April delivered the mirror image of March. The S&P 500 closed the month at a fresh all-time high of 7,209, posting its strongest monthly gain since 2020, with the Nasdaq also setting record closes. The rally happened against a backdrop that, on paper, looked unchanged: Brent crude finished the month near $120 per barrel, the U.S. naval blockade of Iran was extended indefinitely, and the Federal Reserve held rates steady while warning that inflation risks remain elevated.
Earnings Did the Heavy Lifting
With approximately one-third of S&P 500 companies reported by month-end, Q1 earnings season has materially exceeded expectations. The blended year-over-year earnings growth rate stood at 15.1% as of late April, up from 13.1% expected at the end of March, putting the index on track for a sixth consecutive quarter of double-digit earnings growth.1 The strength has been broad and quantifiable, not concentrated in a handful of headline names. Eighty-four percent of reporting companies have beaten EPS estimates, with the magnitude of the beats averaging 12.3%, well above the five-year average of 7.3%.1
- Profit margins reached a new record: The blended net profit margin for the S&P 500 in Q1 2026 stood at 13.4% as of late April, the highest level recorded since FactSet began tracking the metric in 2009, surpassing the prior record of 13.2% set in Q4 2025. Margin expansion was concentrated in the Information Technology sector, which posted a Q1 net margin of 29.1%, up from 25.4% a year earlier. The implication is straightforward: the corporate earnings power that markets are pricing is not a forecast or a forward-looking estimate, it is showing up in actual reported results.1
- Megacap divergence on AI capital spending: The market’s reaction to megacap technology earnings revealed a meaningful new differentiation. The pattern signals a shift: investors are now pricing AI capital spending against evidence of returns, not on the size of the commitment alone. Alphabet rose approximately 34% in April, its strongest monthly gain since 2004, on a Q1 beat across cloud, advertising, and Waymo. Meta Platforms fell roughly 9% after raising 2026 capital expenditure guidance to a range of $125 billion to $145 billion, even as it beat on earnings. Microsoft fell approximately 4% on its results.2
- The valuation tension is real: The forward 12-month price-to-earnings ratio for the S&P 500 stood at 20.9 by late April, above both the five-year average of 19.9 and the ten-year average of 18.9, and well above the 19.7 level recorded at the end of March. Current valuations are down from recent peaks. Strong earnings have closed part of the valuation gap, but the index is still being priced for a continuation of the current trajectory through the second half of 2026.1 3
Implications for Investors: Q1 earnings season has provided substantive validation of the fundamental case for U.S. equities, particularly in the technology and industrial sectors. The strength is genuine and broad-based. At the same time, valuations now embed an expectation that the trajectory continues, and the market’s selective reaction to Big Tech capital spending plans suggests investors are no longer giving open-ended credit for AI investment without evidence of return. Investors should recognize that the earnings story does help justify current prices, while remaining mindful that any deceleration in the back half of 2026 will be less forgiving at 20.9 times forward earnings than it would have been at 18 times.
The Macro Picture Remains Cloudy
The market narrative through April was that the Iran conflict was de-escalating, but the actual situation by month-end was more complicated. A U.S.-Iran ceasefire was announced on April 7 and 8, and on April 17 Iran’s foreign minister declared the Strait of Hormuz open during the truce, prompting an 11% one-day decline in oil prices.4 Within ten days, however, the diplomatic picture had reversed. The administration declined Iran’s proposal to reopen the strait permanently, the U.S. naval blockade of Iranian ports was extended indefinitely, and reports indicated that the U.S. Central Command had prepared plans for additional strikes if negotiations stalled.4
- Oil prices remain elevated and volatile: Brent crude closed near $120 per barrel, up roughly 50% from pre-conflict levels. The April Federal Reserve meeting statement explicitly cited the energy shock as a source of continued inflation risk, and the ISM manufacturing prices index reached 84.6 in April, its highest level since April 2022, on tariff and energy cost pressures.4 5 6
- Demand destruction has begun in Asia: The International Energy Agency revised its 2026 global oil demand forecast in its April Oil Market Report, projecting a Q2 2026 contraction of roughly 1.5 million barrels per day, which would represent the sharpest decline since the COVID-19 pandemic. The revisions are concentrated in the Middle East and Asia Pacific markets. The IEA noted that demand destruction tends to spread when energy scarcity persists, suggesting downside risks to the global growth outlook beyond the immediate supply story.7
- The diplomatic standoff structure has hardened: The conflict has reached an unusual state in which the formal ceasefire holds but the economic standoff continues. Iran has retained the ability to selectively close or condition traffic through the Strait, the U.S. is maintaining a naval blockade of Iranian ports, and the underlying disputes remain unresolved.4
- GDP bounced back from a shutdown-driven slowdown: Real GDP grew at an annualized rate of 2.0% in Q1 2026, according to the BEA’s advance estimate. This was a meaningful acceleration from Q4 2025’s 0.5%. The Q4 slowdown was largely attributable to the 43-day government shutdown. The Q1 rebound was driven by a resumption of government spending and exports, with federal employee compensation snapping back as operations returned to normal.8
- Labor markets remained relatively steady, with unemployment at 4.3%: Employers added 178,000 nonfarm payroll jobs in March, a strong recovery from a significant decline in February (-133,000) that was attributed in part to severe weather and a temporary 35,000-worker Kaiser Permanente strike. Job growth was highly concentrated in healthcare, construction, and transportation, while federal government employment continued to decline.9
- Four FOMC dissents, the most since 1992: The April 28 to 29 FOMC meeting held the federal funds rate at 3.50% to 3.75% in an 8-to-4 vote, the most dissents at a single Fed meeting since October 1992. Three regional presidents dissented against forward-guidance language in the statement that suggested the next rate move would be lower. Governor Stephen Miran, who has dissented at every meeting since joining the Board in September 2025, again favored an immediate 25 basis point cut. The hawkish dissents were grounded in the data: with March CPI at 3.3% year over year, accelerated from 2.4% in February, and headline CPI rising 0.9% month over month driven by a 21.2% gasoline price surge, there is no clear basis to signal future easing. April was Chair Powell’s last FOMC meeting; his term as Chair ends May 15, however Powell has indicated he intends to remain on the Fed Board through his governor term ending in January 2028, with Kevin Warsh expected to take the seat currently held by Stephen Miran on a temporary basis.10 11 12
Implications for Investors: The market’s April rally embedded a meaningful assumption that the Iran conflict would resolve relatively quickly and that energy prices would normalize. The conditions on the ground do not yet support that assumption. Investors should expect continued gyrations in the equity markets in the days to come as oil prices will remain volatile until we see a lasting resolution. We expect energy to remain an inflationary pressure for the remainder of 2026, at least. The Fed dissents signal that the FOMC is not in a hurry to cut rates.
Stagflation Then and Now: How 2026 Compares to the 1970s
Comparisons to the stagflation of the 1970s have re-emerged in market commentary, and the parallels are real enough to take seriously. The triggering events rhyme: a Middle East-driven oil shock has arrived alongside an inflation impulse at a moment when growth is already slowing, leaving the Federal Reserve to navigate a dual-mandate conflict it has not faced in four decades. The differences, however, are equally important, and they explain why the equity market response in 2026 has been so different from the experience of the 1970s. Understanding both sides of that comparison matters for how the rest of this cycle is likely to unfold.
- Energy intensity of the economy has fallen by more than half: The single most important structural difference between 2026 and the 1970s is how much oil it takes to produce a unit of economic output. Yale’s Budget Lab estimates that the oil intensity of U.S. GDP has declined by more than 50% since 1973. Hence an identical oil price shock today produces a meaningfully smaller drag on GDP and a smaller pass-through to core inflation than it would have produced fifty years ago.13
- Inflation expectations are anchored, not unanchored: In the 1970s, the inflation problem became self-reinforcing because expectations of higher future inflation were embedded into wage and price setting behavior. Between 1968 and 1970, before the first oil shock, expected inflation in the University of Michigan survey rose from 3.8% to 4.9%. Today, by contrast, longer-term inflation expectations remain near the Federal Reserve’s 2% target. The April FOMC minutes documented committee concern about whether the energy shock could break that anchor; that concern is the central reason the Fed has resisted cuts despite a softening labor market.10 14
- Debt levels and fiscal flexibility constrain the policy response: The U.S. economy of 2026 is not the U.S. economy of 1981. Federal debt held by the public stands at approximately 100% of GDP, compared to roughly 25% when Volcker began his tightening cycle, when the Federal Reserve raised the federal funds rate to roughly 20% to break the inflation spiral. Corporate debt levels and household debt service costs are similarly elevated. The implication is not that stagflation is impossible, but that the policy tools available to combat it are narrower than they were forty-five years ago, and the cost of using them aggressively would be higher. Thus, we’re unlikely to see the Fed return to a strategy of double-digit federal funds rates as they did in the Volcker years.15
- Productivity and the structure of growth differ sharply: The 1970s economy was characterized by slowing productivity growth, declining global competitiveness in U.S. manufacturing, and limited investment in productivity-enhancing technology. The 2026 economy is the opposite: productivity growth has accelerated, with technology-related investment being one of the primary catalysts of global growth. Stagflation in the 1970s persisted in part because there was no offset to the cost shock; today, the productivity story provides at least a partial offset.16 1
Implications for Investors: The structural advantages that distinguish 2026 from the 1970s are meaningful. Each one: anchored inflation expectations, lower energy intensity, and a productivity-supported earnings backdrop, is a condition that can be tested, not a permanent feature of the economic landscape. Portfolios should not be positioned for a re-run of the 1970s, but investors should recognize that the conditions which have prevented stagflation from taking hold are worth monitoring carefully. Diversification across asset classes, geographies, and inflation-sensitive exposures remains the prudent posture.
The Takeaway
The April rally was not built on optimism alone. It was built on earnings that delivered, productivity gains that have shown up in margins, and structural conditions that distinguish this episode from the 1970s. Anchored inflation expectations and an earnings cycle that justifies premium valuations depend on the energy shock proving temporary, the labor market avoiding sharp deterioration, and the Q1 earnings momentum extending into the back half of the year. Each of those is plausible; none is certain. We remain cautiously optimistic on the balance of the year while expecting periods of volatility along the way.
Returns of Market Indices
U.S. equities posted their strongest monthly gain since 2020, with the S&P 500 closing April at 7,209, an all-time record high; the Nasdaq Composite also reached new closing records during the month, ending at approximately 24,892.3 Global equity markets rose dramatically (MSCI ACWI +10.2%), led by emerging markets (MSCI Emerging Markets Index +14.7%); U.S. large caps (S&P 500) rose 10.5%, while U.S. small caps rose even further (Russell 2000 +12.3%). International developed equities (MSCI EAFE) rose at a slower pace, but still strong at +7.6%. Fixed income returns were mixed: rising oil prices and the FOMC’s hawkish hold pressured longer-duration Treasuries, with the 10-year yield finishing the month near recent highs. Bond markets (Bloomberg U.S. Aggregate) were nearly flat (+0.1%).YTD Returns are shown in the chart below. 17
