A New Chair

Kevin Warsh is now the Federal Reserve Chair, and he is bound to be in the news this week when the PCE deflator is reported for April. The consensus expectation is that the deflator will show inflation rising to 3.9% YOY and investors may rush and take this data point to hypothesize what the Warsh-led FOMC will do in June. However, in his own words, Kevin Warsh wants to be a less-public more reform-oriented Chair of the Federal Reserve. He may remain silent on the matter. We believe his true legacy will be in revamping the Federal Reserve’s policy on communications (a return to pre-Financial Crisis levels), retooling bank regulation (which would include reducing “matters requiring attention,” or MRAs, and ask regulators to focus more on operating principles. According to Vice Chair for Supervision Michelle Bowman, an obsessive use of MRAs has been distracting both regulators and bank management. This was seen by the Silicon Valley Bank bankruptcy which had 19 open MRAs when it collapsed, most of which did not focus on the core issues that brought it down. Bowman’s recent remarks indicate she is looking for changes that would reduce attention on foot-faults and focus more on real risks) and rethinking monetary policy tools (more use of interest rates which impact all individuals versus expanding the Fed’s balance sheet which mainly helps equity holders). If a Warsh-led Fed is less transparent and reduces the use of quantitative easing, it would not hurt the financial markets, but it could dampen risk-taking in the equity market.

Peace Rally

It was surprising to us that the equity market rallied strongly ahead of 3-day holiday weekend. Traders tend to be risk-averse and as a result reduce exposure ahead of most long weekends. However, last week equity traders were clearly expecting a peace plan with Iran (lower oil prices, inflation, and interest rates) and the market rallied strongly. The Dow Jones Industrial Average jumped 294 points on Friday after having gained nearly 922 points in the prior two days! We are less convinced than most that true peace with Iran is on the horizon. Israel is increasing its operations in Lebanon. Still, even as the US conducted “self-defense” strikes on boats and missile sites in Iran on May 26^th and Iran indicated they had the right to retaliate, the DJIA retrenched a mere 118 points. At the same time the S&P 500 and Nasdaq Composite index rose to record highs.

Last week’s action is a bit manic in our opinion, and our technical indicators show that the recent advance took place on weakening breadth. Although the NYSE cumulative advance/decline line made a new high on May 26^th, our 25-day up/down volume oscillator continues to oscillate around zero. This latter indicator reveals that the volume in declining stocks over the last 25 days has been slightly greater or equal to the volume in advancing stocks. See page 7. In short, buying pressure was not convincing. Over the last 10 days the number of stocks recording new highs has averaged 303 and the number recording new lows has averaged 135. With both highs and lows above the 100 benchmark, this indicator became neutral two weeks ago. The daily high/low numbers were much stronger with 350 new highs and 53 new lows at the end of April. See page 8. These are subtle, but important signs of breadth weakness. In our view, it also means that a lot of good news has been discounted by current prices, which makes the equity market riskier than it was a few weeks ago. We remain long-term bullish, but last week we became a bit worried about the near-term outlook.

Earnings Driven

The most amazing thing about the equity market is that while the indices have been making a series of record highs over the last six weeks, the price-earnings multiples for 2026 and 2027 have remained constant at roughly 22 times and 19 times earnings, respectively. This is the basis for our long-term bullishness. But our concern is that positive earnings surprises are no longer surprising and have become expected. According to recent LSEG data, first-quarter earnings growth is projected to be 29% YOY compared with the 16.1% estimated a month ago. This is more than 3.5 times the long-term average of 8.1% YOY. In short, the first quarter has been spectacular, but spectacular may be difficult to maintain. Semiconductor stocks were the darlings of the market last week, and this helped drive the iShares MSCI South Korea Capped ETF (EWY – $200.65) up 15% over the last five trading days generating a gain of more than 106% year-to-date. See page 10. And an analyst’s price target of $1,625 for Micron Technology Inc. (MU – $895.88) drove the stock up 19.3% in a day making it a $1 trillion market capitalization. While the AI mania may not be over, these are signs that it is heating up. 

Economic News

The University of Michigan consumer sentiment index fell from 49.8 to a revised 44.8 in May, falling below its previous record low of 50 in June 2022. The revisions suggested that confidence fell substantially late in the month. Present conditions fell 6.7 points and expectations fell 4 points.

Conference Board consumer confidence fell from an upwardly revised 93.8 in April to 93.1, due entirely to a 3.2 decline in present conditions since expectations actually rose 1 point. Note the recent negative disparity in the University of Michigan sentiment index. However, both sentiment surveys have been overly pessimistic and wrong for the last four years. In short, they have not been the helpful predictive tools that they were a few years ago. See page 3.

Housing and autos are two of the most important sectors of the US economy, and yet both have been languishing for the last three years. For example, total seasonally adjusted unit sales of vehicles were 16.54 million in April 2026 which is just slightly higher than the 16.41 million units sold in April 2023. In terms of housing, total residential construction spending was $924.9 billion in April 2026, which is even lower than the $934.5 billion seen in November 2022. Future spending does not look promising given recent housing starts and permits. April housing permits were down 0.2% YOY and single-family permits fell 5.5% YOY. April’s total housing starts were down for the month but up 4.6% YOY, but single-family starts decreased 2.4% YOY. In short, both the auto and housing market have been in a multi-year slump and if inflation and interest rates continue to rise it could put even more downward pressure on these important parts of the economy.

Gail Dudack

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The S&P 500 had its first three-day decline since March 30, and in our view, this pullback was long overdue. There is no denying that the current advance has been remarkable. Yet even as the S&P 500 rallied 11% in the last six weeks, the price-earnings multiples for the S&P 500 remained consistently at 22 times 2026 earnings and 19 times 2027 earnings. Seen another way, the S&P 500 index has increased by a stunning 23.3% since May 19, 2025, while earnings for the S&P 500 have increased an even greater 25.1% YOY in the same timeframe. In short, it has been an amazing time for equity investors, and we believe there will be more good times ahead.

Caution

Nevertheless, we became a bit more cautious last week. Much of this was due to the fact that we feel the Iranian conflict is unlikely to be resolved without more bombing, some of which could impact Iranian energy facilities. If this were to occur it would send energy prices even higher and trigger more inflation fears. In short, things could become worse before they get better.

This week President Trump indicated he was only an hour away from ordering another huge attack on Iran before leaders of Qatar, Saudi Arabia and the United Arab Emirates asked him for time to pursue an agreement over Iran’s nuclear program. However, some market gurus suggest there would have been a pause in the conflict regardless. And this view is supported by the fact that the Senate just advanced a war-powers resolution that could end hostilities with Iran unless President Trump obtains Congress’ authorization.

But if we are right, more bombing would be a negative surprise, and in our opinion, the Senate’s resolution may only serve to hasten President Trump’s decision to act. It should not go unnoticed that the concept that President Trump always “chickens out” or, TACO, has become popular on Wall Street. But this assessment fails to understand how complicated international negotiations are, how divergent geopolitical forces require President Trump to allow Iran and any other nations involved — directly or indirectly — sufficient time to try to negotiate, or what is involved in deciding what the best options are for the US, and last, but far from least, how determined President Trump is to remove the Iranian nuclear threat.

This administration, like most of the world, knows that there is no way to negotiate with the Islamic Revolutionary Guard Corps (IRGC). The IRGC believe that by using stalling tactics they are winning, and that in the end they will always win. Therefore, they have no need or desire to negotiate. But perhaps this recent delay actually helps the US cause. For example, Europol, the law enforcement agency of the European Union, designated the IRGC to be a terrorist group in February, and this week announced a major digital crackdown that led to the removal of thousands of online accounts linked to Iran’s IRGC. It also suspended the group’s primary X account in the EU. This online digital presence was used by the IRGC to communicate, spread propaganda, recruit supporters, and raise funds. These moves by Europol are a blow to the IRGC.

In addition, new US sanctions are targeting Iranian regime currency exchange houses and associated front companies and blocking 19 vessels involved in Iranian petroleum and petrochemicals shipments to foreign customers. In sum, the US Treasury is systematically dismantling Tehran’s shadow banking system and shadow fleet under Economic Fury. The US Treasury also froze nearly half a billion dollars in regime-linked cryptocurrency. What we see is a flurry of action taking place behind the scenes to cut off revenue to Tehran, but in our opinion, these acts are in anticipation of more bombings in the near future. If so, the risk for equities is high in the next few days or weeks.

Inflation Dominated Economic Data

Moreover, the financial backdrop has deteriorated in the last week. The 10-year Treasury note yield touched 4.687% this week, marking its highest level since January 2025. The 30-year Treasury yield hit its highest level in nearly 19 years and West Texas Intermediate futures, while down slightly this week, are still trading well above $100 a barrel. This puts downward pressure on equity valuation models and high interest rates are also a blow to the housing and auto markets which have been under stress this year.

Some housing data showed improvement in April. The pending home sales index, which precedes existing home sales by about two months, increased 3.2% YOY which was the largest annual increase since August 2025, but this followed seven straight months of flat or declining activity. And the data was mixed, increasing in the South, West, and Midwest, but declining in the Northeast. The South had the strongest gain of 4.7% YOY.

Most economic releases have revealed how the conflict with Iran and the rise in energy prices have taken a toll on consumers. In particular, April inflation data was striking. The CPI rose from 3.3% YOY to 3.8%, core CPI rose from 2.6% YOY to 2.8%; final demand PPI rose from 4.3% YOY to 6.0%, the PPI for intermediate unprocessed goods rose from 12.4% YOY to 21.2%. Import prices rose from 2.3% YOY to 4.2%, import prices excluding fuel rose from 2.4% YOY to 2.9% and export prices rose from 5.4% YOY to 8.8%. These reports point to the fact that while inflation is already high, more inflation is in the pipeline.

Retail sales for April looked strong with a headline increase of 4.9% YOY, up from 4.2% in March. But due to higher inflation, real retail sales increased a mere 0.8% YOY, down from 1.3% in March. The best part of retail data was from internet sales, which increased to $326.7 billion in the first quarter of the year, up 9.8% YOY. Even after inflation (which averaged 2.7% in the same period) this was an impressive gain, and internet sales now represent roughly 17% of total retail sales. Many retail companies will be reporting earnings this week as is typical of the end of earnings season. Looking ahead there are no significant economic releases next week, earnings season is ending, and the next FOMC meeting is June 16-17. In short, a dearth of economic data will bring political news to the forefront.    

Earnings Forecasts

For the first time in fifteen weeks the LSEG IBES S&P earnings estimate for 2026 declined and for the S&P/Dow Jones survey forecasts declined for the first time in twelve weeks. See pages 3 and 10. The declines were small, totaling 35 cents for LSEG IBES and 86 cents for S&P/Dow Jones, but the shift may prove significant since the market has reached all-time highs and the financial backdrop is less supportive. We do not believe the market has reached extreme valuations that would require a major setback, but we worry that the market has become too complacent about Iran, the price of oil, and inflation. Moreover, Nvidia Corporation (NVDA – $220.61), the stock at the center of the AI cycle, and key to S&P 500 earnings, reports after the close on Wednesday. The market’s reaction to this earnings report may be a sign of how the broader market will do in the near term.

Gail Dudack

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It has been a quiet week in terms of the Iran conflict, but we would be wary of becoming complacent about the Middle East since there is a good reason why it has been a relatively peaceful week. Neither the US nor China would benefit from fireworks ahead of this week’s Trump-Xi summit taking place in Beijing. The media is calling this a “high stakes summit” but that seems nonsensical to us since these summits are carefully and methodically planned well in advance. Advance planning is why Treasury Secretary Scott Bessent traveled to China this week after first making a stop in Japan to meet with Japanese Prime Minister SanaeTakaichi and then stopping in Seoul, South Korea to meet with Chinese Vice Premier He Lifeng and Chinese trade negotiators. The real work is done at these preliminary meetings to ensure that both parties can leave the summit with clear deliverables for their respective countries.

On May 14, when President Trump and China’s Xi Jinping meet, the discussions are apt to be more ceremonial than material. The topics to be discussed by these two leaders will certainly include Iran, but we expect both sides will focus more on personal economic issues with the hot topics being Taiwan, semiconductors, rare earth metals, tariffs, jailed Hong Kong activist Jimmy Lai, and AI. We expect there will be a lot of dealmaking by corporate leaders as well.

But when President Trump returns to the US at the end of the week, we would not be surprised if Iran takes center stage again. And Trump has already warned that Iran is on “life support” and the proposal from Tehran was “totally unacceptable.” This is a thinly veiled threat that bombing may resume. The only question is what targets will be bombed (military or energy?) and who contributes (Israel, UAE, Saudi Arabia?). Recent reports reveal that both the UAE and the Saudis have responded to Iranian attacks with covert bombing of their own. Their participation in future bombings could suggest a decisive power shift is taking place in the Middle East. In short, the equity market has recently reached record highs, but we would not chase stocks at this juncture since geopolitical events could trigger a correction, particularly if the US bombs Iranian energy infrastructure.

Nevertheless, we are not in agreement with those like Michael Burry who feel the market has “jumped the shark” and is approaching a crash. We lived through several major stock market bubbles and while AI has all the earmarks of creating an equity bubble (and probably will eventually), the current equity market is still supported by fundamentals. Yes, the semiconductor group made a perpendicular advance last week, but this has attracted so much attention and created so much negativity that it is likely that the semiconductor blowoff will reverse or stall without damaging the broader market. Plus, the semiconductor industry is only the first act of the AI story, and it is more likely that money will shift from the semiconductor stocks to the next step in the AI story such energy producers, transformers, software, and eventually end users.

When we look at the macro fundamental landscape, we do not see a bubble. In fact, we are amazed at the strength in first quarter earnings results. Last week we upgraded our S&P 500 2026 and 2027 earnings forecasts (see page 14), and they may still be too low. This week the LSEG IBES consensus earnings estimate for 2026 rose $8.62 to $336.49, the 2027 forecast rose $5.91 to $386.70 and the 2028 forecast rose $6.50 to $435.44. The S&P Dow Jones consensus earnings estimate rose $2.16 for 2026 to $333.72 and rose $2.67 to $384.61 for 2027. This means that even though the indices have recently hit all-time highs, the market is still trading at 22.0 times the IBES 2026 earnings estimate and 19.2 times the 2027 estimate. At both the March 2000 and March 2022 peaks the trailing PE was 32.1 times versus 24.7 today and a 32 multiple times 2026 earnings would equate to the S&P 500 moving over 10,000. And the S&P 500 forward earnings yield of 4.7% and dividend yield of 1.1% compare well to a 10-year Treasury bond yield of 4.4%. Plus, the S&P Dow Jones 12-month sum of operating earnings shows a gain of 21.1% YOY, far better than the 75-year average of 8.1% YOY. See pages 7 and 8. In the longer run, we remain a buyer of dips.

We also have a nonconsensus view of the recent jobs report. In fact, in our view, the April jobs report provides an argument for lowering the Fed funds rate. Although the headline shows employment grew by 115,000 jobs and the unemployment rate was unchanged at 4.3%, this is a very superficial analysis. The establishment survey showed a better-than-expected increase of 115,000 jobs, but revisions to prior months lowered employment by 16,000. More importantly, the household survey indicated that employment in April fell by 226,000 and the number of unemployed grew by 134,000. The fact that employment fell more than unemployment grew meant the unemployment rate was relatively unchanged (although it did increase fractionally). See page 5. Still, the household survey indicated 226,000 fewer people were employed in April versus March. This is a sign of weakness. Plus, people no longer counted in the labor force increased by 5.29 million in April. Although the labor force can decline for multiple reasons, one is that unemployment insurance has run out, and a worker is still unable to find a job. Overall, the government is not good at measuring why the labor force has declined.

Every month we look at the year-over-year increase/decrease in employment in both BLS surveys. In our view, it is the single best indicator of economic strength and also the best indicator of a pending recession. In April, the establishment survey showed job growth of 0.16% YOY and the household survey showed employment fell 0.8% YOY (the fourth consecutive month of job losses). These rates are well below long term averages of 1.7% and 1.5%, respectively. In short, the Fed’s job is to achieve maximum employment and stable prices, and this is challenging in the current environment. In our opinion, the Fed should always defer to stabilizing employment first since this is less in its control than inflation. Oil prices will come down eventually and inflation will moderate. But with the housing and auto industry already struggling, and AI challenging the work environment, lower rates are what the average household needs in 2026.

The counter argument to the Fed lowering rates is April’s CPI report. Energy prices drove April’s CPI up 3.8% YOY versus 3.3% a month earlier. This was the highest inflation rate seen since the 4.1% YOY recorded in May 2023. Core CPI rose from 2.6% YOY to 2.75% YOY, the highest since the 2.81% YOY recorded in October 2025. (We added a second decimal point since rounded both April 2026 and October 2025 were 2.8%.) The energy component of the CPI rose nearly 18% YOY, with fuel oil up 54% YOY and gasoline up 28.4% YOY. This actually seemed tame given that WTI crude oil futures were up 84% in the same period. The food component of the CPI increased 3.2%, up from 2.7% in March and the combination of higher fuel and food prices is a hardship for lower income households. We would note that all items less energy rose 2.8% in April, up slightly from 2.6% in March. See page 3. In terms of the heavyweight components of the CPI, transportation was up 7.1% YOY, up significantly from 5% a month earlier. Housing was up 3.6% versus 3.4% in March. Food and beverages rose 3.1%, up from 2.6%. Medical care prices rose 2.5%, down from 3.1% in March. Service inflation was 3.4% versus 3.1% a month earlier; service less rent of shelter was 3.5% relatively unchanged from 3.4% in March. Nondurable inflation was 6.6% YOY (fuel) versus 4.9% in March and 1.7% in February. Conversely, durables fell 0.1% YOY, little changed from the 0.1% YOY gain in March. Owners’ equivalent rent was 3.3%, little changed in four months. Recent declines in home prices suggest this index will inch lower in the months ahead. See page 4. All in all, the CPI report revealed the impact of energy on inflation, a fact that may inspire President Trump to end the Iran conflict one way or another. Investors should remain nimble. 

Gail Dudack

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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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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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