-45 on May 13 · Term Began May 15 · First FOMC June 16-17

Kevin Warsh was Senate-confirmed 54-45 on May 13, his term officially began Friday May 15, and Friday May 22 brings his swearing-in ceremony — at the White House, per Nick Timiraos, the first sitting-president-hosted Fed Chair ceremony since Reagan-Greenspan in 1987. Warsh has been explicit in confirmation testimony that the Fed “speaks quite frequently” and that “truth-seeking is more important than repetition” — telegraphing a more restrained forward-guidance posture. He emphasized the Fed must “stay in its lane” to maintain independence. First FOMC is June 16-17; CME FedWatch prices ~96-99% June hold but ~42% probability of at least one hike by year-end. The asymmetry of this week’s risk: a proxy speaker (Williams/Waller/Bowman) airing even mildly hawkish framing reads as Warsh-doctrine signaling and forces duration short-cover — or hawkish capitulation in the OIS curve.

FEDS Notes — Federal Reserve Board Research

Recent: CRE Evergreening (May 4) · 4-Note Batch (May 8)

The Fed’s FEDS Notes index shows a CRE-focused note (“Pretend or Amend? On Evergreening in CRE,” May 4) and a four-note batch (May 8) covering productivity, household balance sheets, and term-premia. The CRE-evergreening piece is the highest-stakes structural read of the month given regional-bank exposure to the CRE refinancing wall; if the next four weeks of bank earnings revisits CRE provisioning, this note becomes the framework allocators cite.

Fed Speaker Calendar — This Week

Waller Today 15:00 UTC · Williams Mid-Week · Powell Closing Out

Today’s highest-impact Fed event is Governor Waller at 15:00 UTC — the last meaningful pre-Warsh swearing-in speech window for a governor to put down a policy marker. Williams’s mid-week appearance is the centrist marker desks are watching most closely. Powell closes out the week before formally handing the gavel. Any hawkish marker from Waller (with the Kalshi >50% January hike odds already in place) compounds the bear-steepener; a dovish marker triggers a violent duration short-cover into NVDA Wednesday night.