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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World News

We go to print in the midst of a chaotic day of news flow and just ahead of an important deadline. President Donald Trump set a cutoff of 8 pm ET Tuesday April 7, 2026, for Iran to open the Strait of Hormuz or face destruction of major bridges and power plants. And once again, President Trump’s word choice, saying he might “destroy a whole civilization” is dominating headlines, instead of the importance of the 8 p.m. deadline. More importantly, an Iranian official, part of a regime that has perpetually cried “death to America” responded to Trump’s threat by issuing a video calling for all young people, athletes, students, and professors to form “human chains” around power plants. Once again, Iran demonstrates a strategy that preys on Western morality while showing a complete lack of respect for any and all, including Iranian, lives. On a more positive note, the Iranian-backed Iraqi militia Kataib Hezbolla said it released the kidnapped American journalist, Shelly Kittleson. Some hope this might be an indirect peace offering.

In the background, an investigation is underway to determine who leaked to the press that an American airman was missing after his fighter jet was shot down over Iran on Good Friday. Sadly, this is another example of a lack of morality and respect for human life here. This leak clearly put an American pilot’s life and the lives of all in the mission to rescue him, at great risk.

A Bahrain-led resolution aimed at reopening the Strait of Hormuz failed at the UN on Tuesday due to opposition from Russia and China. Breaking news suggests US-Israel was already striking Iran’s oil, rail, and bridges ahead of the deadline. Overall, there was great uncertainty regarding what may happen overnight as another Iranian official told Reuters News that Iran was ready for peace and war. But in the last few minutes, at the end of the trading day, financial markets reacted to news that Iran was responding favorably to a Pakistan request to secure more time for diplomacy. Reports are that President Trump has agreed to a two-week ceasefire as long as the Strait of Hormuz is immediately opened. Equity indices closed higher, oil ratcheted lower in late trading, and the 10-year Treasury bond yield eased to 4.3%.

Economic News

There were several important economic news releases this week. The most important of these was the employment report for March. The headline of the report indicated an increase of 178,000 new jobs in the month and a decline in the unemployment rate from 4.4% to 4.3%. But there was a lot to discover beneath the surface. Although the report was a positive surprise showing more than three times the consensus estimate, revisions eliminated 45,000 jobs from previous reports. The unemployment rate fell from 4.4% to 4.3% but this was due to a decline in the civilian labor force. The household survey, which is the source of the unemployment rate, revealed a decrease in both the number of people employed (a decline of 64,000) and a decrease in those unemployed (a decline of 332,000), the sum of which is the civilian labor force. Note in the table on page 3, that while March showed an increase of 178,000 jobs in March, employment grew only 260,000 from a year earlier. This suggests that 2026 is a relatively flat and/or weak job market. Our favorite jobs indicator is the year-over-year change in total jobs. In March there was a mere 0.16% year-over-year increase in jobs in the establishment report and negative 0.4% year-over-year change in the household survey. This is important to monitor since negative growth rates in jobs are indicative of a recession!

When we look at a long-term monthly chart of job growth in the establishment survey it shows that employment recovered from the decline seen during the pandemic but has grown very little since 2023. The 6-month rate of change in both surveys displays how volatile the household survey can be compared to the establishment survey, but it also shows the deceleration in job growth in both surveys since 2023. See page 4. The introduction of AI is expected to reduce job growth and may already be impacting the employment environment. On the other hand, the deportation of many illegal migrants may be an offset for a weak job environment. Nevertheless, the employment landscape is languishing and that is an economic risk.

The ISM manufacturing index inched higher to 52.7 in March from 52.4 in February and marks the third month in a row that the index has been in expansion territory above 50. It was also the fifth month in a row that the production index remained above 50. These are by far the best readings since manufacturing weakness began in early 2022. But unfortunately, the biggest increase in the manufacturing survey was seen in prices paid, a jump from 70.5 to 78.3. See page 5.

The ISM nonmanufacturing index was 54.0 in March down from 56.1 in February but still showing an expansion. Yet, the report was mixed with business activity declining and new orders rising. The employment index has been weak in the manufacturing survey since 2022 and has been erratic in the nonmanufacturing survey. Combining the two ISM employment indices, we can find a read on the overall economy and after March’s weakness this indicator is right at the bottom edge of neutral. It too is signaling a warning of job weakness. See page 6.

Retail sales for the month of February grew 3.7% YOY, the best pace in five months. Retail sales less autos and gasoline increased 4.1% YOY versus 4.5% YOY in January. In the month of March, total auto sales were 16.67 million units, up 3.4% for the month but down 9.1% YOY. In March, imported car unit sales were down 15% YOY, domestic car sales were down 16.5% YOY and domestic truck sales were down 4.8% YOY. The peak for auto sales was 18.6 million units in April 2021, during the pandemic when airlines were practically shut down. See page 7.  

Fundamentals

Many investors wonder why the equity market has performed as well as it has in the face of the Middle East conflict and a huge jump in energy prices. Our answer is earnings! This week the LSEG IBES consensus estimate for 2026 S&P 500 earnings rose $0.28 to $323.02 and the 2027 forecast rose $0.23 to $377.35. IBES also initiated a 2028 forecast of $425.95. The S&P Dow Jones consensus forecast for 2026 rose $0.65 to $320.40 and the estimate for 2027 jumped $1.33 to $374.36. This means the market is trading at 20.5 times the IBES 2026 earnings estimate and 17.5 times the 2027 estimate, one of the lowest multiples since April 2025. Although interest rates have been rising, the forward earnings yield of 5.1% 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. These solid fundamental underpinnings are supporting equity prices despite the uncertainty of the Iran conflict. Technical indicators are little changed this week. The NYSE cumulative advance/decline line has not made a new high in five weeks, indicative of a correction and the 25-day up/down volume oscillator is at negative 1.25, little changed from last week. The AAII 8-week bull/bear spread fell to negative 10.3, the first positive reading since September 2025. In sum, we remain cautiously bullish.

Gail Dudack

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US equities had an impressive rally on the last day of the quarter, with the Dow Jones Industrial Average jumping 1125 points, boosted by reports that President Trump may be willing to end the military campaign against Iran without reopening the Strait of Hormuz. However, there were conflicting reports from the Wall Street Journal and CBS News regarding this issue. There were also rumors that Iran’s president is prepared to discuss a process to end the conflict. Iran’s foreign minister Abbas Araghchi, told Al Jazeera TV he is exchanging direct messages with US envoy Steve Witkoff, but denies this constitutes “negotiations.” (Smoke and mirrors?) But behind the scenes, the US targeted a huge Iranian ammunition depot in Isfahan and Iran responded by threatening to attack Americans on Saudi Arabian soil listing 18 American businesses, including Microsoft Corp. (MSFT – $370.17). The US State Department warned Americans in Saudi Arabia to shelter in place since hotels and other gathering points including US businesses and US educational institutions could be potential targets. In the background, Israeli military reports it has struck a senior Hezbollah commander and a senior fighter in separate attacks in Beirut. And OPEC announced that oil output plunged by 7.3 million barrels per day in March to 21.6 million barrels per day, the lowest output level since June 2020, during the pandemic.

All in all, it was a busy and confusing day of news with both the US and Iran issuing threats. Defense Secretary Pete Hegseth said the next few days could be decisive (we agree) and he warned Tehran that the conflict would intensify if it did not make a deal. Equity prices rose on hopes that an end to the conflict was within reach, but it is important to note that energy markets were less enthusiastic. The key issue for the financial markets is the price of energy and here prices actually moved higher. The Brent crude May contract (LCOc1 – $118.31) closed up 64% and WTI intermediate crude contract (CLc1 – $101.93) rose 53% for the month of March. Not surprisingly, the average price for a gallon of gasoline soared over $4 in the US. Clearly, energy prices are reaching pressure points not only in the US but globally.

Economic and Political Pivot Points

Not only did energy prices not celebrate along with equities, but long-term Treasury yields declined, not because inflation is declining, but because the risk of recession increases the longer crude oil prices remain high. Without a resolution of Middle East turmoil this week, expect more talk about recession, not only for the US but globally. Pressure from higher oil prices is also straining US relations with NATO nations as seen by Spain closing its airspace to US jets, Italy denying military aircraft to land at a base in Sicily and Poland retracting plans to relocate its Patriot batteries to the Middle East.

Technical Pivot Points

In our view, equity prices may have been boosted less by rumors and more by end of the quarter window dressing of portfolios by institutional investors. Several technical indicators are also at interesting pivot points. Our 25-day up/down volume oscillator is currently at negative 1.22, down from last week, and one of the lowest readings since early April 2025. See page 6. Another parallel to April 2025 is seen in the AAII sentiment survey where bearish sentiment hit 52% on March 18, 2026, the highest bearish sentiment since April 30, 2025. In short, the stock market entered the week revealing several extremes that suggested it was ready for an oversold bounce. Our only concern is that while the market resembles the extremes seen in the April 2025 tariff panic, the Iran conflict may be less easy to manage than tariffs. This is the risk.

The Dow Jones Industrial Average, the Nasdaq Composite Index, and the Russell 2000 all fell into correction territory in recent sessions and were down at least 10% from their record highs in late March. The S&P 500 did not register a decline of 10% or more, but more than half of its sectors did reach correction territory. Nevertheless, the end of the quarter bounce reversed some of these losses and the year-to-date performances of the indices ended more mixed than negative. Year-to-date, i.e., quarter-to-date results were losses of 7.1%, 4.6%, and 3.6% in the Nasdaq Composite, S&P 500, and Dow Jones Industrial Average, respectively and gains of 0.6%, 7.2%, and 8.5% in the Russell 2000, the Dow Jones Transportation Average, and the Dow Jones Utility Average, respectively. There was clearly a wide range of performances among the indices with losses concentrated in high PE and technology-based stocks.

And the underlying action of sectors was also mixed. This is seen on page 10 where S&P 500 year-to-date sector performance shows six sectors outperforming the index and five underperforming. The range of performance reveals the dichotomy in the marketplace with the energy sector up over 37%, followed by materials up 9.3% and utilities up 7.5%. While at the bottom, the financial sector is down 9.8% year-to-date, followed by consumer discretionary down 9.3%, and technology off 9.3%. To date, 2026 has been a year that underscores the lesson that a diversified portfolio is the best long-term strategy.

Fundamentals Also Rhyme

The LSEG IBES consensus earnings estimate for 2026 rose $2.26 this week to $322.74 and the 2027 forecast rose $4.62 to $377.12. The S&P Dow Jones consensus forecast for 2026 rose $0.16 to $319.75 and the estimate for 2027 fell $0.47 to $373.00. On March 30^th, the market was trading at 19.7 times the IBES 2026 estimate and 16.8 times the 2027 estimate, the lowest multiples since April 2025. Although interest rates have been rising, the forward earnings yield of 5.25% and dividend yield of 1.2% compare well to a 10-year Treasury bond yield of 4.3%. Plus, the 12-month sum of operating earnings shows a gain of 16.7% YOY, far better than the 75-year average of 8.1% YOY. See pages 4 and 5. This is the main reason that we remain bullish about the longer-term outlook.

Still, the risk of a recession is rising, and this could make Friday’s employment report for March a market moving event. There are already signs that the residential housing market continues to decelerate, and a weak job market would add to the problems that higher energy prices present. Given the fluidity of the conflict in the Middle East, and the possibility that the jobs report could be less than the consensus expectation of a modest rebound of 60,000 to 80,000 jobs in March, we remain near-term cautious. Separately, The Conference Board’s consumer confidence index rose from a revised 91 in February to 91.8 in March, yet it continues to linger below the long-term average of 96. March’s increase was led by the present situation index, which rose slightly from February’s 5-year low. The expectations index was 70.9, down from 72.6. The University of Michigan sentiment survey was 53.5 in March, down from 56.6 in February with weakness concentrated in the expectations index, which was 51.7, down markedly from 56.6. The report said that about one-third of all responses came in before the start of conflict in the Middle East and since energy prices have increased dramatically it is normal to expect that sentiment has deteriorated. However, we would not rely on sentiment indices because they have been forecasting a recession for four consecutive years. In sum, they have been of little use for investment decisions or for predicting the economy. See page 3.

Gail Dudack

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The Middle East conflict, surging energy prices, President Trump’s five-day bombing pause, his announcement of discussions with Iranian leaders followed by Iran’s denial of discussions are just a few of the factors whipsawing stock prices this week. And though many financial gurus are currently forecasting WTI crude will rise above $100 a barrel and stay there, President Trump is predicting oil prices will soon fall like a stone. Neither forecast has been nor apt to be accurate. Neither are the headlines indicating that President Trump “is losing the war.” A Bloomberg News story suggests the conflict is escalating with Gulf States contemplating military options; meanwhile, The Jerusalem Post writes that the US has sent Iran a 15-point plan to end the war. In truth, there is very little that is predictable about this situation; but we would be wary of biased headlines.

But, as we stated last week, there is one obvious fact. Countries such as Saudi Arabia, UAE, Qatar, Jordan, Bahrain, and Kuwait – countries with more modern thinking leadership than Iran — are lining up on the side of the US and Israel, which leaves Iran more isolated than ever before. This collaboration of countries, and the fact that Pakistan is offering to broker a peace deal, leads us to believe there will be some resolution of this conflict in coming days. Still, we do not expect a smooth transition. The Iranian-sponsored Islamic terrorist group has always been purposefully decentralized with autonomous offshoots which allows individuals, or small groups, to survive and carry on even without traditional leadership. This will make any negotiations difficult and perhaps impossible to enforce. We are hoping for peace but fear it may be a difficult road even after the bombing stops.

Plus, the private credit problem continues to unfold. This week two of the biggest names in private credit, Apollo Global Management Inc. (APO – $111.25) and Ares Management Corp. (ARES – $106.04), moved to restrict withdrawals from funds in response to withdrawal requests. Many are concerned that a liquidity squeeze may materialize in the illiquid private credit market. In our view, the risk is substantial, but to the extent that it remains in the private credit market and does not impact the banking system means the risk is not systemic and is unlikely to trigger a larger financial crisis.

Separately, under the state’s consumer protection laws a New Mexico jury found Meta Platforms, Inc. (META – $592.92) liable for failing to protect young people from online dangers. The verdict included $375 million in civil penalties and will be appealed. In Washington DC, in an effort to reach an agreement with Democrats after a more than month-long standoff, and after travelers suffered ridiculously long check-in lines at airports, Senate Republicans offered to fund all of the Department of Homeland Security except for ICE.

Technical Indicators

There was surprisingly little deterioration in our technical indicators this week. The 25-day up/down volume oscillator was slightly lower at negative 0.88, this week, but still neutral. See page 8. The 10-day average of daily new highs fell to 104 this week and new lows were higher at 181. This combination of daily new highs and lows above 100 keeps this indicator at neutral but tilting negative. See page 9. Last week’s AAII survey showed bullishness fell 1.5% to 30.4% and bearishness jumped 5.6% to 52.0%, its highest reading since April 30, 2025. The 8-week bull/bear index is negative 2.9% and neutral. It was last in positive territory in late September. See page 10. Our biggest concern is that the S&P 500, the Dow Jones Industrial Average, and the Nasdaq Composite index have all closed below their 200-day moving averages for four consecutive trading sessions. The longer this breakdown continues, the greater the risk to the major bullish trend and the more likely these moving averages shift from being support to being resistance. Note that the Russell 2000 index is the only major index to remain above its 200-day moving average. We remain cautious since technical indicators as well as negotiations in the Middle East appear to be at pivotal junctions this week; but we remain bullish for the longer term.

Earnings

Bullishness is supported by a fundamental backdrop that remains bright. As fourth quarter earnings season ends, we find there has been a big reassessment of 2026/2027 earnings. This week the LSEG IBES consensus earnings estimate for 2026 rose $2.83 to $320.46 and the 2027 forecast rose $2.08 to $372.50. The S&P Dow Jones consensus forecast for 2026 jumped $5.16 to $319.59 and the estimate for 2027 rose $7.34 to $373.50. This means the market is trading at 20.5 times the IBES 2026 estimate and 17.7 times the 2027 estimate. These are some of the best market valuations seen in a long time.

Economic Roundup

With WTI crude oil prices up nearly 30% YOY, it is the risk of an inflation surge that has investors understandably worried. The final demand PPI index was up 3.4% YOY in February, up from 2.8% YOY seen in January. PPI for finished goods was still modest at 1.7% YOY, but this is apt to rise as higher energy costs trickle down through the economy. Core PPI for finished goods was 3.7% YOY in February and has been above 3% YOY since October 2025. See page 3. Inflation numbers are troubling because while PE multiples have come down to attractive levels, higher inflation goes hand in hand with lower PE multiples. Therefore, the market will remain captive to the price of oil for at least several months.

The residential real estate market continues to weaken. Pending home sales are based on properties that go under contract and this index typically leads existing home sales by two months. The index was down 0.8% YOY in February, with most of the weaknesses in sales centered in the Northeast. In the month of January private residential construction spending fell 0.8% to $933 billion (SAAR) but was up 2.3% YOY. Among the components of construction, outlays for new single-family homes fell 0.2% in January and were down 5.8% on a year-ago basis. Spending on new multifamily homes fell 0.7% but was 0.4% higher than in January 2025. Spending on home improvements dropped 1.4% in January but increased 12.5% over the year. Overall, the data shows households are improving their homes versus trading up. See page 4.

New home sales were down 11.3% YOY in January, with the greatest weakness seen in the Northeast. Inventories rose to 9.7 months of supply. The median home price fell 7% YOY and average home price fell 3.6% YOY. Data shows that YOY home price increases peaked in early 2024 and have been steadily decelerating. Meanwhile, Fed data shows that household net worth rose $2.2 trill in the fourth quarter to $184.1 trillion, up 8.5% YOY. Household debt ratios rose fractionally, but the broad debt service ratio ended 2025 at 11.32%, up from 11.26%, but still below the long-term average of 11.84%. In sum, the average household with a stock portfolio did well in 2025, but homeownership remains out of reach for many.

Gail Dudack

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News of the war in Iran, the blockade in Strait of Hormuz, Brent crude oil at $103.52 a barrel, and the average price for a gallon of gasoline rising from $2.84 to $3.86 in a month, dominates the headlines this week. And while President Trump stated that the conflict should be over in a few weeks, there are risks to this timing. As we wrote two weeks ago: “recent acts of desperation by Islamic Revolutionary Guard Corps (IRGC) could prove fatal, but this retaliation will make the next few days (weeks?) dangerous and unpredictable. We doubt most members of the IRGC have been or will be willing to negotiate and would rather fight to the death. This exemplifies a culture many in the Western world do not truly understand, and it is possible that the conflict could escalate, the number of participants in the war zone could increase, and this turmoil would hurt the production and flow of oil to the world.”

Although we understand that in geopolitical terms short term pain — even in a mid-term election year – can be worth the long-term gain of ridding the world of a nuclear-powered sponsor of death and terrorism, we cynically believe many in our society seek immediate satisfaction and are susceptible to social media to drive their views and emotions. Moreover, despite this week’s news of the elimination of Iran’s leadership including security chief Ali Larijani force commander Gholamreza Soleimani, we expect the remnants of the IRGC will continue to do as much damage as possible, and the war will take longer than President Trump expects. The media may attack the administration for this conflict, but it is a near sighted opinion, in our view. Ironically, this war appears to be moving much of the Middle East closer in line with President Trump while much of Europe stands stoically in distant disagreement. Yet, as every good analyst knows, you should follow the money, or in this case the strength of the economies, to see where the trend leads. A unified US/Middle East creates a powerful force.

And again, we must reiterate that as a net exporter, the US is in a far better position economically than much of the world in terms of energy. Not only has crude oil risen, but so has the dollar, making energy more expensive around the world. And as an exporter of petroleum products, the energy sector and much of the US stand to benefit from higher prices as seen by the outperformance of the energy sector, up over 30% year-to-date. See pages 11 and 12. But this conflict is triggering economic and financial issues around the world, including in the Middle East. We were surprised to read that S&P placed Iraq on CreditWatch negative (the risk of a downgrade) due to the sharp fall in oil production which could put pressure the country’s fiscal and external debt responsibilities. S&P did note that Iraq has significant buffers to meet its foreign debt repayments and this mitigated the risk of a full downgrade.

And though the rising price of crude oil makes another round of inflationary pressure a huge risk, newly released data shows the US economy was in good shape in February before the conflict began. The CPI report for February showed headline inflation was unchanged at 2.4% YOY and core CPI was unchanged at 2.5%. This was positive news but given current crude oil prices, it is old news. The underlying data for February was more interesting since it showed food inflation at 3.1% YOY, up from 2.9% YOY in January, and the broad energy index up fractionally at 0.5% YOY, versus negative 0.14% in January. Within core CPI the price index for goods increased 1.0% YOY, down from 1.1% YOY, and services rose 2.9% YOY, unchanged from a month earlier. See page 3. Wages rose 4.3% YOY in February, well above the 2.4% increase in the CPI, which suggests the typical household is keeping up with inflation. But this makes upcoming data more important. See page 4. The PCE deflator for January rose 2.8% YOY down from 2.9% YOY and the core PCE deflator was up 3.1% YOY, up a notch from 3.0%. All in all, inflation remained stable and well below the long-term average of 3.4% YOY.

Personal income rose 4.4% YOY in January, down from 4.6% a month earlier, but the important number was real personal disposable income which rose 1.8%, up from 1.2% in December. The savings rate was 4.5%, up from 4.0% in December and personal consumption grew 2.4% YOY, up from 1.6% YOY. There was a surprise increase in industrial production in February which grew 1.4% YOY and residential housing starts rose 7.2% YOY (multi-family up 30% YOY) although permits fell 5.4% YOY (multi-family down 12.4%). 

The fiscal deficit for the month of February 2026 was $307.5 billion, up slightly from the $307.0 billion seen a year earlier. Nevertheless, the twelve-month running fiscal deficit was $1.633 trillion, down 24% from the $2.15 trillion seen in February 2025. More importantly, the current $1.633 trillion deficit represents an estimated 5.3% of GDP (using recently revised 4Q25 GDP) down significantly from the 7.2% of GDP seen in February 2025. This is important data and should have a favorable effect on US Treasury bonds as supply slows. The goal of the administration is to get the deficit down to a sustainable 3% of GDP and to see economic growth above 3%. Note that a ratio of 3% of GDP (or less) is typical during economic expansions, but this was not a focus of the Biden administration and deficits grew because of fiscal stimulus throughout this four-year term. This improvement in the fiscal deficit in the past year has been amazing and significant, but we are concerned that unless the administration finds a workaround to the Supreme Court decision on tariffs, there could be a future burden to the Treasury.

Although economic news has been important, we believe it is fundamental support that is keeping market action stronger than many expected. According to LSEG IBES, of the 496companies in the S&P 500 Index that have reported revenue for the fourth quarter of 2025, 72.4% reported revenue above expectations and this compares to the last 24-year average of 63%. Overall, companies are reporting revenues that are 1.9% aboveestimates, which compares to a 24-year average surprise factor of 1.3%. Earnings for calendar 2026 are presently forecasted to increase 16.2%, which is far better than the long-term average of 8.1%. The S&P 500 is currently trading at 21.1 times the IBES 2026 estimate, the lowest multiple since July 2025, and 18.1 times the 2027 estimate. See pages 6, 7, and 13.

There has been some weakness in a few technical indicators this week, in particular the 10-day average of daily new highs and lows. Daily new highs have dropped to 100 and daily new lows have risen to 121, leaving this indicator at risk of going negative if new highs fall below 100. The AAII sentiment indicators were also worth noting with bullishness falling 1.2% to 31.9% and bearishness jumping 10.9% to 46.4% (its highest reading since November 12, 2025. The neutral category fell 9.7% to its lowest reading since November 12, 2025. We would note that November 2025 was when the index successfully tested its 100-day moving average. In recent days the S&P index has been testing its 200-day moving average, now at 6612.14, which we believe will prove to be a meaningful test. We expect the test will be successful, but we remain cautious. The underlying fundamentals of the economy and the stock market remain solid and favorable, but the growing geopolitical divide due to Middle East turmoil is at a dangerous stage in our view. Moreover, Friday, March 30, is a quadruple expiration day which can be preceded by a day or two of great volatility. A break of the 200-day could trigger more short-term selling. We would wait for a successful test. And lest we forget, it is FOMC week and we expect the Fed will not change monetary policy.

Gail Dudack

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As noted last week, we remain a buyer of market weakness over the longer term but given the unpredictability and messiness of the war in the Mideast, we remain cautious in the short term. War-time changeability and chaos are best represented by the wild swings in the price of crude oil. There is no shortage of oil around the world and prices are expected to return to normal in coming weeks, but over 68 loaded oil tankers, or roughly 4.2 billion gallons of crude, are currently trapped or delayed in the Persian Gulf region due to the conflict. This has triggered volatility in WTI intermediate crude futures (CLC1 – $83.45), which rose from a closing price of $65.21 on February 26 to a recent intraday high of $119.48, before closing just above $83 a barrel on March 10. Both Brent crude and WTI prices are roughly 40% higher than they were earlier in the year and this will put pressure on consumers and inflation benchmarks if the Strait of Hormuz does not open soon. According to price-tracking data from AAA, the average price for a gallon of gas in the US was up six cents this week to roughly $3.54, and the only state with gas prices under $3 a gallon was Kansas at $2.96. California continues to have the most expensive gas in the US, with a gallon costing an average of $5.29.  

Cons

The inflationary impact of higher energy prices clearly poses a risk to the economy since higher energy costs hurt middle and lower-income households most severely. It could also mean the Federal Reserve may postpone lowering interest rates and this would be a disappointment to the consensus.

Another concern we have is the weakness in the job market. The employment environment has been deteriorating for over six months, but the increased use of AI is clearly stunting job growth.

The February jobs report was a negative surprise with a loss of 92,000 jobs for the month (versus expectations of a 50,000+ increase) and the unemployment rate rose 0.1% to 4.4%. According to the BLS establishment survey, employment grew by a mere 156,000 jobs in the 12 months ended February. More disturbingly, the household survey showed a 12-month decline of 426,000 jobs. See page 4. However, the BLS delayed its annual Census Bureau population update from January to February, which means February’s report included revised population estimates which incorporated new information on births, deaths, and migration changes since the most recent decennial census. This year’s population assessments also incorporated data on net international migration. The changes made to January 2026 data also reflected adjustments back to the April 2020 Census population base. After these head spinning revisions, the January 2026 employment number, on a not seasonally adjusted basis, showed a month-to-month decline of 2.05 million jobs and a decline of 895,000 jobs on a seasonally adjusted basis. Not surprisingly, our year-over-year household survey chart now shows January and February job growth to be negative 0.45% and negative 0.26%, respectively. Negative growth in employment is normally a sign of a recession which implies this is a major concern. However, since all these changes were applied to the month of January 2026, year-over-year or month-to-month comparisons are impossible. All in all, we have found the accuracy and assessment of BLS data to be troublesome in recent years so we would not make major decisions based on this data. Still, there does appear to be weakness in the job market. 

Pros

One may wonder why the recent stock market, despite all the volatility and the risks to oil and the Middle East, has performed as well as it has. We believe it stems from the fact that most traders expect the conflict to be resolved quickly, and the administration suggests it should. Moreover, conflicts and energy crises, on average, have not been a big negative for the equity market, particularly in recent years. A table on page 3, from The Stock Traders’ Almanac, shows that over the last 87 years equity markets have had an average gain of 3.4% in the six months (2.9% in twelve months) after the beginning of a crisis and a 7.6% gain in the six months (12.7% in the twelve months) following the start of a crisis over the last 47 years.

The worst one year experience was the 34.3% decline which followed the Arab Oil Embargo of 1973. This embargo sent oil prices from $2.90 to $11.65 a barrel, led to a rationing of gasoline in the US, and gave rise to inflation peaking at 11% in 1974. The second worst one-year performance followed the October 2001 invasion of Afghanistan. However, this decline was due primarily to the bursting of the Dot-com bubble in March 2000. In short, history suggests crises have not been major issues for the equity market.

In addition, some recent reports suggest the job market may not be as bad as we thought. The ISM manufacturing and nonmanufacturing employment indices rose to 48.8 and 51.8, respectively, for the month of February. As a result, the total employment index rose to 100.6, its highest level since February 2025. The ISM manufacturing index for February was down 0.2 to 52.4, but the nonmanufacturing index jumped 2.3 points to 56.1. Both ISM indices were up over 4% YOY, reflecting an improvement in the economy and the ISM nonmanufacturing survey showed improvement in each category, except for prices paid which fell from 66.6 to 63.0 – a positive. See page 8.

Although we are monitoring consumer data closely, most reports remain solid. Advance estimates of retail and food services sales for January 2026 were down 0.2% for the month, but up 3.2% YOY seasonally adjusted and up 3.1% YOY not seasonally adjusted. These were solid numbers and exceeded inflation of 2.4% YOY. Total vehicle unit sales were 16.1 million in February, up nearly 6% for the month, but down 1.8% YOY. The good news in this report was the 2.8% YOY increase in domestic light weight vehicles. Conversely, foreign light weight vehicle unit sales fell 7.0% YOY. This suggests the administration’s fiscal policy that gives tax breaks to domestic-made vehicles (Car Loan Interest Deduction) continues to have a positive impact on domestically made vehicle sales. See page 7.

New consumer credit data was also positive. Consumer credit outstanding increased $8.1 billion in the month of January, which included a $4.7 billion increase in revolving credit and a $3.3 billion increase in nonrevolving. As a result, the six-month rates of change for total, revolving, and nonrevolving credit were 1.2%, 1.4%, and 1.1%. The twelve month rates of change were 3.2%, 1.9%, and 3.6%, respectively. This is a significant improvement from most months in 2025 when revolving credit was contracting. Contractions in credit are often signs of consumer distress and recession. Perhaps the greatest positive of all is the growth in S&P 500 earnings. As fourth quarter 2025 earnings season ends, consensus estimates continue to increase. This week the LSEG IBES consensus earnings estimate for 2026 rose $1.33 to $316.69 and the 2027 forecast rose $2.37 to $367.81. The S&P Dow Jones consensus estimate for 2026 rose $1.28 to $313.60 and the estimate for 2027 jumped $2.50 to $365.30. This means the market is trading at 21.5 times the IBES 2026 estimate and 18.5 times the 2027 estimate. In sum, fundamentals remain solid and support buying on weakness. See page 10.  

Gail Dudack

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We remain a buyer of market weakness over the longer term but given the escalation of the war in the Mideast, we would be cautious this week since war can be chaotic and messy. The war took a dangerous turn after Iran launched widespread retaliatory missiles and drone attacks targeting US military assets, as well as airports and oil infrastructure across the Middle East. The countries impacted include all six of the Arab nations in the Gulf Cooperation Council (GCC): Kuwait, Oman, the United Arab Emirates (UAE), Saudi Arabia, Qatar, and Bahrain, as well as Jordan. Attacks have also hit civilian infrastructure, oil facilities, British air bases in Cyprus, and oil tankers in the Strait of Hormuz. In our opinion, these appear to be acts of desperation by Islamic Revolutionary Guard Corps (IRGC), acts that could prove fatal, but this retaliation will make the next few days dangerous and unpredictable. We doubt most members of the IRGC have been or will be willing to negotiate and would rather fight to the death. This exemplifies a culture many in the Western world do not truly understand, and it is possible that the conflict could escalate, the number of participants in the war zone could increase, and this turmoil would hurt the production and flow of oil to the world. Weakness in the financial markets have been an obvious response to this threat, to which we add several important observations.

First, this conflict shows how vital US energy independence is to America. The disruption in oil exports is expected to have a nominal impact on the American economy since the US is a net exporter of energy. The effect will be minimal if the crisis lasts a month or less and financial markets appear to understand this. While the US equity market has declined in recent days, it has been a relative out-performer in terms of global markets. Over the last five trading sessions the S&P 500 index lost 1.1% versus the Vanguard FTSE All-Word ex-US ETF (VEU – $77.62) with a loss of 4.7%, or the iShares China Large Cap ETF (FXI – $36.06) with a decline of 6.0%. See page 10. 

Second, over the last five trading days Brent crude futures (LCOc1 – $81.73) and West Texas intermediate crude futures (CLc1 – $74.73) rose 15% and 14%, respectively. These oil price increases will be a benefit to exporters such as Russia, Canada, Venezuela, and the US; but they increase the cost of fuel and hurt most economies around the world. The recent rally in the dollar increases the pain for many importers of oil since crude oil is priced in dollars. China, in particular, imports 70% of its consumption of oil, 90% of which is seaborne imports. This could put China in a desperate situation. However, The Center on Global Energy Policy at Columbia reported in January* that China’s recent aggressive stockpiling of crude oil suggests it could weather a multi-month disruption of imports from Iran and Venezuela. Time will tell. These two countries were the source of at least 15% of China’s imports in 2025.

Third, it should not go unnoticed that the conflict with Iran goes well beyond Iran’s borders. The combination of removing Maduro in Venezuela and potentially the radical government of Iran, could have major long-term implications for China and the global balance of power. It is a reset that stems China’s access to energy, natural resources, and its goal of economic dominance.

Fourth, the rising cost of crude oil is inflationary and the longer the conflict persists, the greater the risk to oil and natural gas production and refineries, and the more inflationary risk grows. OPEC+ has decided to unwind past production cuts, and the US and China could release strategic stockpiles, but these are small changes and sentiment could move prices higher, nonetheless. Moreover, natural gas markets are severely impacted. According to the Center on Global Energy Policy “Liquid Natural Gas (LNG) transiting through the Strait of Hormuz has been disrupted since February 28 and nearly 90% of the LNG transiting the Strait is destined for Asian markets, which will therefore be the most directly impacted. While China accounts for the largest share—approximately 25%—of the disrupted LNG volumes.” From a US perspective, this will likely postpone any future Federal Reserve rate cuts in coming months. It also has implications for long-term interest rates and the broad fixed income markets.

These inflation fears were already rising after last week’s PPI report which showed final demand rose 0.5% for the month of January and 2.9% YOY. Final demand for services rose 0.8% in January and 3.4% YOY. Conversely, final demand for goods fell 0.3% in January and rose only 1.6% YOY. The 0.5% increase in headline PPI was the highest in four months; the 0.8% rise for final demand services was the largest increase in six months and the 0.3% decline in final demand goods was the largest decrease in ten months. Note that most of January’s rise in PPI for final demand services can be traced to margins for final demand trade services, which jumped 2.5%. Trade indexes measure changes in margins received by wholesalers and retailers. We believe the concern over January’s PPI was overdone. See page 3.

Fifth, this Mideast conflict is negatively impacting many economies in the Middle East, Asia, and Europe and the longer it persists the more it will slow the global economy. Some economists estimate that every $10 increase in the price of oil reduces global GDP by 0.2%. Global air travel is also disrupted as the war has kept major Middle Eastern airports closed or severely restricted. Reuters reports that this is one of the sharpest aviation shocks in recent years. Initially, flights were halted over Iranian airspace, but this has spread to a much larger area after Dubai International Airport sustained damage during Iran’s attacks. United Arab Emirates, the world’s largest international carrier, said it suspended operations to and from its Dubai mega-hub, leaving thousands of global travelers stranded. In short, many economies in the area are put on hold, and this will impact the revenue and profits of many international companies.

However, while the war and oil prices dominate the headlines and create some near-term uncertainty, earnings season is generating another strong quarter. According to LSEG IBES, the estimated earnings growth rate for the S&P 500 for the fourth quarter of 2025 is 14.3%, and if the energy sector is excluded, the growth rate improves to 14.7%. The S&P 500 expects to see share-weighted earnings of $630.2 billion in the fourth quarter, compared to share-weighted earnings of $551.5 billion a year earlier. The LSEG IBES consensus earnings estimate for 2026 rose $0.76 this week to $315.36 and the 2027 forecast rose $0.90 to $365.44. The S&P Dow Jones consensus estimate for 2026 rose $1.60 to $312.32 and the estimate for 2027 jumped $2.59 to $362.80. This implies the market is trading at 21.6 times the IBES 2026 estimate and 18.7 times the 2027 estimate. Although some analysts feel PE multiples are rich, the forward earnings yield of 4.7% and dividend yield of 1.14% compare well to a 10-year Treasury bond yield of 4.1%. Plus, the 12-month sum of operating earnings per share shows a gain of 16.7% YOY, far better than the 75-year average of 8.1% YOY. See pages 5 and 12. In sum, strong fundamental underpinnings are why we remain a buyer on weakness.

*https://www.energypolicy.columbia.edu/where-china-gets-its-oil-crude-imports-in-2025-reveal-stockpiling-and-changing-fortunes-of-certain-suppliers-including-those-sanctioned/

Gail Dudack

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A day before President Trump’s State of the Union speech, a wave of panic rolled over the equity market. Some of this was due to a multitude of questions left unanswered by the Supreme Court after it struck down many of the administration’s tariffs. The law at the center of the case is the International Emergency Economic Powers Act, known as IEEPA, which authorizes the president to use the law “to deal with any unusual and extraordinary threat, which has its source in whole or substantial part outside the United States, to the national security, foreign policy, or economy of the United States, if the president declares a national emergency with respect to such threat.” A separate provision of the law provides that when there is a national emergency, the president may “regulate … importation or exportation” of “property in which any foreign country or a national thereof has any interest.” President Trump initiated tariffs early in 2025 after declaring a state of emergency and asserting that unfair trade posed a threat to the US economy. The Trump administration used tariffs to conduct foreign policy and at the same time to boost jobs and manufacturing in the US. After the Supreme Court decision, he responded by signing an executive order that imposes a 10% duty on articles imported to the US for a period of 150 days. In the interim, the administration will be looking at ways to reinstate its tariff policy.

Unfortunately, since the Supreme Court took no stand on tariffs already collected it leaves the US government open to lawsuits that will take many years to resolve. However, we ponder why companies would be suing the US for reparations if it is true, as most economists suggest, that tariffs were a “tax” on households and that they hurt the US consumer. Both cannot be true. And as we reported last week, the January 2026 CPI report showed that price indices for durables rose 0.4% YOY and nondurables rose 1.3% YOY. If tariffs on imported goods were the source of inflation, it should show up here. On the contrary, it was service sector inflation that rose 3.2% YOY and services have been the source of inflation throughout 2025.

A New York Federal Reserve study found that 86% to 94% of the burden of 2025 tariffs hurt US businesses and consumers, not foreign exporters. Yet, if this is true why did General Motors (GM – $81.29) and Ford Motor Co. (F – $14.20) report solid 2025 financials despite absorbing significant EV-related charges? Tariffs on autos were some of the first to go into effect, were some of the highest tariffs enacted, were not tied to IEEPA, and continue to be in force. And yet, General Motors generated $12.7 billion in adjusted EBIT and $2.7 billion net income, despite absorbing significant EV-related charges. Moreover, the company indicated that its core business remains highly profitable, and they expect profits will increase in 2026 despite roughly $7 billion in fourth quarter 2025 EV restructuring. In our opinion, too many economists and media commentators are quoting each other instead of looking at the actual numbers.

The other catalyst for a selling wave this week was a report by a little known firm called Citrini Research that rattled investors by envisioning a future in which autonomous AI systems – or agents – upend the entire US economy, from jobs to markets and mortgages. A warning from Nassim Taleb, author of the 2007 best-selling book “The Black Swan: The Impact of the Highly Improbable” told investors they should brace for escalating volatility as the AI rally enters a fragile phase and even bankruptcies could be ahead for the software sector. In response, International Business Machines Corporation (IBM – $229.32) fell 13% on February 23^rd.

There is another development that has investors worried and that is the vast and opaque $1.8 trillion private credit market. Blue Owl Capital (OWL – $10.73), an asset manager specializing in private debt financing, recently announced it was limiting withdrawals from a $1.6 billion fund. This sent ripples through the private credit industry. We are concerned about this as well, particularly since this is an unregulated area of finance. It is unlikely that the private debt market represents a systemic risk to the banking system, however, private credit firms have been partnering with insurers which potentially broadens the risk they represent. 

While no one likes to see the stock market go down, we see a silver lining to the recent selloff. If the stock market were in a bubble – and one could materialize someday – this kind of panic linked to concern about future fundamentals and earnings, is not typical of a market top. And as we noted last week, as the S&P approaches a milestone of 7,000 it is not unusual to see a bit of fear and consolidation. In short, this fear is good. It is also showing up in investor surveys. Last week’s AAII sentiment survey showed bullishness fell 4.0% to 34.5% and bearishness fell 1.2% to 36.9%. Bullishness is now below average for the first time in 12 weeks. Bearishness is above average for the fifth time in 12 weeks. The 8-week bull/bear index is 10.2% and neutral. The last significant signal in this indicator was a positive one in late September. See page 10.

There was a series of economic releases during the week, and in a nutshell, it showed that the economy was slowing at the end of 2025. This begins with the first estimate for fourth quarter GDP of 1.4%, which follows on the heels of the 4.4% reported for the third quarter. The weakness was concentrated in a decline in residential investment and decline in government spending, but the consumer, while still resilient, did slow consumption. Housing starts for December were down 7% YOY despite a small gain for the month. Single-family starts fell 9% YOY. Housing permits were down 2.2% YOY and single-family permits declined 11% YOY. For the year ending in December, 1.5 million housing units were completed, a decline of 8% from the previous year. See page 3.

International trade was an interesting release. In 2025, the trade deficit in goods and services was $901.5 billion, down $2.1 billion, or 0.2% from 2024. Exports were $3.4 trillion, up $199.8 billion, or 6.2%, and imports were $4.3 trillion, up $197.8 billion, or 4.8%. The oddity of 2025 was the erratic trade in nonmonetary gold — which is included in the trade numbers for goods. Much of this activity in gold trade was triggered by uncertainty regarding tariffs announced in April 2025 and the shift to hard assets. Some of these tariffs are now nullified by the recent Supreme Court decision. Nonmonetary gold imports surged to a record $80.8 billion in the first quarter of 2025; however, nearly half of this, or $34.8 billion of gold was exported in the second quarter of 2025. Notably, the $34.8 billion gold exports represented 6.5% of total exports in the second quarter — a record. See page 4. However, what gives us comfort is earnings growth. This week the LSEG IBES consensus earnings estimate for 2026 rose $0.17 to $314.62 and the 2027 forecast rose $0.54 to $364.54. The S&P Dow Jones estimate for 2026 rose $0.33 to $310.72 and the new consensus estimate for 2027 debuted at $360.22. This means the market is trading at 21.7 times 2026 estimated earnings and 18.75 times 2027 estimated earnings. Although PE multiples are a bit rich, the forward earnings yield of 4.7% and dividend yield of 1.15% compare well to a 10-year Treasury bond yield of 4.08%. Plus, the 12-month sum of operating earnings shows a gain of 16.7% YOY, far better than the 75-year average of 8.1% YOY. We remain a buyer on weakness.

Gail Dudack

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US Strategy Weekly                    

Lower Inflation Ahead

We like to find “crowded trades” or extremes in sentiment regarding an investment and then find the flaws in the view. One of these crowded views is the global stance on the US dollar. According to a recent Bank of America survey, global fund managers have the most bearish outlook on the US greenback in over a decade. Analysts attribute this weakness to concerns regarding US policy predictability and Federal Reserve independence. In both cases, we feel the fear is overhyped and would not hold up to scrutiny. Nevertheless, pessimism has been correct with the dollar down over 11% since its peak in early January 2025. But we would point out that part of the dollar’s weakness is a result of the narrowing of the trade deficit since this results in less demand for dollars. Analysts may simply be using policy and the Fed as the reason for the weakness. Ironically, a weaker dollar makes US exports more attractive so in the long run a weaker currency can be good for the economy. In our opinion, a weaker dollar is not a major concern — although it can be inflationary — and the reason is simple. Modern currency is fiat money backed only by trust and confidence in a country. This trust is based upon the stability and transparency of its government and banking system, the strength of its economy, the relative level of inflation, and geopolitical and military power. In sum, the US has more of these important qualities than any other competing currency. Dollar weakness could simply be the greenback’s adjustment to the narrowing of the trade deficit.   

In terms of measuring US economic strength and relative inflation there were two important reports last week. January payrolls are always a problem — for several reasons. Each January, the establishment survey is benchmarked to new data gathered from the Quarterly Census of Employment and Wages – QCEW – which counts jobs covered by the unemployment insurance tax system. In addition, seasonal adjustments are reworked with more current data. This January the BLS also changed the birth-death model to include current sample information.

The household survey also undergoes an annual adjustment for new population data from the Census Bureau in January; however, this adjustment was delayed this month. And finally, the BLS noted that severe winter storms resulted in the household data response rate falling to 64.3%. In short, the January jobs report was riddled with issues making any worthwhile analysis impossible. Nevertheless, we did see the growth rate for total household employment fall from 1.5% YOY to 0.4% YOY. The establishment growth rate was also low at 0.2% YOY and has been relatively unchanged since October. In short, recent data releases suggest weak job growth. See page 3.

We have been writing about the weak growth in total employment which began in 2024 and continued in 2025. One risk is that AI will continue to dull job growth. If so, we worry that this could lead to a recession, particularly since a recession is best defined as a year-over-year decline in total employment. Nonetheless, the unemployment rate fell from 4.4% to 4.3% in January. The underlying data showed a significant divergence in unemployment rates among levels of education. The rate for those with less than a high school diploma fell from 5.6% to 5.2%. High school graduates saw unemployment jump from 4.0% to 4.5%. The rate for those with some college or an associate degree fell from 3.8% to 3.6%; whereas a college degree or higher saw a rate increase from 2.8% to 2.9%. These were unusual changes, but due to the various adjustments and low survey response in the January jobs report we believe the numbers are too unreliable to draw any conclusions. See page 4.   

January’s inflation numbers were better than expected with the headline CPI index falling from 2.7% YOY to 2.4% YOY and core inflation falling from 2.6% YOY to 2.5% YOY. However, many of the components of the CPI grew faster than headline, especially the index for fuels and utilities which rose 1.1% for the month and 6.1% YOY. This inflation in utilities and energy services is taking place even though energy commodities fell 6.6 % YOY in January after falling 3.0% YOY in December. This contradiction is due to supply and demand disruptions at the consumer end. The previous administration’s environmental policies resulted in the subtraction of nearly 17 gigawatts of reliable baseload power generation in the US. These 17 gigawatts are enough to power 12 to 15 million homes or the equivalent of the output of 17 large nuclear reactors. This huge decline on the supply side was coupled with soaring demand for energy from large data centers which support AI and crypto mining. These two factors are the likely causes for the differentiation between falling raw material prices and soaring energy services pricing. See page 5.

The debate regarding the inflationary impact of tariffs on consumers is answered by the chart on page 6. There was some increase in durable and nondurable consumer prices in the middle of 2025, but this never rose to more than 1.9% YOY in durables and 2.3% YOY in nondurable. In January 2026, the price indices for durables rose 0.4% YOY and nondurables rose 1.3% YOY. However, service sector inflation rose 3.2% YOY. Service inflation has been high, first driven by housing prices, then by motor vehicle insurance, followed by a spike in hospital & related services, and more recently led by household insurance pricing. These rolling spikes in pricing have kept service inflation above 3% YOY for the last four years. Nevertheless, the 3.2% YOY seen in January matches the November 2025 level, both of which were the lowest since August 2021. Note that service sector inflation is closely tied to employment costs and the employment cost index (ECI) was 3.4% in the fourth quarter, the lowest since the second quarter of 2021. AI should also help to keep employment costs low and employee productivity high in coming years. See page 6.

Core CPI indices have been steadily decelerating since the cyclical peak made in September and are now clustered in a range of 1.8% YOY to 2.4% YOY. In all cases, core indices are equal or down from January a year ago. This is good news for consumers. But a few sticking points remain, and these currently include necessities such as utility and housing insurance costs. See page 7.  

A main reason for our optimistic inflation forecast of 2.2% or less in 2026 is that crude oil prices continue to be negative on a year-over-year basis. Inflation has rarely if ever moved substantially higher when energy commodity prices are falling. However, as we noted, policy factors and demand changes have impacted energy services pricing. We expect the current administration will address both supply and demand issues this year. If so, the fed funds rate could move lower in 2026, but we would not be surprised if the FOMC required several more months of data before cutting rates. Traders are currently pricing in a 63% chance of a 25-basis-points rate cut at the June meeting, which is a recent upward shift. Note that in March 2022 the real fed funds rate was at its lowest and most dovish level in over 75 years! See page 8. This was a contributing factor to the 9.1% YOY peak in the CPI in June 2022. If the Fed delays cutting rates again in the face of a weakening job market, they risk being wrong one more time.

Technical indicators favor the bulls, particularly the NYSE cumulative advance/decline line which made a new high on February 17, 2026. However, the 10-day average of daily new lows has moved above 100, shifting this indicator from positive to neutral. The rotation of leadership and questioning of AI-related fundamentals is a positive factor for the longer run in our view; but we would not be surprised if the S&P index spends more time consolidating below the 7,000 level. We remain a buyer of weakness.

Gail Dudack

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