US Strategy Weekly: A UAE Moment

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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