Also: Hidden value traps in private lending, and a suspicious betting transaction emerges near Washington. Good morning. Markets remain unsettled from last Friday's volatility. Stock index futures point to a slightly lower open for U.S. stocks, Brent crude prices edge higher, and U.S. Treasury yields hold near their elevated levels after a sharp rise over the weekend. Ongoing tensions in the Gulf region and clashes on social media have reinforced investor awareness that the Strait of Hormuz remains closed, with little hope of a swift reopening.
Market Snapshot (as of May 18, 2026) S&P 500 Mini Futures: 7,402.75, down 29.50 points, or 0.40% Dow Jones Mini Futures: 49,297.00, down 320 points, or 0.64% Nasdaq-100 Mini Futures: 29,129.00, down 102.75 points, or 0.35% U.S. 10-Year Treasury Yield: 4.61%, up 0.01 percentage points, or 0.28% Crude Oil Futures: $106.50, up $1.08, or 1.02%
Oil Price Shock vs. Tax Refund Boost The retail sector, already grappling with persistent supply chain issues in recent years, now faces fresh challenges from the Middle East conflict. Major retailers are reporting their fiscal first-quarter (February to April) earnings, a period that fully encompasses two months of the conflict. With new CEOs recently appointed at both Wal-Mart and Target, this week's earnings reports will serve as their first major test under the new market pressures. Both executives are company veterans taking the helm at a pivotal time. Target is pushing forward with a turnaround plan, while Wal-Mart is focusing on building a tech-driven growth model. Investor confidence in both companies' prospects is high, with Target's stock up 24% year-to-date and Wal-Mart's up 18%, both outperforming the broader market. However, rising gasoline prices could hinder this growth. Wal-Mart management noted at a Citigroup conference in March that consumer spending tends to shift towards value items when gas prices approach $4 per gallon. The bank's research suggests that if prices climb to $5 per gallon, household spending would face significant pressure. Since April, the U.S. national average retail gas price has hovered around $4 per gallon, approaching $4.50 in May. A counterbalancing factor exists: the "Major Livelihood Benefits Act" has led to significantly larger tax refunds this year. According to RBC Capital Markets equity analyst Steven Shemesh, total U.S. tax refunds are up 18% year-over-year, injecting an additional roughly $50 billion into the economy. This suggests the Middle East conflict may not immediately dent retailers' quarterly revenue figures. Yet, corporate profits are under pressure. Over the past few years, even amidst high inflation, S&P 500 retail companies have consistently expanded their profit margins. Last year, the sector's operating margin hit a record high since S&P Global Market Intelligence began tracking the data in 2006. Now, with prices rising across key inputs like fertilizer, plastics, aluminum, and fuel, retail profit margins are being squeezed. For Wal-Mart, profitability is crucial. Its tech-centric growth narrative, supported by high-margin businesses like advertising and membership fees, underpins a forward P/E ratio of 43. This model's core premise is achieving operating profit growth that outpaces revenue growth. Rising costs could unravel this logic. Last week, Wal-Mart announced plans to cut or relocate about 1,000 corporate positions. Retail giants like Wal-Mart, Target, and Costco (reporting later this month) possess far greater resilience than their peers in an inflationary environment. They wield strong bargaining power with suppliers, sell essential goods, and are top choices for value-conscious consumers. Target's earlier decision to expand its fresh food offerings now appears highly prescient. Nonetheless, the longer the Strait of Hormuz remains closed, the harder it will be for retailers to protect their margins.
Stocks to Watch Dominion Energy: In talks to be acquired by NextEra Energy, a deal that could be one of the year's largest. The stock surged 12% pre-market, while NextEra's shares dipped slightly. An agreement could be announced as soon as today. UnitedHealth Group: Berkshire Hathaway disclosed late Friday it had exited its position in the insurer, sending the stock down 5% pre-market. Berkshire also revealed new stakes in Delta Air Lines and Macy's, pushing those shares higher pre-market. Regeneron Pharmaceuticals: Announced Friday evening that a Phase 3 trial for a melanoma treatment failed to meet its primary efficacy endpoint, causing the stock to drop over 10% pre-market. Ryanair: The Irish low-cost carrier warned that the Middle East conflict is raising fuel costs and that travelers delaying bookings are putting pressure on ticket prices. Its shares fell over 3%.
Market Insight To borrow from Churchill, investing in Business Development Companies (BDCs) is akin to buying credit assets nested within a fund, which is then packaged as a stock. Many investors are eager to invest in these publicly traded private lending platforms, even as the underlying assets face credit risks from borrowers like software companies. Currently, most BDC stocks trade at significant discounts to their net asset value, some with high dividend yields. However, investing in BDC shares is fundamentally different from directly purchasing loans or bonds. A low price does not necessarily equate to equivalent investment value.
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