The market rally takes a breather. Here are 3 reasons why — and 1 silver lining

An important development from the financial markets: Every weekday, the CNBC Investing Club with Jim Cramer releases the Homestretch — an actionable afternoon update, just in time for the last hour of trading on Wall Street. Markets are pulling back on Tuesday from record highs, with stocks tied to artificial intelligence buildout down the most. The tech-heavy Nasdaq was down 1.

5% in afternoon trading, while the S & P 500 was off about 0. Several factors were at play. First was the continued strength in the oil market due to uncertainty over the Iran peace deal.

Economic Details

At its highs of the day Tuesday, U. oil benchmark WTI crude crossed above $102 per barrel; it settled Monday at $98. Another factor was the hot April consumer price index (CPI) report , which made the market worried that the Federal Reserve's next move could be a hike, not a cut.

The market now sees a roughly 36% probability of a rate hike by year-end, up from about 24% yesterday, according to the CME FedWatch tool . These probabilities can swing back and forth with every new data point and headline out of the war, so we wouldn't read too much into this just yet. Still, we also wouldn't ignore the signals from the bond market, which is sensitive to inflation expectations.

The 10-year Treasury yield climbed to 4. 45% and the 30-Year yield crossed above 5%. Rising interest rates are typically negative for high price-to-earnings multiple stocks, explaining why growth-oriented names took a hit.

Analyst Views

Third and finally, a lot of AI-related stocks were overbought after going parabolic in recent weeks. Some giveback had to be expected at some point. The challenge with parabolic moves is that when momentum reverses, the sell-offs are often much faster than investors can react to.

That's why we prefer to trim positions during parabolic rallies, recognizing that we're unlikely to perfectly time the top. We don't think the AI trade is over, but we would not be surprised to see some profit-taking persist in the near term, given the extraordinary run the group has had since the end of March. While the rotation is pressuring many of our data center-related winners, including Corning , GE Vernova , Eaton and Broadcom , the silver lining is that some of that money is finding its way into out-of-favor groups that have lagged the broader market rally, including healthcare and consumer staples.

Procter & Gamble , Eli Lilly , Costco , and Johnson & Johnson were some of the biggest gainers in the portfolio. It's a light night for earnings. NextPower is the only major company scheduled to report.

Financial markets are tracking the development closely as investors assess the likely impact.