May delivered strong headline results against a market backdrop defined by competing forces. Corporate earnings accelerated to their best pace since late 2021, supported by technology and ongoing AI infrastructure spending, while mega-cap leadership continued to lift the cap-weighted S&P 500. At the same time, narrow market breadth, persistent inflation, energy price uncertainty, and a Federal Reserve leadership transition created a wider range of possible outcomes for markets.

Strong Earnings and the Rally That Left Half the Market Behind

The first-quarter earnings season closed May in remarkable fashion. After nearly all S&P 500 companies reported, the blended year-over-year earnings growth rate reached 28.6%, the highest since the fourth quarter of 2021.¹ Some 85% of companies beat consensus estimates, a rate above the five-year and ten-year averages, and the magnitude of surprise, 16.7% above estimates, was the widest since early 2021.¹ The technology sector led all sectors with blended growth of 54.3%, lifted by results from Nvidia, Microsoft, and Dell Technologies. Nvidia alone reported first-quarter revenue of $81.6 billion, an 85% year-over-year increase, and GAAP net income of $58.3 billion, with data center revenue up 92% to a record $75.2 billion.² The first quarter was, by most traditional measures, one of the strongest in recent memory.

• AI capex: The Nvidia result crystallized a theme running through every major technology earnings call this season: hyperscaler capital spending has not paused. Meta’s increase to full-year 2026 capital expenditure guidance reinforced a broader trend: hyperscalers continue to spend aggressively on AI infrastructure, with aggregate 2026 capex now estimated near $725 billion. ² Nvidia CEO Jensen Huang described demand as having “gone parabolic” as agentic AI applications accelerated orders from cloud and sovereign customers alike.
• The breadth problem: Behind the record index closes, the rally remained narrow through most of May. The S&P 500 reached new highs due to the mega-caps driving gains, while the average stock in the same index, as measured by the equal-weight S&P 500, produced only modest gains. The top ten holdings by weight currently account for roughly 40% of the S&P 500’s total index value, compared to a historical norm of 20 to 25%.³
• Historical context: The current dominance of the cap-weighted S&P 500 over its equal-weight counterpart has a clear historical precedent: the late-1990s tech bubble when the cap-weighted index outperformed the equal-weighted index by roughly 31% on a 3-year rolling basis.³ More recently, in 2021 the Magnificent Seven gained more than 50% while the broader S&P 500 returned approximately 29%. However, these periods of concentration can reverse quickly: in 2022 the equal-weight index outperformed the Mag 7 by 34 percentage points when the market declined by 18%.³
• Valuation and guidance: The forward 12-month price-to-earnings ratio for the S&P 500 stands at 21.2, above recent historical averages.¹ For the second quarter, roughly equal numbers of S&P 500 companies issued positive and negative EPS guidance, a ratio that is worth monitoring as the back half of 2026 approaches. The market’s reaction to Nvidia’s May earnings release highlights the valuation tension embedded in today’s AI leadership. Despite reporting 85% year-over-year revenue growth, shares fell about 2% the following day. This was perceived as a “sell the news” response to a quarter that beat on every metric, because elevated expectations had raised the bar for what constitutes outperformance.²

Implications for Investors: The earnings picture appears to support stock valuations as the AI infrastructure cycle shows little sign of peaking. The concern is not the cycle itself but the distribution of its rewards. When 40% of the S&P 500’s weight sits in ten names, a stumble in any one of them has a greater impact than it would in a more balanced market. Investors who hold broad index exposure also hold a concentrated bet on continued mega-cap outperformance. The gap between cap-weight and equal-weight returns, now widened for several years running, historically closes, and the closure is rarely gradual. Maintaining exposure to companies outside the leading cluster, whether through non-U.S. large cap funds, sector tilts, or individual positions, may provide some insulation when leadership eventually changes.

A New Fed Chair, Inflation Update, and a Shifting Yield Curve

May delivered three macro events that each on their own would have been remarkable for a given month: the highest CPI reading in three years, the confirmation of a new Federal Reserve chair, and a sharp decline in oil prices.

• Inflation: On May 12^th, the Bureau of Labor Statistics reported that the Consumer Price Index rose 0.6% in April on a seasonally adjusted basis, putting the 12-month rate at 3.8%, the highest since May 2023. Energy accounted for more than 40% of the monthly increase, with gasoline up 28.4% year-over-year and the broader energy index up 17.9%.⁴ Core inflation, excluding food and energy, rose 0.4% for the month and 2.8% over the year, well above the Federal Reserve’s 2% target.⁴ Real average hourly wages slipped 0.5% for the month.⁴
• The new Fed Chair: The Senate confirmed Kevin Warsh as Federal Reserve Chair in a 54-to-45 vote, the slimmest confirmation margin in the modern Fed era.⁵ Warsh took office May 15^th as Jerome Powell’s term as chair expired. The transition comes at an awkward moment: the April FOMC meeting produced four dissents, the most divided committee since 1992, and the funds rate has been held at 3.50% to 3.75% for three consecutive meetings.⁵ Futures markets have shifted meaningfully: expectations of rate cuts have been priced out and traders have shifted to speculating about a potential rate hike this year.⁵
• Labor market: April payrolls rose 115,000, well above the 55,000 consensus, and the unemployment rate held at 4.3%, marking back-to-back monthly job gains for the first time in more than a year.⁶ Average hourly earnings rose 3.6% year-over-year, below the 3.8% forecast, a mild positive for the inflation picture.⁶
• Oil: Brent crude fell nearly 19% in May as ceasefire extension talks between the U.S. and Iran progressed toward a 60-day memorandum of understanding.⁷ The WTI oil benchmark fell approximately 16.5% for the month. The decline was welcome, but the situation remains perilous as the Strait of Hormuz remained under restricted conditions pending formal approval of the ceasefire extension.⁷ The decline in oil prices is likely to benefit near-term CPI readings, but the underlying supply picture remains fragile.
• Yield curve: The Treasury curve flattened meaningfully in May as markets repriced the Fed’s path. The 2-year yield rose sharply on hike expectations, finishing the month near 4.12%, while the 10-year finished the month at approximately 4.45%, having spiked toward 4.7% mid-month on the CPI announcement before retreating as oil prices fell. The 30-year reached 5.18%, its highest level since 2023, before retreating to finish at 5%.⁸ The spread between 2-year and 10-year Treasury yields narrowed to roughly 0.33%, well below the 1-1.5% range typical of a healthy expansion, as the front end absorbed the inflation shock faster than the long end.⁸

Implications for Investors: Core inflation is running nearly a full percentage point above the Fed’s target, and the new chair must establish credibility in his first meeting while managing a divided committee. The bond market appears to be pricing not just near-term inflation worries, but also longer-run uncertainty about the fiscal outlook and the Fed’s policy direction. Even after May’s decline, energy prices remain well above year-ago levels, sustaining upward pressure on inflation and weighing on consumer purchasing power. For equity investors, the macroeconomic picture reinforces the case for companies with pricing power, low refinancing risk, and durable free cash flow, characteristics that hold up across a wider range of rate outcomes than the market has seen in recent years.

 

The Takeaway

If May had a single lesson, it was that strong aggregate numbers can coexist with significant underlying fragility. Earnings were broadly excellent, yet the market rewarded a fraction of the companies generating them. Inflation persisted at the headline level as oil fell, core prices remained stubborn, and the yield curve flattened in ways that suggest the bond market is not yet convinced the problem is solved. A new Fed chair stepped into one of the most divided committees in a generation. Each of these stories has a constructive resolution available to it. What remains unclear is whether they arrive in the sequence that markets have priced in. Investors willing to stay the course while keeping quality and diversification at the center of their portfolios are, in our view, well positioned for what the second half may bring.

 

Returns of Market Indices 

U.S. equities finished May at record levels, with the S&P 500 closing at 7,580, the Dow Jones Industrial Average at 51,032, and the Nasdaq Composite at 26,973, each at an all-time closing high.⁹ The S&P 500 posted a return of 5.26%, driven by the late-month AI and technology rally following the Nvidia earnings report. Global equity returns were also strong (MSCI ACWI +5.2%). Emerging markets equities, which are particularly sensitive to oil prices, rose dramatically (MSCI EM Equities +9.7%).  International developed-market equities, as measured by the MSCI EAFE Index, underperformed U.S. large caps for the month (+3.2% return).⁹ U.S. small caps rose as well (Russell 2000 +4.4%). Fixed income was under pressure: the 10-year Treasury yield ended May near 4.45% after spiking toward 4.7% mid-month on the CPI results, and the 30-year Treasury reached 5.18% at its mid-month peak, pressuring the Bloomberg U.S. Aggregate Bond Index for the month, which finished nearly flat (+0.31%).⁹ YTD Returns are shown in the chart below.

 

Sources

1. FactSet Research Systems, “Earnings Insight,” May 29, 2026 (insight.factset.com). Blended Q1 2026 S&P 500 earnings growth rate of 28.6%; 85% of companies beating estimates; aggregate EPS surprise of 16.7%; forward 12-month P/E of 21.2; Information Technology blended growth of 54.3%; 56 companies issuing positive and 46 negative Q2 2026 EPS guidance.

2. Nvidia Corporation, Q1 FY2027 Earnings Release, May 20, 2026 (nvidianews.nvidia.com). Revenue of $81.6 billion (85% YoY); data center revenue of $75.2 billion (92% YoY); GAAP net income of $58.3 billion (211% YoY); non-GAAP diluted EPS of $1.87. Hyperscaler 2026 capex estimate of approximately $725 billion per CNBC, “Hyperscalers’ AI buildout will require massive amounts of energy,” May 13, 2026 (cnbc.com).

3. S&P Dow Jones Indices, Equal Weight Sector Dashboard, May 2026 (spglobal.com). Top-10 weight at approximately 40% of S&P 500; historical norm 20-25%; dot-com era rolling outperformance figure of ~31%. Magnificent Seven 2021–2022 relative return data per Bloomberg.

4. U.S. Bureau of Labor Statistics, “Consumer Price Index — April 2026,” released May 12, 2026 (bls.gov/news.release/archives/cpi_05122026.htm). CPI +0.6% MoM, +3.8% YoY; core CPI +0.4% MoM, +2.8% YoY; energy index +17.9% YoY; gasoline index +28.4% YoY; real average hourly earnings -0.5% MoM.

5. U.S. Senate Roll Call, May 13, 2026: Kevin Warsh confirmed as Federal Reserve Chair, 54-45 vote. Federal Reserve, FOMC Statement, April 29, 2026; four dissents noted. CNBC, “Kevin Warsh wins Senate confirmation as the next Federal Reserve chair,” May 13, 2026 (cnbc.com). CME FedWatch, May 2026: market-implied probability of a rate hike by December 2026. Federal funds rate target range: 3.50%-3.75%.

6. U.S. Bureau of Labor Statistics, “Employment Situation — April 2026,” released May 8, 2026 (bls.gov/news.release/empsit.nr0.htm). Nonfarm payrolls +115,000; unemployment 4.3%; average hourly earnings +3.6% YoY.

7. CNBC, “Oil drops 20% from 2026 peak on optimism over U.S.-Iran ceasefire talks,” May 29, 2026 (cnbc.com). Brent crude down ~19% for May; WTI down ~16.5%. Pending 60-day MOU between U.S. and Iran to extend ceasefire, per CNBC reporting, May 28, 2026.

8. Federal Reserve H.15 Selected Interest Rates, daily release, May 29, 2026 (federalreserve.gov/releases/h15); data sourced via FRED series DGS2, DGS10, DGS30 (Federal Reserve Bank of St. Louis, fred.stlouisfed.org). Treasury constant maturity yields at month-end: 2-year ~4.12%, 10-year ~4.45%; 30-year mid-month peak ~5.18%, finishing near 5.0%. 2s10s spread (FRED series T10Y2Y) approximately 33 basis points at month-end, vs. 100-150 bp range typical of a healthy expansion. Yield curve flattening driven by front-end repricing on revised Fed expectations; rise in long-end yields attributed to term premium rebuilding.

9. Bloomberg, index closing levels, May 29, 2026. S&P 500: 7,580.06; Dow Jones Industrial Average: 51,032.46; Nasdaq Composite: 26,972.62. 10-year Treasury yield: approximately 4.45% at month-end; 30-year Treasury yield peak of approximately 5.18% mid-month. MSCI EAFE, MSCI ACWI, MSCI Emerging Markets, Russell 2000, and Bloomberg U.S. Aggregate Bond Index returns: Bloomberg terminal, May 2026.

 

 

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

 

Sources

1. FactSet, Earnings Insight (insight.factset.com), April 24, 2026 update. Blended Q1 2026 earnings growth rate 15.1% (vs. 13.1% expected at March 31); 28% of S&P 500 reported as of April 24; 84% beat EPS estimates with magnitude of beats at 12.3% (vs. 5-year average 7.3%). Net profit margin 13.4%, the highest level since FactSet began tracking the metric in 2009. Forward 12-month P/E ratio 20.9. Information Technology sector net profit margin 29.1% in Q1 2026 vs. 25.4% in Q1 2025.

2. TheStreet, “Stock Market Today: S&P 500 caps off best month since 2020 as Alphabet rallies, Apple beats,” April 30, 2026; CNBC, April 30, 2026 stock market live updates. Alphabet up approximately 34% in April, strongest monthly gain since 2004; Meta Platforms down approximately 9% after raising 2026 capex guidance to $125 billion to $145 billion; Microsoft down approximately 4% on Q1 results.

3. CNBC, “Dow surges nearly 800 points, S&P 500 posts first close above 7,200 and best month since 2020,” April 30, 2026; CNBC, “Stock market today: live updates,” April 27 and April 30, 2026. S&P 500 closing level 7,209.01 on April 30, 2026; Nasdaq Composite 24,892.31; Dow Jones Industrial Average 49,652.14. Brent crude near $120/bbl, WTI near $107 at month-end. California gasoline at $6.01/gallon per AAA data.

4. Fortune, “Iran offers to reopen Strait of Hormuz amid oil price surge, but Trump seems unlikely to accept,” April 27, 2026; CNBC, April 30, 2026 market updates citing Wall Street Journal and Axios reports; Reuters and AP coverage of U.S.-Iran ceasefire (April 7 to 8) and Iran’s April 17 declaration that the Strait of Hormuz was open during the truce (oil prices fell 11% on the announcement). The administration extended the ceasefire indefinitely on April 22 and declined the Iran proposal to reopen the Strait permanently. CENTCOM reportedly prepared plans for additional strikes per Axios.

5. AAA national average gasoline prices, accessed April 30, 2026; CNBC reporting on California gasoline prices ($6.01/gallon, highest since October 2023).

6. CNBC, “Stock market today: live updates,” April 30, 2026 and May 1, 2026. ISM Manufacturing Prices Index reached 84.6 in April, highest level since April 2022.

7. International Energy Agency, Oil Market Report, April 2026 (per 24/7 Wall St. citation, April 30, 2026). 2026 global oil demand forecast revised lower by 730,000 barrels per day; Q2 2026 demand contraction projected at approximately 1.5 mb/d, the sharpest decline since the COVID-19 pandemic. Demand destruction concentrated in Middle East and Asia Pacific.

8. Bureau of Economic Analysis, “GDP (Advance Estimate), 1st Quarter 2026,” released April 30, 2026 (bea.gov). Real GDP increased at an annual rate of 2.0% in Q1 2026, following 0.5% growth in Q4 2025. Q1 contributors included investment, exports, consumer spending, and government spending. Congressional Research Service, “The 2025 (FY2026) Government Shutdown: Economic Effects,” R48832: shutdown ran October 1 through November 12, 2025, lasting 43 days, the longest in U.S. history. CBO estimated the shutdown reduced Q4 2025 GDP growth by approximately 1.5 percentage points at an annual rate.

9. Bureau of Labor Statistics, “The Employment Situation – March 2026,” released April 3, 2026 (bls.gov). Total nonfarm payroll employment increased by 178,000 in March; unemployment rate at 4.3%. Job gains in healthcare (+76,000), construction, and transportation and warehousing; federal government employment continued to decline. February revised down by 41,000 to -133,000. CNBC, “Jobs report March 2026,” April 3, 2026: ambulatory health care services rose 54,000, with 35,000 reflecting return of striking Kaiser Permanente workers.

10. Federal Reserve, FOMC Statement, April 29, 2026; Federal funds target range held at 3.50% to 3.75% in an 8-to-4 vote, the most dissents at a single FOMC meeting since October 1992. Hawkish dissents from Beth Hammack (Cleveland), Neel Kashkari (Minneapolis), and Lorie Logan (Dallas), each opposing the forward-guidance language. Governor Stephen Miran dissented in favor of an immediate 25 basis point cut, his sixth consecutive dissent since joining the Board in September 2025. Powell intends to remain on the Board through his governor term ending January 2028.

11. Bureau of Labor Statistics, Consumer Price Index Summary, March 2026 release (April 10, 2026). March CPI +3.3% year over year (accelerated from 2.4% in February); core CPI +2.6%; gasoline prices +21.2% month over month, the largest monthly increase since the gasoline series was first published in 1967; energy prices +10.9% in March, largest monthly increase since September 2005. Headline CPI +0.9% month over month.

12. Federal Reserve, H.15 Selected Interest Rates (federalreserve.gov), data as of late April 2026. 10-year Treasury constant maturity finishing April near recent highs.

13. Yale Budget Lab, “What Are the Macroeconomic Implications of Recent Turmoil in Oil Markets?,” March 27, 2026: oil intensity of U.S. GDP has declined by more than 50% since 1973; the U.S. is now a net petroleum exporter, with a $58 billion petroleum trade surplus in 2025 (Loomis Sayles, March 2026 analysis citing Haver Analytics and S&P Global). Center on Global Energy Policy at Columbia University, “Oil Intensity: The Curiously Steady Decline of Oil in GDP”: global oil intensity peaked in 1973 at approximately 1 barrel per $1,000 of global GDP, declining to 0.43 barrels per $1,000 by 2019.

14. Reserve Bank of Australia, “Oil Price Shocks, Monetary Policy and Stagflation,” Conference Volume 2009 (Lutz Kilian): inflation expectations anchoring is the principal explanation for the absence of 1970s-style stagflation in subsequent oil shocks. University of Michigan Survey of Consumers, historical data: expected inflation rose from 3.8% to 4.9% between 1967 and 1970, before the first oil shock.

15. Federal Reserve Bank of St. Louis (FRED) historical data: federal debt held by the public approximately 100% of GDP as of recent quarter, compared to approximately 25% in 1980 to 1981. Federal Reserve historical effective federal funds rate: peaked at approximately 20% in 1981 under Chair Paul Volcker.

16. OECD, Economic Outlook Interim Report, March 2026 (oecd.org). Global GDP growth projected at 2.9% in 2026; technology-related investment cited as a key pillar of projected global growth.

17. Bloomberg index returns as of April 30, 2026. April 2026 monthly total returns: MSCI ACWI Index +10.2%; MSCI Emerging Markets Index +14.7%; S&P 500 Index +10.5%; Russell 2000 Index +12.3%; MSCI EAFE Index +7.6%; Bloomberg U.S. Aggregate Bond Index +0.1%. All figures sourced from Bloomberg terminal data; final returns should be verified directly via Bloomberg Index Services or relevant index provider factsheets prior to publication.

February delivered rotation, drama, and a useful reminder that not all markets move in the same direction at once.

The AI Trade Gets More Complicated
Nvidia posted a genuine blowout fourth quarter, with revenue up 73% year over year and data center demand still accelerating, yet shares fell more than 5% the day earnings were released.¹ The Magnificent 7 is now down roughly 7% year to date.² It was a clean illustration of where the AI trade stands heading into 2026: fundamentals remain strong, but the market has moved from pricing in potential to demanding proof.

• Disruption anxiety: Mentions of AI disruption on S&P 500 earnings calls nearly doubled from the prior quarter.³ That is encouraging if your company is building the infrastructure. It is considerably less so if your business model might be disrupted by AI. In the market’s crosshairs are software stocks, which have been hit hard over concerns that AI will be easily able to create competing solutions. The stock prices of private credit firms that lend to these software companies likewise pulled back on similar worries.
• The Counterpoint: Fundamental earnings for most software stocks have remained stable. Many firms have reiterated guidance and some companies like Salesforce announced a massive share buyback, indicating that investors may be overestimating the depth and breadth of AI disruption. So too with private credit funds, where the loan books of higher quality lenders appear healthy.
• Belief in future success of AI remains high: Open AI raised $110 billion in their most recent round of funding, bringing the estimated valuation to $840 billion.⁴ This reflects private capital’s seemingly insatiable appetite for AI models. For perspective, at an $840 billion market capitalization, OpenAI would be the 12^th largest company in the S&P 500. OpenAI’s revenue is growing quickly, but the path from revenue to durable, defensible profit remains years away.

Implications for Investors: The AI trade is just starting to evolve. The era of rewarding any company with “AI” in its investor deck is giving way to one that demands evidence of monetization, defensible competitive position, and a credible path to returns on capital. Infrastructure providers with genuine pricing power remain attractive. Owning broad, diversified exposure rather than concentrated bets on any single theme, whether hardware, model providers, or AI-adjacent software, remains the prudent strategy. The winners of the next phase may look quite different from the leaders of the last one.

Tariffs, the Supreme Court, and a Messy Macro Backdrop

February produced the most dramatic tariff development since early 2025 when the Supreme Court ruled 6-3 that the president exceeded the International Emergency Economic Powers Act (IEEPA) authority used to impose broad reciprocal tariffs. Those tariffs had pushed the average effective U.S. tariff rate to roughly 16% at their peak, the highest level since the 1930s. The court struck down President Trump’s use of tariffs under IEEPA.

• The legal response and new tariff authority: President Trump responded by invoking Section 122 of the Trade Act of 1974, a narrower authority that permits tariffs of up to 15% for up to 150 days to address balance-of-payments deficits. A 10% global tariff took effect February 24; the following day the president announced his intention to raise the rate to 15%. Previously negotiated bilateral framework agreements with major trading partners remain in place, for now.
• Tariff Layer Cake: The IEEPA tariffs were the largest single layer, but not the only one. Other tariffs remain intact: 50% on steel and aluminum, 25% on imported automobiles, and 10% on lumber. The U.S.-China truce also remains in effect. The average effective tariff rate fell from roughly 16% at its peak to an estimated 13.7% following the ruling and the Section 122 replacement.^{7, 8}
• GDP and the macro backdrop: Fourth quarter growth came in at 1.4%, well below the 2.8% consensus, partly due to the 43-day government shutdown, which likely reduced GDP by 1-2% according to the Congressional Budget Office (CBO). Consumer spending and business investment were both positive underneath the headline, suggesting underlying momentum remains intact.^{5, 6}
• Inflation and the Fed: January PPI rose 0.5% for the month versus a 0.3% forecast. Core PPI gained 0.8%, more than double expectations. That combination may encourage the Federal Reserve to remain cautious about cutting rates. The next FOMC meeting is March 17 to 18, with updated economic projections to follow. Rate cuts remain possible in 2026, but a re-acceleration in wholesale prices as well as inflationary pressures coming from the new conflict in Iran makes this less certain.^{7, 8}

Implications for Investors: The tariff story has a new chapter but is far from over. The Section 122 tariff expires around mid-July 2026 absent congressional action, creating a near-term policy cliff. New tariff authority is being pursued through additional legal vehicles while companies like Costco who were heavily impacted by the tariffs will seek reimbursement. For investors, diversified geographic exposure remains the sensible hedge. The combination of tariff uncertainty, the evolving situation in Iran and sticky inflation may limit the Fed’s ability to respond if growth weakens.

Trends Worth Noting

• Buybacks hit a record: Corporate America authorized $233 billion in February repurchases, the largest February on record. Salesforce, Walmart, and Verizon led.⁹ Companies buying their own stock at this scale represents sustained, informed demand for equities.
• Small caps outperformed: The Russell 2000 is up roughly 6% year to date while the S&P 500 is essentially flat.¹⁰ Smaller companies draw more revenue domestically and stand to benefit most from any eventual Fed rate cuts.
• International markets led: Developed markets outside the U.S. gained roughly 10% year to date, with the MSCI EAFE logging 14 consecutive weekly gains late in the month.¹¹ Emerging markets added 14%.¹² European earnings momentum and a slight dollar decline both helped.

The Takeaway
Earnings season confirmed healthy fundamentals: roughly 14% year-over-year earnings growth, the fifth consecutive quarter of double-digit expansion.¹³ The underlying economy is slowing from its recent pace but still growing. The rotation toward smaller companies and international stocks validates the case for diversification we have been making for months. Patience and discipline remain the appropriate posture.

RETURN OF MARKET INDICES
Global equity markets (MSCI ACWI) were positive for the month (+1.3%) led by non-U.S. Equities. U.S. large caps were down slightly in February (S&P 500 -0.8%) while U.S. small caps (Russell 2000) were the reverse mirror image, rising by 0.8%. International developed (MSCI EAFE) and emerging market equities (MSCI Emerging Markets Index) were the standouts rising by 4.7% and 5.5%, respectively. Bonds provided quiet ballast as yields drifted lower on slowing growth data, with prices rising 1.6% for the month.

Source: Bloomberg. EAFE is MSCI EAFE Index⁽¹⁾, Emerging Markets is MSCI Emerging Markets⁽²⁾ and U.S. Bonds is Barclays U.S. Aggregate⁽³⁾. ACWI is the MSCI ACWI Index⁽⁴⁾. Small Caps is the Russell 2000 Index⁽⁵⁾. S&P 500 is the S&P 500 Index⁽⁶⁾. The above information is as of 2/28/2026.

Sources

¹ Bloomberg Equity Markets; Nvidia Q4 FY2026 earnings release, February 26, 2026.

² Bloomberg Magnificent 7 Index, year-to-date return as of February 27, 2026.

³ Bloomberg transcript analysis of S&P 500 Q4 2025 earnings calls, February 2026.

⁴ Bloomberg News, OpenAI Series G financing, February 2026.

⁵ U.S. Bureau of Economic Analysis, Advance Estimate of Q4 2025 GDP, released February 20, 2026.

⁶ U.S. Congressional Budget Office, estimate of partial government shutdown impact on Q4 2025 GDP growth, February 2026.

⁷ U.S. Bureau of Labor Statistics, Producer Price Index news release for January 2026, released February 27, 2026.

⁸ Federal Reserve, FOMC meeting calendar. The March 17 to 18, 2026 meeting will include a Summary of Economic Projections (federalreserve.gov).

⁹ Birinyi Associates, U.S. corporate buyback authorization data, February 2026, as reported by Bloomberg. $233.3 billion authorized in February, the largest February on record. Individual company figures from company investor relations announcements: Salesforce $50 billion (February 25, 2026); Walmart $30 billion; Verizon $25 billion.

¹⁰ Russell 2000 Index and S&P 500 Index, year-to-date total returns as of February 27, 2026. FTSE Russell; S&P Dow Jones Indices.

¹¹ MSCI EAFE Index, year-to-date net total return as of February 27, 2026. MSCI Inc.

¹² MSCI Emerging Markets Index, year-to-date net total return as of February 27, 2026. MSCI Inc.

¹³ FactSet Earnings Insight, S&P 500 Q4 2025 earnings season, week of February 27, 2026 (factset.com). Blended earnings growth rate of 14.2% with 96% of S&P 500 companies reporting; fifth consecutive quarter of double-digit earnings growth.

January set a tone for a more cautious investor stance. Much of the U.S. was forced to trudge through snow from recent winter storms and similarly labor markets are trudging slowly along. We remain in a low-hire, low-fire equilibrium. Employers are hesitant to expand, given fiscal uncertainty but are equally loath to let go of trained staff.

While corporate earnings are projected to remain healthy, with an estimated 14% growth for the year, the variables of trade policy and central bank transition create a challenging environment.

After three consecutive cuts to end 2025, the Fed shifted stance to a wait-and-see outlook as the committee voted to hold interest rates steady at the January meeting. The FOMC’s internal debate appears centered on the neutral rate (the level at which policy neither stimulates nor restricts growth) with two of the twelve voters advocating for further cuts to support a slowing manufacturing sector.

A notable development was the nomination of Kevin Warsh to succeed Powell when his term ends in May. During his previous time as a Fed Governor (2006-2011), Warsh was initially supportive of crisis-era liquidity and low rates but opposed the second round of quantitative easing (QE2) in 2011 which he believed would lead to inflation.

Warsh has yet to be confirmed, which could be a challenging  process¹, but understanding his outlook on the Federal Reserve can provide insight to how he might act as Fed Chair.

Warsh In His Own Words

In a November opinion piece in the Wall Street Journal², Warsh outlined his vision:

“Fundamental reform of monetary and regulatory policy would unlock the benefits of AI to all Americans. The economy would be stronger. Living standards would be higher. Inflation would fall further. And the Fed will have contributed to a new golden age.”

Setting aside the utopian prose, his outlook is reflected in four theses, and we examine each in the context of what they mean for investors.

1) “The Fed should discard its forecast of stagflation in the next couple of years”. He believes that ”AI will be a significant disinflationary force, increasing productivity and bolstering American competitiveness. Productivity improvements should drive significant increase in real take-home wages.”

Translation: The Fed has been driving by looking in the rear-view mirror (backward looking data that shows a slowing economy and sluggish labor market). Future productivity growth and lower inflation from AI isn’t being factored in, so the Fed is being too conservative.

Implications for Investors:

• Warsh’s logic is that AI productivity gains will manifest rapidly, offsetting the potential inflationary risk of lowering rates prematurely. Advances such as the widespread adoption of PCs and the internet have shown that technology that bolsters workers’ productivity has been a boon for economic growth and corporate earnings and helps to lower inflation.
• We remain optimistic about the benefits of AI but believe that companies (and their investors) that adapt to this technology will see benefits long before the economy. While we agree with Warsh that AI is a rising tide, we believe some boats will rise faster than others.
• If Warsh is less concerned about the potential for inflation, he’s more likely to be willing to lower rates independent of how backward-looking economy data is showing. Lower rates would stimulate the economy and encourage assets like small cap stocks and other speculative investments. This could also provide a tailwind for bond investors

2) “Inflation is a choice.”

Translation: Warsh argues that inflation isn’t the product of an overheated economy but rather the result of too much government spending and expansion of the Fed’s balance sheet. The head of the snake (the Fed) would be eating less of its own tail (buying its own debt).

Implications for Investors:

• Warsh favors shrinking the Fed’s balance sheet, which could manifest in a withdrawal of meaningful government buying of Treasurys.
• We agree that excessive government stimulus during the pandemic contributed to a surge in consumer spending and was a major contributor to inflation. However, the Fed’s balance sheet is used for quantitative easing (QE) programs designed to provide liquidity to markets and influence interest rates beyond short-term rates. Considering the U.S. Dollar is used globally for trade, many foreign banks and financial entities that hold U.S. Dollars need consistent access to U.S. debt markets. In periods of market stress, the Fed has used its balance sheet to support the normal functioning of cash and bond markets.
• While shrinking the Fed’s balance sheet is a laudable financial goal, it may prove difficult if long-term rates crimp consumers or periods of financial stress require Fed intervention.
• If this were to occur, it would likely lead to a steepening of the yield curve, which in turn would lead to higher borrowing costs across the economy (mortgages, corporate bonds, etc.). However, higher borrowing costs would slow the economy. Thus, even if the Fed decided to allow the curve to steepen, at a certain point they would be forced to resume purchases. This dichotomy raises doubt (and speculation) about the degree to which the policy might happen.

3)  “The Fed’s rules and regulations have systematically disadvantaged small and medium-sized banks, which has slowed the flow of credit”.

Translation: Warsh believes that by easing regulatory requirements for smaller lenders, there will be additional availability of credit.

Implications for Investors:

• Improving the availability of credit would help grease the wheels of the U.S. economy by encouraging lending. Smaller banks would have more ability to lend, which could benefit smaller businesses.
• However, the benefits of this could be muted in the context of an environment where credit is available, but at higher rates. For example, a lender might be willing to offer a larger mortgage but at a higher rate of interest.
• This could lead to real estate prices continuing to remain high.

3) “Fed leaders have tried to bind U.S. banks to a complicated, vaunted set of rules in the name of global regulatory convergence.”

Translation:

Warsh argues that the Fed should seek to deregulate U.S. banks and encourage them to de-couple rather than coordinate with their overseas counterparts.

Implications for Investors:

• Deregulation of banks, in general, would likely lead to increased lending and profitability and therefore higher prices on bank stocks.
• Many of the current regulations sprang out of past financial crises and were structured to try to prevent history from repeating. Often a crisis may start locally but have global implications. Notable examples like the 2008 Global Financial Crisis, the Great Depression, the Savings and Loan Crisis of the 1980’s-90’s, etc.
• While excess regulation acts as a speed bump on the road to revenue, a lack of speed limits and guardrails wouldn’t make banks better “drivers”. It would likely result in banks using greater financial leverage, reducing loan quality and potentially repeating some of the errors that led to the Global Financial Crisis.

Capital Markets

Equity markets saw a notable rotation in January as investors grew cautious of the AI theme driving market recent gains amidst higher valuations. Notably this led to a wider breadth of stocks driving market gains including smaller companies (as measured by the Russell 2000).

Official data reported in January remains cloudy due to the late-2025 government shutdown. This data lag created a volatility vacuum where anecdotal evidence and earnings calls carried more weight than usual as earnings were released.

Emerging Market Equities lead the way returning an impressive 8.9% for the month. U.S. Small Caps (Russell 2000) and Developed International Equities (MSCI EAFE) also showed large gains, returning 5.4% and 5.2% respectively. U.S. Large Caps (S&P 500) lagged, returning 1.44% in January. Bonds, as measured by Bloomberg’s U.S. Aggregate index, were nearly flat for another month, eking out a slightly positive 0.11%.

Return of Market Indices

2025 was a year of economic uncertainty and concern, but also of resilience and growth. In this month’s Economic Update, we look back at the issues that dominated our thinking on the economy and financial markets each quarter and then look forward to what we’re focused on in 2026.

Source: Bloomberg. EAFE is MSCI EAFE Index⁽¹⁾, Emerging Markets is MSCI Emerging Markets⁽²⁾ and U.S. Bonds is Barclays U.S. Aggregate⁽³⁾. ACWI is the MSCI ACWI Index⁽⁴⁾. Small Caps is the Russell 2000 Index⁽⁵⁾. S&P 500 is the S&P 500 Index⁽⁶⁾. The above information is as of 1/31/2026.

¹ Warsh’s journey to become Fed Chair is unlikely to be quick. Post-nomination, the next step toward approval is for vetting to go through the Senate Banking Committee. However, committee member Senator Thom Tillis (R-NC) has indicated he would not on any Fed nominee until the Department of Justice’s investigation of Chair Powell over the Fed’s  headquarters is resolved which he believes is politically motivated Senator Tillis’ term ends in 2026, and he is not seeking re-election, making him less susceptible to political pressure. The Senate Banking Committee is narrowly divided (13 Republicans to 11 Democrats), thus if Tillis refuses to support the nominee, the committee the nomination could stall.

2 Warsh, Kevin The Federal Reserve’s Broken Leadership, Wall Street Journal Opinion 11/16/25

This document contains forward-looking statements, predictions and forecasts (“forward-looking statements”) concerning our beliefs and opinions in respect of the future. Forward-looking statements necessarily involve risks and uncertainties, and undue reliance should not be placed on them. There can be no assurance that forward-looking statements will prove to be accurate, and actual results and future events could differ materially from those anticipated in such statements.

2025 was a year of economic uncertainty and concern, but also of resilience and growth. In this month’s Economic Update, we look back at the issues that dominated our thinking on the economy and financial markets each quarter and then look forward to what we’re focused on in 2026.

Q1: Fear of the Unknown
As the Trump administration in Washington found its footing, expectations for global trade reform loomed large. In Q1, our attention was on the impact that tariffs could have on inflation and economic growth, and how the unpredictability of outcomes could spook the financial markets.

A reactionary massive surge in imports contributed to a contraction in GDP of 0.5% in quarter¹. At the same time, inflation remained elevated, leading the Fed to keep its restrictive monetary policy in place. In this uncertain environment, the US stock market struggled for direction as investors feared that recession, or even stagflation, might be on the horizon. By quarter’s end, volatility had returned to the market, and the S&P 500 had lost 4.3%.

In our March update, we reminded investors of the resilience of American institutions and advised them to remain patient, focusing on long-term goals rather than short-term volatility. This advice would serve them especially well in the quarter to come.

Q2: Liberation Day Selloff and Recovery
The second quarter began with the Liberation Day announcement of sweeping tariffs on America’s trading partners. The size and scope of the tariffs caught investors off guard, resulting in a swift selloff across equity markets, including an 11% decline in the S&P 500.

We pointed out that periods of extreme uncertainty may persist for a time, but they are not permanent, and that markets react favorably once a measure of predictability returns.

The announcement of a three-month “pause” in the tariff rollout signaled such a window of predictability. By the end of the quarter, equity markets had recovered, and the S&P was up nearly 6% YTD.

Q3: Shooting the Messenger and Divergence at the Fed
Tariff risk persisted into the third quarter; however, delayed implementation timelines and constructive progress in trade negotiations helped ease market concerns. In Q3, the Bureau of Labor Statistics revised estimates on job growth downward. The reaction was swift: President Trump fired the head of the BLS, the dollar weakened, and equity markets declined. Though the Fed was divided on the pace of rate cuts, the slowing economic data proved enough to convince them to cut rates by 0.25% in September. Equity markets responded favorably, with the S&P 500 rising by a healthy 7.8% in the quarter.

Q4: Closing Time and K-Shaped Data
The fourth quarter began with the shutdown of the Federal government. While every shutdown is unique, we expected the impact on equities to be modest and temporary, and recommended clients stay the course rather than trading on this news. This was indeed sound advice. Despite becoming the longest shutdown on record, the impact on equity markets was mild.

As economic growth took center stage toward year-end, we brought attention to the distinctive nature of the current K-shaped data, which evidenced a bifurcated mix of “winners and losers” in equity markets, higher vs. lower-income households, and other areas of the economy.

The fourth quarter was a victor lap for patient equity investors. The government reopened, and the Fed committed to a “normalization” path with 0.25% rate cuts in October and December.

Looking Ahead: 2026 Rhymes, but will not Repeat

We believe three trends will play out in 2026:

1. Steady Fundamentals. The US economy remains resilient, benefitting from pro-growth fiscal policy, healthy corporate balance sheets, and robust consumer spending, with the anticipated 2026 tax rebate likely to provide a modest incremental boost to household consumption and aggregate demand.
2. (Relative) Rate Stability. We expect monetary policy to normalize with a bias towards slowly lowering rates. Incoming Fed members are likely to be sympathetic to the administration’s preference for lower rates. Compared to the last 6 years, where rates rose from zero to over 5% rapidly and then gradually trickled down, we are entering a period of relative stability. In addition, there is a potential for lower rates regardless of economic trends. Stability and lower rates benefit both companies and investors.
3. Earnings Expansion ². Meaningful earnings growth likely won’t be confined to AI stocks and the Magnificent 7 ³ in 2026. There is a pronounced shift in earnings expectations toward companies beyond the Magnificent 7. While Mag 7 stocks are still expected to deliver strong earnings growth, the change in year-over-year expectations is modest – only +2% higher in 2026 (+22.7% vs. +22.3% for 2025). By contrast, analyst earnings estimates for the other 493 companies are 33% higher for 2026 than in 2025 (+12.5%vs. +9.4%).

The combination of these three trends points toward a favorable backdrop for investors in 2026. However, we continue to recommend a diversified and flexible portfolio philosophy, rather than chasing last year’s “winners” and shunning last year’s “losers.”

No one could have predicted the events of 2025 that we recapped above, but veteran investors know that every new year holds unexpected twists. As we noted many times throughout 2025, the best maxim for long-term investment success is “Patience and Discipline.”

Capital Markets
December was a soft month for US investment returns, while overseas equities saw an appreciable rise. The All-Country World Equity Index (ACWI) rose 1%. Both Developed Non-US equities, as measured by the EAFE and Emerging Market Equities, as measured by the MSCI EM Equity Index, rose by 3%. The S&P 500 finished nearly flat for the second month in a row (+0.1%). Likewise, bonds as measured by Bloomberg’s US Aggregate index were nearly flat, declining by 0.2%. US Small Caps declined 0.6% for the month.

Source: Bloomberg. EAFE is MSCI EAFE Index⁽¹⁾, Emerging Markets is MSCI Emerging Markets⁽²⁾ and U.S. Bonds is Barclays U.S. Aggregate⁽³⁾. ACWI is the MSCI ACWI Index⁽⁴⁾. Small Caps is the Russell 2000 Index⁽⁵⁾. S&P 500 is the S&P 500 Index⁽⁶⁾. The above information is as of 12/31/2025.

 

1 Since GDP is a measure of domestic production, imports represent foreign 2 production and thus are subtracted from the GDP calculation as these are already accounted for in domestic spending.

2 Source: FactSet Earnings Insight 12/19/25

3 The Magnificent 7 currently include Nvidia, Apple, Microsoft, Amazon, Alphabet (Google), Meta (Facebook), and Tesla. While Broadcom replaced Tesla as one of the 7 largest stocks in the S&P 500 by market capitalization, Tesla is still commonly included in the Mag 7 group.

 

This document contains forward-looking statements, predictions and forecasts (“forward-looking statements”) concerning our beliefs and opinions in respect of the future. Forward-looking statements necessarily involve risks and uncertainties, and undue reliance should not be placed on them. There can be no assurance that forward-looking statements will prove to be accurate, and actual results and future events could differ materially from those anticipated in such statements.

November saw a convergence of three storms of worry from investors: doubts about the continuing run-up of AI-themed stocks, lack of access to economic data because of the government shutdown, and mixed messages about the Fed’s next move.

While uncertainty will persist, we expect the three trends outlined below to form a durable engine for corporate earnings growth, providing fundamental support for market valuations into 2026.

Trend #1: Economic Resilience and Pro-Growth Fiscal Policy

• Healthy Corporate Fundamentals: Corporate balance sheets remain generally sound. The confluence of lower financing costs and productivity-driven earnings growth creates a powerful backdrop for sustained profit. As the chart below illustrates, margins have been rising for years, and AI has the potential to further this trend.
• Wealth Effects and Spending Power: Despite ongoing uncertainty around policies like tariffs and reduced immigration, the consumer remains supported by low unemployment and the wealth effects of rising asset prices. As a result, consumer spending continues to provide a strong floor for corporate revenue expectations.
• Targeted Fiscal Stimulus: The long-term effects of infrastructure bills and tax cuts from the One Big Beautiful Bill will continue to feed into the economy, promoting targeted investments in key sectors and ensuring U.S. GDP growth remains at or above trend.

Source: Bloomberg. The above information is as of 12/08/2025.

Trend #2 Monetary Policy Normalization: Lower Rates and Valuation Support

The Federal Reserve’s ongoing pivot from a restrictive stance to neutral will be a meaningful tailwind. As inflation pressures ease, the Fed is anticipated to execute further interest rate cuts through 2026, fundamentally altering the calculus for risk assets. The result:

• Decreased Cost of Capital: Lower rates reduce corporate borrowing costs, supporting both capital investment tied to the AI transition, increased share repurchases and additional M&A activity, all of which support equity valuations. Likewise, lower rates act as a potential tailwind to make consumer borrowing more affordable (lower costs for mortgages, car loans, and credit cards).
• Lowering the Discount Rate: The Discount Rate is a financial hurdle that a potential investment must exceed to be worth your time and money. This is the opportunity cost for investors choosing a very low risk asset (ex: cash or CDs) versus a higher risk asset with more potential return (ex: equities). Lower interest rates reduce the relative appeal of low risk-assets and support higher stock market valuations.
• Support for Cyclical Sectors: While financial markets react relatively quickly to lower rates, the impact on the economy takes more time and can lag by 6-12 months. We are just starting to see the boost to rate-sensitive and cyclical sectors of the market that underperformed during the higher rate environment.

Trend #3: The Transition of AI Investment from Hype to Productivity

While the initial waves of AI investment favored companies directly involved in development like semiconductor and cloud infrastructure firms, the 2026 narrative is set to shift toward enterprise adoption and tangible productivity gains.

• Sustained IT Infrastructure Spending: The build-out of data centers and the proliferation of number-crunching semiconductors is expected to continue at a staggering pace in 2026. While this spending will likely eventually slow, these multi-year projects which are still underway. This monumental capital expenditure acts as an economic stimulus and directly feeds the revenues of the hardware and infrastructure sectors.
• Operating Leverage Expansion: As publicly traded companies outside the tech sector embed AI into their operations, we expect meaningful gains in operating leverage. Efficiency improvements spanning R&D, supply chains, and customer service should translate directly into higher profit margins.
• Revaluation Driven by Innovation: The market is likely to reward a broader set of companies that demonstrate clear, measurable Return on Investment (ROI) from their AI investments. This dynamic supports a re-rating of valuations for high-quality firms that translate AI adoption into new revenue streams and improved profitability.

Implications for Investors
Collectively, these three trends suggest a favorable backdrop for investors in 2026. Short-term market movements will continue to be driven by macro data releases, like the whipsaw market reaction to the September revised job report and speculation around Fed rate cuts. However, long-term focus should remain on measured investment in companies positioned to capitalize on the coming productivity boom, supported by a constructive shift in monetary policy. As always, patience and remaining invested for the long-term are the best approaches.

Capital Markets
November was a volatile month for markets as investors fretted over the possibility of the Fed potentially changing course on rates. The All-Country World Equity Index (ACWI) and S&P 500 both finished nearly flat (+0.02% and +0.25% respectively) after a mid-month drop of close to 4%. US Small Cap equities, measured by the Russell 2000, finished up by close to 1% (+0.96%) but saw an even larger intramonth swing, dropping over 6% briefly. International Developed stocks, as measured by the EAFE, were less influenced by US interest rate worries and increased by 0.65%. Emerging market equities reversed course after last month’s strong performance, dropping 2.38% for the month. US bond prices rose 0.62% for the month.

Source: Bloomberg. EAFE is MSCI EAFE Index⁽¹⁾, Emerging Markets is MSCI Emerging Markets⁽²⁾ and U.S. Bonds is Barclays U.S. Aggregate⁽³⁾. ACWI is the MSCI ACWI Index⁽⁴⁾. Small Caps is the Russell 2000 Index⁽⁵⁾. S&P 500 is the S&P 500 Index⁽⁶⁾. The above information is as of 11/30/2025.

This document contains forward-looking statements, predictions and forecasts (“forward-looking statements”) concerning our beliefs and opinions in respect of the future. Forward-looking statements necessarily involve risks and uncertainties, and undue reliance should not be placed on them. There can be no assurance that forward-looking statements will prove to be accurate, and actual results and future events could differ materially from those anticipated in such statements.

“When you come to a fork in the road, take it.” – Yogi Berra

The term “K-shaped recovery” gained prominence in 2020 during the uneven rebound from the Covid-19 recession. Popularized by economist Peter Atwater, the concept describes how, following an economic downturn, certain economic groups and industry sectors recover rapidly while others stagnate. A K-shaped recovery differs from the more familiar V-shaped recovery (a sharp decline followed by a strong rebound) or U-shaped recovery (a slower return to growth). The K-shape is defined by unequal growth: some “arms” of the economy rise while others continue to fall, creating a pattern that resembles the letter “K.”

In the years since the pandemic, this “K” pattern has persisted, and we currently have a K-shaped economy. Wealth has grown disproportionately among high-income households, large corporations (especially tech and capital-light firms), and asset‐owners, while lower‐income households, small and medium employers, and service-industries reliant on physical presence continue to struggle.

Consumer spending is a primary driver of the U.S. economy and a key indicator of economic growth and illustrates the K-phenomenon. Before the onset of Covid, spending patterns were broadly similar across income groups. However, the chart below illustrates that spending by the highest 20% of earners outpaced that of other groups as we emerged from the pandemic, and the gap continues to widen.

Source: Moody’s

Similarly, a report from October 2024 from the Federal Reserve shows that retail spending of the bottom 80% of Americans, as measured by income, has roughly kept pace with inflation, while the highest 20% of earners have increased their spending by close to 50% in the post-pandemic period!

Source: Hacıoğlu Hoke, Sinem, Leo Feler, and Jack Chylak (2024). “A Better Way of Understanding the US Consumer: Decomposing Retail Sales by Household Income,” FEDS Notes. Washington: Board of Governors of the Federal Reserve System, October 11, 2024, https://doi.org/10.17016/2380-7172.3611.

What’s Driving the K-Shaped Economy?
There are four primary factors driving the K-shaped economy that help to explain the widening disparity between winners and losers among both producers and consumers. These include:

• The Impact of Technology
  The rapid adoption of artificial intelligence, automation, and digital platforms has accelerated productivity and profitability in key high-tech sectors. Workers and companies equipped to leverage technology are pulling ahead, while those dependent on manual or low-skill labor are being left behind.
• Uneven Wage and Employment Growth
  The post-pandemic labor market remains divided. High-income professionals in technology, finance, and healthcare enjoy steady job growth and salary increases, while many service-sector and blue-collar workers face stagnant wages or reduced hours. Automation and AI-driven efficiencies have increased productivity while displacing many lower-wage roles.
• The Unequal Impact of Inflation and Interest Rates
  Inflation and elevated interest rates have widened the gap between economic winners and losers. Wealthier households with greater savings and investment portfolios can absorb higher prices and even benefit from rising interest income. Meanwhile, lower-income families, who spend a higher share of income on essentials like food, energy, and rent, feel the strain. Rising credit card balances and delinquency rates show how unevenly these costs are distributed.
• Asset Price Divergence aka “The Wealth Effect”
  Financial markets have surged over the past two years. Homeowners and investors have seen their wealth grow as real estate and stock values appreciate. In contrast, renters, and those without substantial assets, have missed out on these wealth effects, widening the financial gap between households.

Implications for Investors
Aggregate metrics like GDP growth, corporate profits and stock market indices reflect activity as a whole rather than how each segment is faring. Overall, the U.S. economy appears healthy. But underneath the surface there is deep inequality, fragility in many out-of-favor sectors, and risks that reflect an asymmetric weakness in the economy.

For investors, the K-shaped economy creates both opportunities and risks, as returns will vary sharply across sectors and industries.

Sector Divergence Reflects “Two Economies”
In 2025, stock market performance mirrors the same K-shaped pattern. Technology stocks related to AI have soared while consumer staples and other sectors lagged.

According to S&P sector data through the end of October:

• The Upper-Arm of the K Leaders: The Technology sector saw a total return of +29.9% and the Communications sector +26.8%, fueled by corporate investment in AI, automation and productivity tools. The Industrial and Utility sectors saw a rise of +18.9% and +20.2%, respectively.
• The Lower-Arm Laggards: By contrast, all other sectors saw single-digit returns: the Financial sector (+9.6%), Consumer Discretionary sector (+7.8%), Healthcare sector (+6.3%), Energy sector (+5.8%), Materials sector (+3.8%), Real Estate sector (nearly flat at +0.2%).

Source: Standard and Poor’s

Rising Inequality Alters Market Dynamics
As wealth becomes more concentrated, stock market participation increasingly reflects the spending and investment behavior of affluent households. Gains in financial markets boost high-income spending, which supports certain sectors, while the rest of the economy remains subdued. For investors, paying close attention to demographic and income-driven consumption trends is more important than ever.

Defensive Positioning for Uneven Growth
In a K-shaped environment, diversification across economic segments becomes crucial. Investors should favor companies with pricing power, strong balance sheets, and exposure to higher-income consumers. Long-time readers will note that the first two criteria are also hallmarks of Quality-focused investing, which we have frequently advocated.

The K-shape is becoming a defining feature of the modern U.S. economy. For investors, understanding this divergence is essential to navigating risk and identifying opportunity as the winners in 2025 likely will continue to be firms that cater to higher-income consumers and those that best leverage technology and maintain pricing power.

Capital Markets
Following on the recent pattern of market rises after each rate cut, once again all boats rose with the tide in October. The All-Country World Equity Index (ACWI) and S&P 500 both rose 2.3%. US Small Cap equities, measured by the Russell 2000, gained 1.8%. International Developed stocks, as measured by the EAFE, increased by 1.2%. Emerging market equities had another strong month, surging 4.2% Not to be left out, US bond prices rose 0.6% for the month.

Source: Bloomberg. EAFE is MSCI EAFE Index⁽¹⁾, Emerging Markets is MSCI Emerging Markets⁽²⁾ and U.S. Bonds is Barclays U.S. Aggregate⁽³⁾. ACWI is the MSCI ACWI Index⁽⁴⁾. Small Caps is the Russell 2000 Index⁽⁵⁾. S&P 500 is the S&P 500 Index⁽⁶⁾. The above information is as of 10/31/2025.

One Small Cut, More to Come
In last month’s Economic Update, we identified four areas of particular interest regarding the upcoming September meeting of the Federal Reserve’s Open Market Committee (FOMC).

The Interest Rate Decision
We expected the Committee would lower the federal funds rate by 0.25% to 4.00% -4.25% based on a generally held view that the economy was slowing. In a nearly unanimous 11-1 decision, members voted to drop rates by a quarter percent. The lone dissenter was the newly appointed Fed Governor, Stephan Miran, who was in favor of a more aggressive 0.50% reduction.

Forward Guidance
The FOMC updated its Statement of Economic Projections (SEP), commonly referred to as the “Dot Plot,” at the September meeting.

As noted last month, the SEP outlines where individual Fed members expect inflation and interest rates to trend over the coming quarters and provides members’ future year-end target ranges. Investors watch the Dot Plot closely for insight into the Fed’s future policy path and interest rate expectations which, in turn, influence everything from bond yields to equity valuations.

The chart below shows the updated SEP dot plot for September. Each blue dot on the chart represents the opinion of one of the 19 FOMC participants.
September 2025 Fed Dot Plot Showing Projected Target Range of Fed Funds Rate and moves per calendar year (Green Arrows)

Source: September 17, 2025 FOMC Summary of Economic Projections and Bondsavvy calculations.

The median of the September dot plot projections sees the Fed Funds rate falling by a further 0.5% in 2025, an additional 0.25% in 2026 and 2027.

The dot plots as a group have shifted down 0.25% for each calendar year, apart from the outlier (Miran) who projected a significantly lower rate in 2025 and 2027 than the rest of the FOMC.

Dissent!
Stephen Miran, who formerly served as Chairman of Economic Advisers in the current Trump Administration, argued the Federal Funds rate is currently about 2% too high, proposing that structural shifts in immigration, tariffs, regulation, and tax policy have pushed the “neutral” rate downward. The neutral rate is the theoretical “sweet spot” where the economy has both full employment and stable inflation.

Miran asserted that the inflationary pressure from policy changes is overstated, especially pressure attributed to tariffs, and that more aggressive easing is necessary to forestall deterioration in labor markets.

While Miran’s views are consistent with those of the Administration, they stand in contrast to the majority view on the FOMC that changes to American policy (tariffs, immigration) continue to be a near-term reinflationary risk.

Inflation and Labor Market Trends
Powell emphasized that while inflation has eased from its peaks, it “remains somewhat elevated,” especially noting that goods prices have driven part of the pickup in inflation recently. PCE rose 2.0% over the 12 months ending in August.   While overall unemployment remains low, Powell described it as a “low-firing, low-hiring environment” noting that younger people entering the workforce are having a hard time finding work.

Overall, economic data is somewhat mixed. Labor markets are slowing, but not collapsing, which is consistent with the Fed lowering interest rates. However, the economy seems to be humming along. Q2 GDP came in at 3.8% quarter over quarter, boosted by healthy consumption. The US consumer continues to spend.  Forecasts for Q3 show this trend continuing.  According to the Atlanta Fed, the GDPNow forecast for Q3 is projected to come in at 3.8%, which suggests the economy is still on reasonable footing, even if the economic terrain appears uneven.

Closing Time – The Federal Government Shuts Down (Again)
Effective October 1^st, the Federal Government has shut down.

Over the last 50 years, the US government has shut down a remarkable 21 times. Most shutdowns have been brief, lasting only a few days.

The current shutdown is interesting for several reasons:

• In the past, these typically occurred at times when Congress had already passed some funding resolutions, so the shutdown only impacted a subset of government agencies. In the current case, Congress has not passed any annual spending bills, so this would result in funding for all agencies to lapse.
• Office of Management and Budget Director Russell Vought has indicated that in addition to the usual furloughs, the administration may start to permanently fire federal employees in the days to come.
• The longest shutdown of the last 50 years was the most recent one: December 2018’s 35-day shutdown during the previous Trump administration.

What are the Effects of a Shutdown?
The immediate effect is furlough – temporary unemployment – of ~40% of federal employees considered non-essential. Furloughed employees are reimbursed for lost pay when they return to work. These employees hold a variety of roles across the economy, so their absence manifests in a host of ways: travelers would expect longer travel times at the airport (fewer TSA employees), potential changes at the grocery store (fewer USDA food inspectors), closures of national parks (fewer park workers) and so forth. If the shutdown is brief, the economic disruption is primarily felt by the furloughed Federal workers.

Historically, financial markets have typically shrugged off government shutdowns. Goldman Sachs notes that 10 yr Treasury yields and the USD, which are a barometer of the global financial system’s faith in the smooth functioning of the US government, have typically weakened following government shutdowns and subsequently taken time to recover once the government reopens. However, these effects are not long-lasting.

US equity markets have likewise seen muted impacts from shutdowns, as shown in the chart below:

When might we see a resolution?
There is no reliable way to predict the duration of the shutdown. Military pay, which stands to be impacted this time around, has historically encouraged a deadline for reopening. The first military pay date at risk is October 15^th. Another deadline for a possible resolution could be the second week of October, when funding for the Women Infants and Children (WIC) nutrition program is set to run out of money.

Given the uncertain, and likely temporary market impact associated with the shutdown, we recommend clients maintain their long-term investment focus and avoid a change in strategy as a result of the current shutdown.

Capital Markets
As the Fed moved to cut rates, all boats rose with the tide in September. Equity markets saw the biggest moves, with the All Country World Index (ACWI) rising 3.7%. The S&P 500 was slightly behind, climbing 3.6% for the month. Emerging market equities surged 7.2% while International Developed stocks, as measured by the EAFE, increased by 2%. US Small Cap equities, measured by the Russell 2000, had another strong month, increasing by 3.1%. US bond prices rose 1.1% for the month.

Source: Bloomberg. EAFE is MSCI EAFE Index⁽¹⁾, Emerging Markets is MSCI Emerging Markets⁽²⁾ and U.S. Bonds is Barclays U.S. Aggregate⁽³⁾. ACWI is the MSCI ACWI Index⁽⁴⁾. Small Caps is the Russell 2000 Index⁽⁵⁾. S&P 500 is the S&P 500 Index⁽⁶⁾. The above information is as of 9/30/2025.

 

The Federal Reserve meets next week, and once again, it faces a mixed economic picture.

On an encouraging note, inflation appears to be stabilizing. The latest Producer Price Index (PPI) fell 0.1% in August after a 0.7% increase in July.⁴ The Atlanta Fed’s GDPNow model is forecasting a healthy 3.1% growth rate for the third quarter.³

However, recent downward revisions to employment data and slower job growth suggest the economy may be cooling more than previously thought. The Fed’s challenge remains the same: striking the right balance between keeping inflation in check and supporting continued growth.

The prospect of one, possibly two, new Federal Reserve members has prompted a wave of questions about the Fed’s structure and decision-making process. This month, we will cover a few of the most common questions, as well as highlight what we are watching for at the next Fed meeting.

Q: How often does the Federal Open Market Committee (FOMC) meet?

A: The FOMC has eight regularly scheduled meetings per year where they share their review of financial and economic conditions and discuss the target for monetary policy in the context of their dual mandate of price stability and maximum employment.

Q: Who votes at the FOMC?

A: The FOMC has 12 voting members: the seven members of the Board of Governors, the president of the Federal Reserve Bank of New York, and four of the eleven other Reserve Bank presidents.

The four voting Reserve Bank presidents serve on rotating one-year terms, with seats filled from the following four groups with one president from each group:

• Boston, Philadelphia, and Richmond
• Cleveland and Chicago
• Atlanta, St. Louis, and Dallas
• Minneapolis, Kansas City, and San Francisco

Non-voting Reserve Bank presidents still attend the FOMC meetings and weigh in on discussions, even though they don’t have a vote.

Q: What happens when there is a Board vacancy?

A: The process begins with the President nominating a candidate. These nominations are expected to provide a “fair representation of the financial, agriculture, industrial, and commercial interests and geographical divisions of the country.”¹.  Importantly, no two Governors may come from the same Federal Reserve District. Board membership is intended to reflect the various economic interests across the entire country.

A candidate must then undergo a thorough background check and submit financial and ethics disclosures. Next comes the Senate Banking Committee’s confirmation hearing, where the nominee shares their views on economic policy. If the Senate Banking Committee votes to move the nomination forward, it goes to the full Senate for debate and a final vote. Once confirmed, the nominee is sworn in and begins their term.

Governors serve a term of 14 years and appointments are staggered so that one term expires on January 31^st of each even-numbered year. Once a Governor has served 14 years, they may not be re-appointed, however a Governor who served a shorter term could be re-appointed at a later date to serve up to the full 14-year term.

Once appointed, Fed Governors may not be removed based on their policy views. The staggered, lengthy terms are intended to help insulate the Federal Reserve system from day-to-day political pressures.

Q: What happens at the end of Chair Jerome Powell’s term?

A: Powell’s term as Chair of the Federal Reserve ends in May 2026. If he is not reappointed at that time, the President will nominate a new Chair from among the seven members of the Board of Governors, who will then be confirmed by the Senate for a four-year term.

Powell is eligible to remain a part of the Board of Governors until his term ends in January 2028.

Q: What are you watching at this upcoming meeting?

A: We are watching four areas:

• The interest rate decision. A 0.25% rate cut is widely expected due to the declining inflation trend and weakening labor data. A larger cut would suggest the FOMC views economic conditions to be weaker than expected, while keeping rates unchanged would suggest they are concerned that inflation may reverse course.
• Forward Guidance. The FOMC updates its Statement of Economic Projections (SEP), commonly referred to as the “Dot Plot”, four times a year. The SEP outlines where individual Fed members expect inflation and interest rates to trend over the coming quarters. When the dots cluster closely around certain levels, it suggests a consensus view; when they are more widely dispersed, it reflects significant differences of opinion among policymakers. Investors watch the Dot Plot closely for insight into the Fed’s future policy path and interest rate expectations, which in turn influence everything from bond yields to equity valuations.
• Inflation and Labor Market Data. The Fed will build an outlook by drawing on a wide range of economic data and indicators. While precise forecasting is never possible, identifying consistent patterns across multiple data points can reveal underlying trends that might be overlooked when focusing on any single metric in isolation .
• Dissent! The FOMC member opinions often have a high degree of consensus as, ultimately, they are all reviewing the same set of information from slightly different perspectives. Thus, outlier views can help highlight data points which are otherwise easily missed. For instance, as we noted in last month’s Economic Update², Fed Governor Waller had opined weeks in advance the July meeting that there was a high likelihood of downward revisions in the labor market. This was long before the Bureau of Labor Statistics (BLS) disclosed that from March 2024 to March 2025, 911,000 fewer jobs were created than previously estimated. Both Bowman and Waller dissented from the decision at the last meeting to hold rates steady, favoring a rate cut sooner. We will be watching to see if they push for a larger cut or align with the likely consensus for a 0.25% reduction as this could signal an increasing appetite to cut further and/or faster.

Capital Markets
Equity markets rose broadly in August. The All Country World Index (ACWI) climbed 2.5%. The S&P 500 rose 2%. International Developed stocks, as measured by the EAFE, increased by 4.3%. Emerging Market equities (MSCI Emerging Markets Index) rose by 1.5%. US Small Cap equities, measured by the Russell 2000, lead the way with a rise of 7.1%, likely the result of a highly anticipated Fed rate cut in September. US bond prices rose 1.2% for the month.

1: Board of Governors of the Federal Reserve System. March 28, 2017. America’s Central Bank: The History and Structure of the Federal Reserve. Speech by Governor Powell on America’s central bank: the history and structure of the Federal Reserve – Federal Reserve Board

2: Crestwood August 2025 Economic Update: Shooting the Messenger and the Shifting Fed

3: Federal Reserve Bank of Atlanta. GDPNow. GDPNow – Federal Reserve Bank of Atlanta

4: U.S. Bureau of Labor Statistics. Economic New Release – Producer Price Index News Release summary. Producer Price Index News Release summary – 2025 M08 Results

This document contains forward-looking statements, predictions and forecasts (“forward-looking statements”) concerning our beliefs and opinions in respect of the future. Forward-looking statements necessarily involve risks and uncertainties, and undue reliance should not be placed on them. There can be no assurance that forward-looking statements will prove to be accurate, and actual results and future events could differ materially from those anticipated in such statements.

A report from the Bureau of Labor Statistics (BLS) released after July’s FOMC meeting showed weaker job growth in the May-July period than previously estimated. Job growth for June and July was significantly revised downward, with 258,000 fewer reported new jobs.  The labor market is feeling the pressures of broad uncertainty, higher tariffs, and reduced immigration.

The reaction was swift: President Trump fired the head of the BLS, the dollar weakened, and equity markets reacted poorly to both the numbers and the firing.

As we have noted in prior Economic Updates, data gathering is a slow process and subject to frequent revision. Further, Fed Governor Waller noted in a speech on July 17 that there was a likelihood of downward revisions when the data was released¹. So, for those closely listening to the Fed, the BLS announcement was not completely out of the blue.

Importantly, while the disappointing job growth numbers show that economic activity is slowing, the data also support the case that the job market is still generally healthy.  The weaker data increases the odds that the Fed cuts interest rates during its next meeting on September 17.

Divergence of Opinions at the FOMC
At its July 30 meeting, the Federal Open Market Committee (FOMC) opted to hold the federal funds rate at 4.25% – 4.50% for the fifth consecutive session. The recurring theme behind the Fed’s decision to leave rates unchanged has been persistent uncertainty.

The FOMC Diffusion Index (shown below) captures the distribution of individual FOMC participants’ judgments about economic forecasts like GDP, inflation or unemployment. The chart shows that index levels have risen significantly this year. In fact, they are reaching points not seen since the period surrounding the Pandemic or the years following the Great Financial Crisis of 2008.

In the current environment, it’s not surprising that the decision of the FOMC this time was not unanimous. While individual dissents among Fed governors and presidents of the various Federal Reserve banks are not uncommon, July’s meeting marked the first time since 1993 that two governors dissented from the majority decision. Who dissented is worth noting: Michelle Bowman and Christopher Waller both favored a rate cut now. Their premise was that inflationary pressure from tariffs will be temporary and that risks to employment warrant a cut sooner rather than later.

Readers will note that Waller had signaled his pending dissent weeks in advance in the speech noted above, and Bowman was among the potential candidates to succeed Powell as the next Fed Chair. Their opinions may be foreshadowing the direction of the next iteration of the Fed.

September will be eventful for several reasons:

1. President Trump has nominated Stephen Miran, often credited as the chief architect of the administration’s tariff policy, to fill the vacancy left by Fed Governor Adriana Kugler’s August departure. In 2024, Miran co-wrote a paper ² critical of the Fed and argued that governance should be overhauled. Among the recommendations were giving the President the power to remove Fed board members and Reserve Bank leaders at will². The Senate Banking Committee will hold hearings on Miran’s nomination, which will include questioning him about his qualifications, policy positions, and perspective on the role of the Fed.
2. The Fed will have several more months of labor market and inflation data to contextualize the effect of tariffs and immigration policy on the US economy.
3. The FOMC will release an updated Statement of Economic Projections (aka, their “Dot Plot”), which captures the Fed members’ estimates for the range of interest rates over the next few years.

What does this mean for investors?
Investors should continue to expect further economic impact from an evolving tariff policy and reduced immigration as well as deportations. Although their impact on prices and growth can be slow to manifest, their effects inevitably show in data such as the labor market report. Investors should anticipate this and not be taken off guard when data appears to ‘surprise’ the market by showing evidence of this. As always, patience and discipline are the best approaches.

Capital Markets
The MSCI All Country World Index (ACWI) rose 1.4% in July. The S&P 500 rose for a third straight month returning 2.2%. The Index is now up 8.6% year-to-date after being down as much as 15% in early April. Developed International equities (MSCI EAFE) weakened, losing 1.4% for the month, while Emerging Markets rose by 2%. US Small and Mid Caps (Russell 2000) rose 1.7%, while bonds were flat.

Source: Bloomberg. EAFE is MSCI EAFE Index⁽¹⁾, Emerging Markets is MSCI Emerging Markets⁽²⁾ and U.S. Bonds is Barclays U.S. Aggregate⁽³⁾. ACWI is the MSCI ACWI Index⁽⁴⁾. Small Caps is the Russell 2000 Index⁽⁵⁾. S&P 500 is the S&P 500 Index⁽⁶⁾. The S&P 500 Ex-NVDA/ AVGO represents the S&P 500 excluding the stocks Nvidia and Broadcom, the remaining stocks are then weighted by their market cap. The above information is as of 7/31/2025.

 

Footnotes:
^1: The Case for Cutting Now by Governor Christopher Waller. Full text available at: https://www.federalreserve.gov/newsevents/speech/waller20250717a.htm
²: Reform the Federal Reserve’s Governance to Deliver Better Monetary Outcomes by Dan Katz, Stephen Miran. Full text available at: https://manhattan.institute/article/reform-the-federal-reserves-governance-to-deliver-better-monetary-outcomes

This document contains forward-looking statements, predictions and forecasts (“forward-looking statements”) concerning our beliefs and opinions in respect of the future. Forward-looking statements necessarily involve risks and uncertainties, and undue reliance should not be placed on them. There can be no assurance that forward-looking statements will prove to be accurate, and actual results and future events could differ materially from those anticipated in such statements.