Outlook The growth rate of corporate earnings has broadened. Final first-quarter earnings data compiled by FactSet revealed the anticipated structural shift. While the “Magnificent 7” delivered strong aggregate EPS growth of 63.2%, the other 493 companies in the S&P 500 generated earnings growth of 17.4%—their fastest pace of expansion since the fourth quarter of 2021.1 However, with this growth comes rising stock prices. Because both stock prices and earnings have increased, earnings yields (earnings as a percentage of stock prices) have remained relatively range-bound since 2023. In contrast, Treasury bond yields have moved higher recently. As a result, the equity risk premium—which compares stock yields to bond yields—has shrunk to a level lower than what has been observed over the past 20 years.2
. . . U.S. equity markets navigated a volatile week as investors balanced rising interest rates, persistent inflation pressures, geopolitical developments, and a strong finish to the first-quarter earnings season. The S&P 500 advanced approximately 0.9% for the week, extending its winning streak to eight consecutive weeks, while the Dow Jones Industrial Average gained more than 2% and the Nasdaq posted a more modest increase. Interest Rates and Bond Market A key driver of volatility during the week was the continued movement in U.S. Treasury yields. The 10-year Treasury yield rose to approximately 4.60–4.67% early in the week, its highest level in over a year, and the 30-year yield climbed above 5.1%, marking a notable high not seen in roughly a year. These moves continued the repricing that followed hotter-than-expected inflation data (CPI) in mid-May. Although yields moderated somewhat by week’s end, with the 10-year easing back toward 4.56% and the 30-year settling near 5.06%, the broader takeaway is that bond market volatility signals investors are increasingly embracing a “higher-for-longer” rate environment. Inflation and Federal Reserve Outlook The underlying catalyst for these yield movements was a series of inflation readings that reinforced concerns about persistent pricing pressures. April CPI showed inflation running at approximately 3.8% year-over-year, while producer prices rose at roughly a 6% annual pace, indicating continued cost pressures throughout the production pipeline. Import prices also increased, reflecting the impact of higher energy costs and ongoing supply chain pressures. Taken together, these data points prompted markets to reassess Federal Reserve expectations, largely removing the likelihood of near-term rate cuts and reopening the possibility of further tightening under the Fed’s new leadership. Geopolitics and Energy Market Geopolitical developments further added to market complexity, particularly through their influence on energy prices and inflation expectations. Ongoing tensions involving the United States and Iran pushed crude oil prices above $100 per barrel at points during the week, reinforcing inflation concerns and contributing to upward pressure on yields. While there were intermittent signs of potential diplomatic progress, uncertainty remained elevated. Corporate Earnings Corporate earnings remained a key pillar of support, as the first-quarter earnings season approached completion. According to FactSet, approximately 84% of S&P 500 companies reported positive earnings surprises and 81% exceeded revenue expectations, both well above historical averages. This strength in corporate profitability has helped offset macroeconomic headwinds and provided a solid foundation for equity valuations. Market Outlook In summary, the week highlighted the ongoing tug-of-war in markets. Rising yields, persistent inflation, and geopolitical risks created volatility, while strong earnings and resilient economic data continued to support equities. The result was a market that advanced despite headwinds, though increasingly dependent on rate stability. Looking ahead, Treasury yields and inflation will remain key drivers, with investors focused on upcoming data and Federal Reserve signals for confirmation that price pressures are easing. https://en.macromicro.me/charts/141449/world-stock-market-earning-yields-minus-10year-bond-yields | 
