Take a deep breath. Mighty Microsoft (MSFT) hit its quarterly numbers, singlehandedly raising the earnings picture for the market as a whole.

It’s been a great year for the biggest corporations on the planet. So why is the S&P 500 struggling to hold onto any year-over-year progress whatsoever, while the NASDAQ has dropped 7% in the past 12 months?

The companies haven’t changed. Overall, neither the fundamentals nor the forward outlook has gotten one bit worse since the market peaked.

If anything, investors now anticipate 3 percentage points higher earnings growth in 2022 than anyone predicted back in November. The bar is not getting lower. It’s getting higher.

And that doesn’t happen in environments like this without material evidence that expectations are set too low. Every upgrade is a struggle these days. You need to make a convincing case . . . or risk disaster if you’re wrong.

What’s changed is the Fed and the inflationary factors that are currently weighing on monetary policy. In the last six months, oil shocks in particular have proved that inflation is going to be a lot harder to defeat than we initially hoped.

It’s going to require a lot more interest rate shock to get prices under control. As a result, while the earnings outlook has improved significantly, the rate outlook has largely kept up.

Back in November, the futures market was signaling that the Fed would probably raise rates a total of 0.75 percentage point in the coming year. At the most extreme, a few renegades thought overnight rates would get as high as 2%.

Today, almost nobody sincerely believes that overnight rates will be lower than 2% a year from now. Most are betting that the Fed will keep hiking until the bottom of the yield curve is above 3%.

That’s a very different world. And it overshadows all the good news we’ve seen on the earnings front, quarter after quarter.

I don’t think that kind of rate ladder will kill us. It’s actually close to “normal” from a long-term historical perspective, even “healthy” from that point of view.

But after a decade of abnormally low interest rates, it’s going to feel a little painful and a little strange. Investors hate change. When the world goes off the familiar playbook, the instinctive response is to sell and come back when everything starts to make sense again.

That’s what the options market is telling me, day after day. Premiums have soared . . . and expectations have gotten extreme in both directions.

Even in the short term, S&P 500 calls signal a sense of either disaster or profound relief ahead, without leaving a lot of room for calmer outcomes in between.

Go out to the next Fed meeting next week and the “safest” at-the-money calls suggest that big money is banking on the market as a whole climbing as much as 8% in the next few days.

On the other hand, comparable puts suggest similar bets riding on an 8% decline. That’s a vast divergence of opinion. Ultimately, one side will win big and the other will lose.

And we’ll know. The way these contracts line up tell me that by the end of the expiration period (May 4, the day the Fed decides), the S&P 500 stands a very good chance of closing roughly where it is now.

There will be sound and fury in between. You can focus on the twists and turns . . . or on the destination. Guess what? In a week, big money doesn’t think the market will look dramatically different from the way it looks now.

Some stocks will soar. Others will plunge. And most will oscillate around where they are now.

Go out to September, when the mid-term election cycle will be shaping up to determine the future of U.S. politics for the next two years. Cooler heads prevail.

At-the-money contracts suggest that the S&P 500 will wobble across a 13-14% range throughout the next 5 months. Over that longer timeline, volatility smooths out.

Go out a year, to the bets big money is making on where the market will be in late March 2023. Something surprising happens.

The puts still imply that we might see the S&P 500 dip 6% across that period. It’s not a great forecast, but that’s as low as most people with real skin in the game are willing to predict.

Granted, a significant minority of investors are betting real money that the S&P 500 will drop another 9% in the coming year. But beyond a few fringe contracts, that’s as dismal as it gets.

If it’s the end of the world, why aren’t more big accounts crowding into the extreme puts? And as it happens, the calls suggest that the bulls feel pretty good about the S&P 500 climbing 10-11% in the coming year.

That’s not spectacular after what we’ve seen in the last few months. But it’s a pretty good indication of how sentiment is balanced.

What everyone agrees on is that it’s going to be a bumpy road along the way. We all need to get through the uncertainty around the next Fed meeting.

After that, money will pivot. And we’ll know the shape of things to come . . . which right now looks a lot like “normal” on Wall Street.