May the Stocks Be With You

Wow. What a rebound over the past month. The second quarter is off to a torrid start; it’s not just the flowers blooming.

QTD, the S&P 500 is up over 13%, YTD is around 8%, and the rolling 1-year return is a bit above 35%. Wow.

This month I’ll provide a quick update, then focus on one of the driving forces behind the market’s strong push, and then take a look forward.

QUICK UPDATE 

• Iran remains the dominant macro swing factor. A deal that could reopen the Strait of Hormuz is proving elusive, oil fell below $100 on hopes of de-escalation, but recent news has pushed it back above.
• The growth backdrop is holding up better than the headlines suggest.
• The concern is not activity collapsing—it is cost pressure building.
• U.S. services are still expanding, but with softer demand underneath.
• Business investment remains a bright spot.
• Jobs data indicate stabilization, not acceleration.

Against this backdrop, U.S. equities remain resilient despite geopolitical uncertainty, with many of the major indices reaching new highs. In addition to the aforementioned gains in the S&P 500, the NASDAQ is now up nearly 25% since March 30, while semiconductors have surged more than 43% off the lows.

Small caps continue to recover sharply from the March lows. The Russell 2000 is up nearly 19% since March 30, reflecting improving confidence in domestic economic activity.

International developed markets continue to generate strong absolute returns, with international equities continuing to benefit from diversification and less concentration risk than U.S. markets. So, what’s driving the strong returns? Corporate earnings are leading the way.

Chart 1, 2:25— The first quarter produced one of the best earnings seasons in some time. The S&P 500 earnings growth rate is well exceeding beginning of the year expectations. In addition, the earnings beat rate is surprising to the upside. Technology, Communication Services, Materials, and Discretionary sectors are the standouts. However, the strength is broad and not overly reliant on the leaders. Shift your attention to the bottom right of the table to see impressive earnings growth even when excluding technology, or energy, or the Magnificent 7.

Further, the blended 1Q net profit margin for the S&P 500 is estimated to be 14.7%, per FactSet.

Interestingly, given these strong results, one might expect an even stronger move from stocks. General price reactions have been relatively muted, given the earnings numbers. We think investors are looking forward to 2Q earnings where it is expected that the impacts from the Iran war will filter into the results. Speaking of looking forward… let’s explore what may drive equity markets from here.

Chart 2, 3:06— While earnings are the engine, there are four other important factors. Of the five, we see three that are supportive, one is a challenge, and one is neutral.

Earnings/Margins and AI Cap Ex are tailwinds and should continue to provide support. The Fed and Monetary Policy are a possible tailwind; however, a new Fed Chair, growing dissent within the Fed, and uncertain inflationary pressures insert some doubt as to how much positive support this factor will contribute. Geopolitics and Oil are possible disruptors, while Consumer and Business activity will likely remain a neutral factor.

We’ve been through a lot so far in 2026, and we are not even halfway home. For now, strong fundamentals are carrying the day despite headline uncertainties.