Earnings Revision

In “The Outlook for 2026 – A Year of Great Promise with Risks” (December 24, 2026) we estimated S&P 500 earnings of $315 for 2026 and $350 for 2027 while adding the caveat that “we believe our forecasts could prove too conservative.” Our forecasts seemed optimistic at the time, but with first quarter earnings season now more than 65% complete, it is obvious that we were indeed too conservative about earnings growth.  

First quarter earnings results have been stellar. LSEG Data Analytics reported that 83% of reported earnings have exceeded consensus estimates and first quarter year-over-year earnings growth is expected to be nearly 28%. This is nearly 3.5 times the long-term average of 8.1% YOY and the steadfastness of solid and broad-based earnings growth continues to defy the naysayers worried about the negative impact of tariffs in 2025 and high gasoline prices in 2026. Energy prices are likely to lift inflation in coming months, but to Corporate America the offsets to this have been lower taxes on individuals which helps consumption, lower corporate taxes, productivity gains due to AI, and robust capital investment due to a tax law change that allows businesses to deduct the full cost of new investments in the year they are made.

As a result, we are increasing our 2026 estimate from $315 to $330 and our 2027 estimate from $350 to $382. These represent earnings growth rates of 27.5% and 9%, respectively, and are only slightly above the current LSEG IBES consensus estimates of $327.87 and $380.79, respectively. Our revisions also imply that while positive earnings surprises have boosted stocks consistently in recent quarters, these positive surprises will be more difficult to generate as the year advances. In short, the equity market has been driven and supported by excellent earnings growth, but in large part, that has been discounted in prices.

No Target Revision

With the S&P 500 closing at 7259.22, it means the equity market is currently trading at 22 times this year’s earnings and 19 times next year’s earnings. The Outlook for 2026 also stated that “The trailing PE multiple of the S&P 500 index has hovered around 26 times for most of the last twelve months and we do not expect this to change. And when we apply a 26 PE multiple to our earnings forecast of $315, we get an S&P 500 target of 8190, which represents a gain of 18%.”

In our view, our original 8190 target is still a good forecast for the S&P 500 but for different reasons. Earnings have been better than expected, but inflation has increased. History shows that higher inflation has been and should be a drag on PE multiples. Nevertheless, a blended earnings estimate (one-third of 2026 plus two-thirds of 2027 earnings) times the current multiple of 22 equals an S&P 500 target of 8170. In sum, the 8170-8190 range appears to be a justifiable target for this year.

Great Promise with Risks

Our theme of “great promise with risks” remains a good description for 2026. The conflict with Iran was not a risk that we anticipated this year, but we were concerned that the Supreme Court could rule against Trump’s tariff policy and have a negative impact on GDP. This has come to pass; however, it appears that there are several ways to implement tariffs, and the administration is finding a work-around. Hopefully this change will be successful, narrow the trade gap, and boost GDP. A strong economy is a must for several reasons, but none more important than it helps a country carry its huge deficit. The key ratio is the debt-to-GDP ratio and debt should not be growing faster than GDP to prevent a debt crisis. At the end of March, the 12-month sum of deficits to GDP was 5.2%, well above the administration’s 3% target, but also down from the frightening 7.2% seen in January 2024. See page 4.

A big concern has been the K-shaped economy and how this could impact consumption. Unfortunately, recent economic data is showing some consumer stress. GDP grew 2.0% (SAAR) in the first quarter of 2026, following a weak 0.5% pace in the fourth quarter due to a record-breaking 43-day government shutdown. See page 3. A major contributor to first quarter GDP was consumer spending, which added 1.1% to growth; however, the largest contributor was personal consumption of services, which added 1.11%, while consumption of goods was slightly negative. The Federal government added 0.6% to GDP, nonresidential investment added 1.4%, inventory accumulation added 0.4% and exports added 1.3%. Residential investment subtracted 0.3% and net exports decreased first quarter GDP by 1.3%. Net exports were the second worst drag on quarterly real GDP growth in four years. See page 4.

In nominal terms, gross domestic product rose 6% in the first quarter, driven largely by personal consumption which increased 5.5% YOY. Gross private domestic product rose a mere 1.6% YOY overall, but investment in equipment and software rose 13.7% and investment in intellectual property increased 10.7%. Nonresidential investment in structures fell 3.9% YOY and residential investment fell 2.9% YOY. It is clear from the data that capital investment has been helping the economy, but big consumer areas like housing and vehicle sales have been weak. Total vehicle sales, including light weight trucks, were 16.3 million units (SAAR), down 1.3% for the month of April and down 7.2% YOY. See page 5.

The ISM manufacturing index was unchanged in April, but six of ten components declined in the month and one of the “positive” components was prices paid to vendors. The ISM nonmanufacturing index fell 0.4 in April to 53.6, but four of its nine components rose in the month and one, prices paid, was unchanged. All in all, the ISM indices displayed a mixed economic picture for April. But note the combination of the two ISM employment indices was 94.4, up 2.1 in April, and while still weak, remains safely within the long-term neutral range. See page 6.

New home sales were better than expected in March, rising 7% for the month to 682,000 annualized units, representing a 3% YOY increase. Sales are still recovering from a sharp decline in January. The price of a new median home was $384,000, down 6% YOY. Housing starts were strong in March, increasing 10.8% YOY and single-family starts rose 8.9% YOY. But housing permits weakened and total permits were down 7.4% YOY and single-family permits were off 7.9% YOY. Rising inflation will make housing less affordable in coming months, and we expect the housing market to remain sluggish in the second quarter. See page 7.

Still Buying Dips Fundamentals remain solid for US equity markets and technical indicators are also supportive. The Russell 2000 index is the best performing index this year with a gain of 14.6%, followed by the Nasdaq Composite up 9%, the S&P 500 up 6%, and the DJIA up 2.6%. A market led by small-capitalization companies is a bullish characteristic. The NYSE cumulative advance/decline line made a record high on April 20, 2026, but is only 325 net advancing stocks away from a new record. This is positive.

Gail Dudack

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It is Fed week and the consensus view is that there will be no change in monetary policy on Wednesday. We agree. Jerome Powell’s term ends May 15, which means this meeting is apt to be his last as chairman. Still, this press conference could be more interesting than normal, not because of monetary policy but because President Trump has indicated he will fire Powell if he does not leave the Board on May 15. Chairs typically leave the board when their leadership terms end, but Powell has signaled he might defiantly stay on. It would be the first time a former chair remained on the board since 1948. The press is certain to question Powell about his intentions at the press conference this week and we, along with many, will be listening to hear what Chairman Powell has to say.

Nominee Kevin Warsh is also expected to be confirmed on Wednesday and if so, he would be the new Fed Chair at the June 2026 meeting. At Warsh’s confirmation hearing last week, he indicated he plans to bring a number of changes to the Federal Reserve. He suggested that inflation measurements such as “trimmed-mean measures – which lop off the fastest-rising and sharpest-falling prices to get a picture of where most prices are heading – are better gauges of the inflation trend” than many current benchmarks. The Dallas Federal Reserve’s trimmed-mean reading was 2.3% in March, which leads many forecasters to believe Warsh will argue for lower interest rates, if appointed.

But a Warsh appointment could be more consequential than a new benchmark for inflation. During confirmation testimony he argued that interest rates are a better tool for monetary policy than quantitative easing/tightening and he would like to shrink the Fed’s balance sheet. His reasoning is that interest rates impact all Americans, whereas increasing the balance sheet boosts stock prices which has a greater impact on the wealthy than the broader population. He noted that he would also like to revisit the Fed’s 2% inflation target, which could be a major debate for the FOMC. And Warsh signaled that in his view Fed Governors should not give forward guidance about monetary policy or rate-path views. In most cases, these changes would take the Federal Reserve back to its roots and time prior to the Financial Crisis, after which the Fed needed to oversee bank bailouts, implement extreme quantitative easing, and shift to being a more transparent Federal Reserve.

Energy prices rose again this week, not due to Iran or the US, but because the UAE announced it would leave OPEC and OPEC+ on May 1, 2026. The UAE is one of OPEC’s biggest oil producers and this decision severely weakens OPEC’s control over global supplies. Moreover, it reveals a growing discord among the Gulf nations, and between the UAE and Saudi Arabia, in particular. The UAE’s spare capacity allows Abu Dhabi to add extra oil to the market once the Strait of Hormuz is open, and to gain a larger share of the global market. The UAE has also been strengthening its ties with Israel and the US, which makes this move a positive step for President Trump. Separately, the US objected strongly after Iran was selected as one of the 34 vice presidents of the United Nations Nonproliferation Treaty conference on April 27. Unbelievable.

OpenAI has had a difficult week after a Wall Street Journal story indicated there is conflict between Chief Executive Sam Altman and Chief Financial Officer Sara Friar regarding whether revenue can support massive spending on data centers. Simultaneously, Elon Musk took the stand in its high stakes suit against OpenAI. In the suit Musk is seeking $150 billion in damages (with proceeds to go to OpenAI’s charitable arm) after OpenAI betrayed Musk and abandoned the mission to be a nonprofit and benevolent steward of AI for humanity. Since OpenAI hopes to go public in the near future this could be a pivotal week or two for the company and Sam Altman.

But the best news of the week has been earnings. This is the busiest week for first quarter earnings results, and to date, the trend has been stellar. Last week the LSEG IBES 2026 consensus earnings estimate rose $1.60 to $326.78, the 2027 forecast rose $1.17 to $380.37 and the 2028 forecast rose $0.90 to $428.79. In short, the market is trading at 22.0 times the IBES 2026 estimate and 18.9 times the 2027 estimate. The S&P 500 forward earnings yield of 4.7% and dividend yield of 1.2% compare well to a 10-year Treasury bond yield of 4.35%. Plus, the 12-month sum of operating earnings shows a gain of 17.1% YOY, far better than the 75-year average of 8.1% YOY. This has been, and continues to be, an earnings-driven market. See page 7.

Along with good fundamentals, the technical condition of the market is strong. The 25-day up/down volume oscillator is 1.81, up from last week, still neutral, but inching toward an overbought reading of 3.0 or greater. The 10-day average of daily new highs was 347 this week and new lows were 48. This combination of daily new highs above 100 and new lows below 100 raised this indicator from neutral to positive last week. See pages 9 and 10. We remain a buyer of weakness.

One concern we do have is the increasing amount of leverage in the equity market. According to the Office of Financial Research, at the end of 2025, the 10 largest hedge funds in the US increased leverage to 23.9 times equity, the highest since June 2019 (24.64 times). One offset was that medium-sized hedge funds reduced leverage to 10.4 times equity from 12.5 times. In terms of style, event-strategy hedge funds had the largest increase in leverage, up 55% YOY, at the end of 2025. See page 3. Leverage can make the market more volatile and vulnerable to news events in the future.

But most economic news has been solid. Total retail & food services sales rose 4.1% YOY in March, the best pace since September 2025. Excluding motor vehicles and parts, sales rose 5.4% YOY, the best since February 2023. And excluding gas station sales, sales rose 4.1% YOY, down from 4.4% YOY in February. Gasoline station sales were $60.6 billion, the highest since July 2022, and up 18.5% YOY. This is not surprising given that crude oil prices were up 42% YOY in March. Still, nonstore sales were a record $135.4 billion in March, up 9.4% YOY. Real retail sales rose 1.2% YOY, down a bit from 1.4% in February, but matching the 12-month average. See page 4.  

The pending home sales index was 73.7 in March, up from 72.6 in February. Note that seasonally, sales rise in March and November of each year; nevertheless, the index has been stuck in a narrow range for the last four years. Homeownership rates fell slightly in the first quarter, to 65.3% overall, from 65.7% at the end of 2025. This matches the long-term average. Homeownership for those 35 to 44 years of age was the only group to see an increase in ownership in the first quarter, inching up from 60.9% to 61.1%. See page 5. The Conference Board’s consumer confidence index unexpectedly rose from an upwardly revised 92.2 in March to 92.8 in April but remains below the long-term average of 96. The increase was led by a modest improvement in the expectations index, although expectations remain below the recession threshold of 80. The final report for the University of Michigan consumer sentiment index showed April fell to 49.8, down from 53.3 in March, due largely to higher gasoline prices. The median 12-month inflation expectation rose to 4.7% from 3.8%. Expectations led the index lower, falling from 51.7 to 48.1, below the June 2022 low of 50, and lower than the May 1980 low of 51.7. However, keep in mind that sentiment indicators have been despondent and signaling recession since 2022. See page 6.

Gail Dudack

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President Trump’s two-week ceasefire with Iran, initially scheduled to end Tuesday, April 21, 2026, was just extended minutes ago at the request of Pakistan to allow Iran to submit a unified peace proposal to the US. We doubt that Iran can produce a unified proposal. Leadership is in disarray and if they could produce a unified proposal, we doubt it would be one that the US could accept. This leaves financial markets in limbo.

Uncertainty is a constant for investors, but this time the uncertainty regarding the Iranian conflict has immediate implications for investors and the fallout has and will continue to impact markets around the globe. In recent days, oil prices tumbled and equity prices rose to record highs in anticipation that peace talks would be successful. This must now be reassessed. The near-term risk of reversals in both trends is high, and we would not make big investment decisions in the days ahead.

Iranian leaders are patient and believe they will win. They are not democratically elected and therefore do not need to please the Iranian people. They believe they have time on their side as compared to their elected adversaries. But in our view, the request from Pakistan to wait for a unified proposal is a thinly veiled stall tactic that will not last for long. Many world leaders have fallen prey to the media’s message of TACO (Trump Always Chickens Out) and believe President Trump will compromise or back down from his demand of no nuclear weapons. But this is foolish. At present, Iranian leadership feels the Strait of Hormuz is their golden bargaining chip; however, the US blockade of their blockade has turned that asset into a liability. Iran relies on the strait for both its necessities and supplies (such as the sanctioned Iranian cargo ship Touska seized in the Gulf of Oman by the US and carrying “dual use” cargo after traveling through Chinese ports) as well as the way to export its oil (their main source of revenue). The US is preventing any ships from docking or leaving Iranian ports. In addition, the Iranian blockade of the Strait of Hormuz has inspired countries to find new sources of petroleum and fuel. Countries like Saudi Arabia are finding alternative ways to export oil. Eventually, the Iranian blockade may backfire.

Iran, i.e., the Islamic Revolutionary Guard Corps (IRGC), believes it can endure economic and military pressure longer than the United States. And unfortunately, the IRGC is emboldened by statements such as the one from the International Energy Agency (IEA) opining that this conflict is creating the worst energy crisis ever faced by the world. (Someone clearly did not live in the US during the Oil Embargo of the 1970s!) However, President Trump has demonstrated that he does not make idle threats. If Iran proves to be unable or unwilling to negotiate in good faith, we believe the odds of renewed bombing is extremely high. Again, we would suggest not making big decisions this week.

Meanwhile, the ceasefire between Hezbollah and Israel has been breached by Hezbollah, just ahead of US-mediated talks between the Israeli and Lebanese governments scheduled for later this week. Once again, this creates uncertainty because Israel welcomes any excuse to continue to unarm Hezbollah by force.

Sock Puppet

In other news, Kevin Warsh, nominee to chair the Federal Reserve, appeared before the Senate Banking Committee for his confirmation hearing. And despite being labeled a “sock puppet” by Senator Elizabeth Warren, Warsh appears headed for confirmation. His testimony included interesting comments including monetary policy independence is essential, reforms are necessary for monetary policy and Fed communications. In terms of policy, Warsh noted that interest rate levels impact all people in the US whereas increasing the Fed’s balance sheet benefits only stockholders and the wealthy. He also implied that Federal Reserve Board members should not be too transparent in terms of policy direction. (We agree! A transparent Federal Reserve inspires greater speculative activity, and this has been rampant in recent years.)

Economic News

According to the April Beige Book, the economy advanced modestly as the first quarter of 2026 ended with eight of the 12 Federal Reserve districts reporting modest growth. Atlanta, Cleveland, and Richmond were among the best performing regions with New York reporting a small decline in activity. Most importantly, the report made it clear that the job market is best described as a “low fire, low hire” environment.

The NAR pending home sales index rose from 72.1 in February to 73.7 in March but continues to languish below 2025 levels in all regions except the South. There was modest improvement in the Northeast and South, but sales fell in the Midwest and West. Builder confidence for newly built single-family homes fell 4 points in April to 34, the lowest level since September 2025. Current sale conditions fell 4 points to 37, sales expectations in the next six months were down 7 points to 42 and traffic of potential buyers fell 3 points to 22. Overall, the residential real estate market remains in the doldrums. See page 3.

Retail sales, when not-seasonally adjusted, usually jump in December — for holiday sales — and in March – after a post-holiday spending slump. March 2026 retail sales increased nearly 16% month-over-month (MOM) and 4.5% year-over-year (YOY). Retail sales excluding motor vehicles & parts jumped 15.5% MOM and 6.3% YOY. Motor vehicles & parts sales soared 17.7% MOM but fell 2.3% YOY. See page 4. March’s largest increases were seen in gasoline stations where sales increased 18.3% YOY and nonstore retailers where sales increased 13.2% YOY. However, clothing, electronics and appliances, building materials, and sporting goods sales were also strong. In sum, as noted in the Beige Book, the economy demonstrated steady growth in the first quarter.

Fundamentals and Technicals

The LSEG IBES consensus earnings estimates continue to rise and for 2026 increased $1.45 this week to $325.18. The 2027 forecast rose $1.26 to $379.20 and the 2028 forecast rose $2.10 to $427.91. This means the S&P 500 is currently trading at 21.7 times this year’s earnings, 18.6 times 2027 earnings and 16.5 times 2028 earnings. The equity market is not as cheap as it was in late March, but these PE multiples are reasonable valuations even with the equity market just below all-time highs. See pages 5-6. Year-to-date the Dow Jones Transportation Average leads all indices with a gain of 37.9%, followed by the Russell 2000 with a gain of 11.4%, the Dow Jones Utility Average with a gain of 6.1%, the Nasdaq Composite up 4.4%, the S&P 500 up 3.2%, and the Dow Jones Industrial Average up 2.3%. Not surprisingly, the NYSE cumulative advance/decline line hit a record high on April 20, 2026 and the 10-day average of new daily highs jumped to 315. These are all solid signs for the market in the longer term. See pages 7-8.

Gail Dudack

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The first few hours of the US blockade of the Strait of Hormuz — with US warships located outside the strait in the Gulf of Oman — resulted in only eight vessel crossings. This was touted as a disaster by some politicians since it is a mere fraction of the 130 per day that was typical a few weeks ago. However, war-risk insurance costs remain high, according to insurance experts, and this will take time to change. Nevertheless, the US blockade may be less about opening the strait to global commerce and more about keeping Iran from exporting oil to China and other friendly nations. In short, the blockade may be meant to pressure Iran economically, to stop Iran from exporting oil, and to reduce Iran’s ability to fund more weapons. Financial markets appeared to understand this strategy better than news sources and WTI light crude oil futures remained relatively unchanged at $91.48 but equities rallied and regained all of their year-to-date losses.

The year-to-date performances of various equity indices is revealing. From best to worst these are: the Dow Jones Transportation Average up 22.5%, the Dow Jones Utilities Average up 9.6%, Russell 2000 index up 9.0%, the Wilshire 5000 composite up 2.25%, the S&P 500 index up 1.8%, the Nasdaq Composite index up 1.7%, and the Dow Jones Industrial Average up 1.0%. The huge advance in the Dow Jones Transportation Average appears counterintuitive given the recent increase in fuel costs, but this benchmark now includes many logistics and trucking firms that have been helped by a healthy economy. Plus, talk of a possible merger between American Airlines Group Inc. (AAL — $12.13) and United Airlines Holdings, Inc. (UAL – $97.20) helped to boost the index this week. Utility stocks are up this year due to an aging infrastructure coupled with a massive power demand from AI data centers.

The 9% gain in the Russell 2000 index is the most interesting to us. We believe this performance reflects the resilience of the US economy and the fact that this index is heavily weighted to smaller domestically based companies versus the large international companies that dominate the S&P 500, the Dow Jones Industrial Average and Nasdaq Composite. As we noted several weeks ago, while most analysts focus on the risk of inflation due to higher energy costs, they miss the point that the higher cost of oil, which is based in US dollars, is a bigger burden to non-dollar, non-oil-producing countries than it is to Americans. In short, we worry less about the US and more about global growth. In our view, the US is the global economic leader and therefore, a relative safe haven for investors. Equally important is the fact that some of the “magnificent seven” stocks have recently encountered skepticism that the massive investment in AI infrastructure will continue and/or reap the financial benefits needed to support sky high valuations. As a result, they have been the underperformers this year. The good news is that valuations have become more reasonable. And from an historical perspective, it is bullish that this group of stocks has encountered skepticism. The alternative would have been a mania for the MAG 7, a roaring stock market bubble, followed by an inevitable bear market!

What we are Watching: Bank Earnings

In terms of 2026 price performance, the financial sector has been one of the worst performing sectors this year due to a variety of issues including President Trump’s urging to banks to cap credit card interest rates at 10%, a weak housing market, a sluggish auto loan market, and the risk of another wave of inflation in 2026. Risk of a crisis in the private credit market has also weighed heavily on the financial sector. But since banking is at the heart of all economic cycles, it is important to have solid leadership from this sector to support a healthy bull market cycle. For all these reasons, first quarter earnings season will be important and enlightening for the banks. Investors should watch not only for earnings but to see if loan loss reserves increase, which we expect will materialize due to recent defaults in software company loans. To date, earnings reports from Wells Fargo & Co. (WFC – $81.70), JPMorgan Chase & Co. (JPM – $311.12), and Citigroup Inc. (C – $129.58) revealed strong trading revenue across the board, but most companies had a cautious view emphasizing future economic risks. Goldman Sachs Group Inc. (GS – $909.63) reported record revenue in equity trading but weakness in fixed income, currencies, and commodities. More bank earnings, including Bank of America (BAC – $53.35), will be released later this week. Price action in these banks has been mixed in response to earnings releases; yet we believe the financial sector may be poised to become a relative outperforming sector if the Iranian conflict gets resolved. This would be bullish for all equities.

Technical Indicators Improve

There was some improvement in our technical indicators this week, in particular the 10-day average of daily new highs was 163 and the 10-day average of daily new lows fell to 90. This combination of daily new highs above 100 and new lows below 100 shifts this indicator from neutral to positive. The last time the NYSE cumulative advance/decline line made a new high was on February 26, 2026, but it is currently a net 1,865 advances away from making a new record. The possibility of a new high in this indicator, coupled with the outperformance of smaller capitalization stocks is favorable. In sum, we remain a buyer on weakness. See page 10.

Inflation Insights

Inflation picked up in March as expected and headline CPI jumped from 2.4% YOY to 3.3% YOY. Nevertheless, core CPI remained relatively unchanged, inching up from 2.5% YOY to 2.6% YOY. Note that both CPI indices remain below the long-term average of 3.5% YOY. PPI indices were more directly impacted by soaring oil prices and the PPI for finished goods jumped from 1.6% YOY in February to 4.1% in March. Core PPI for finished goods remained unchanged at 3.7% YOY. The PPI final demand index, the most watched index, rose from 3.4% YOY to 4.0% YOY. This puts all these indices above the long-term average of 3% YOY. See page 3.

There is a growing disparity between core PPI and core CPI at the moment, and this is a relatively rare occurrence. Similar disparities occurred in 1973-1974 during the Oil Embargo, in 2008-2009 during the financial crisis, and in 2022-2023 when the Biden-Harris administration focused on reducing fossil fuel reliance, hindered domestic oil & gas production, and paused new LNG export terminals. History shows that the CPI is heavily influenced by the PPI index but does not always have the same extremes. A chart combining CPI, PPI, and WTI oil prices is important. See page 4. Although the high price of fuel is a big negative for households, note that the current 66% YOY increase in WTI prices is not that unusual and not as extreme as the March 2021 to March 2022 period when oil prices rose 237% YOY as of April 2021 and averaged gains of 97% YOY for the subsequent 12 months! The NFIB small business optimism index fell to 95.8 in March, matching the low seen in April 2025, and sliding below the long-term average of 98.0. The uncertainty index rose to 92.0, the highest since the 100 seen in September 2025. There has been an historical correlation between small business optimism and the inverse of the unemployment rate. Since early 2023, the unemployment rate has been slowly rising, and small business optimism has been slowly falling. In other words, the trend is not new or extreme, but it is worrisome. Our biggest concern for 2026 continues to be weakness in the job market. The next employment report is scheduled for Friday, May 8, 2026. See page 5.

Gail Dudack

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