This Rally Doesn’t Add UpE-mini S&P 500 FuturesCME_MINI:ES1!hermes_trismeIn April, we witnessed one of the most unprecedented bull runs of the last decade. The market rose more than 10% after a spectacular V-turn off a nine-month low. The March sell-off was fuelled by the shock of the U.S. operation in Iran and the so-called “AI bubble” narrative that circulated in the press since late 2025. March also closed below the 200-day moving average (200 DMA), a signal many view as the end of the bull market. Then, suddenly, everything changed. Even before the U.S. officially declared a ceasefire, the market made a V-turn and started to rally. As geopolitical tensions eased, the market gained momentum and ended April with a spectacular close at an all-time high. Anyone who bet against the market - which didn’t seem unreasonable - likely suffered severe losses. So why would someone be bearish now? From a technical perspective, there isn’t much to argue in favour of a pullback. The only concern is the magnitude of the move (more than 10% in a month). It’s not completely unprecedented, but it is certainly rare. However, this alone is not enough for a bearish argument. Top monthly SPX returns in the last 10 years What is important is that the “COVID” runs were sparked by U.S. monetary easing - a massive liquidity injection that boosted equity prices. That’s not what we see today; in fact, it’s the opposite. As oil prices rose, so did inflation expectations, forcing the Fed and other central banks to revise their plans. In February, the market was pricing a more than 70% chance of an interest-rate cut by year end. Now those odds have fallen to around 10%, which effectively means the market expects rates to stay where they are. “CME Fed watch” data, probability of the rate change by end of 2026. Large green area means market currently expects rate to stay the same over this year, a major shift from pre-war expectations Interest rates play an important role in virtually all equity-valuation models. So we can say with some confidence that, all else equal, valuations should be lower than they were three months ago. That raises the question: what is justifying current market levels? My take is that the recent market action is exploratory. The rally was driven largely by volatility contraction and short covering—but that component is now gone. Uncertainty around the U.S.–Iran conflict remains high. Meanwhile, the oil futures curve reflects an assumption that current geopolitical risk premiums will fade, with prices drifting back toward sub-$80 levels over time. That assumption could unwind quickly if tensions re-escalate. The market is now pricing too much certainty: a durable ceasefire, contained oil/inflation risk, resilient earnings, and no further Fed repricing. If any of those assumptions weaken, expect a strong pullback into the major value area formed from October through February. The “AI revolution” narrative that re-emerged as the market surged may prove true in the long run, but personally I don’t buy the rapid shift from “AI bubble” to “AI revolution.” It is difficult to say when it might happen but I’d bet on something by the end of May. A practical way to express this view is with options (e.g. OTM put or bear put spread): you can define your risk and stay in the game even if the market decides to rally a bit more and squeeze bears further. Disclaimer I don't give trading or investing advice, just sharing my thoughts. Please do your own analysis and adopt prudent risk management.