Outlook The 1st quarter of 2026 has demonstrated, so far, that corporate earnings are doing very well and, in fact, have been exceeding expectations by a rather large margin. The significant jump in the S&P 500's year-over-year earnings growth rate for the quarter — from an initial estimate of 13.1% on March 31 to a blended 27.7% as of May 8 — is primarily driven by substantial positive surprises and the outsized influence of a few "Magnificent 7" companies; specifically, Alphabet Inc., Amazon.com Inc., NVIDIA Corp., and Meta Platforms Inc.1 However, beneath the headlines are some significant one-time beneficial items – which included a $1.3 billion tariff-related benefit for Ford Motor Co., an $8 billion tax-benefit for Meta Platforms Inc., a $17 billion non-operating income benefit for Amazon.com Inc.’s investment in AI company Anthropic, and a $38 billion non-marketable securities benefit for Alphabet Inc. These alone provided a one-time $64 billion quarterly bump to S&P 500 income. Absent these one-time items, earnings would be much lower and likely in line with estimates, which is still impressive in our opinion. That said, this quarter seems to have set the bar, potentially artificially high, for subsequent quarters. . . . U.S. equity markets continued their upward trajectory, albeit with increased volatility following April’s strong rally. After beginning the week with a pullback, major indices recovered, advancing solidly with the S&P 500 gaining 2.3% and the Nasdaq increasing by 4.5%, largely driven by continued strength in mega-cap technology and semiconductor stocks. The Dow Jones Industrial Average lagged slightly, while still posting modest gains. Corporate Earnings Continue to Provide Support Although the peak of the “Magnificent Seven” earnings season already occurred, corporate earnings remained a key focus. Results across sectors continued to come in ahead of expectations, reinforcing the view that corporate profitability remains resilient despite elevated interest rates and geopolitical uncertainty. Technology and AI-related companies continued to lead in performance, with semiconductor stocks posting strong gains as investor enthusiasm around artificial intelligence infrastructure and investment demand remained robust. At the broader level, first-quarter earnings expectations keep improving, with the earnings growth rate currently measured at 27.7% year-over-year.1 This upward revision highlights the strength of fundamentals. Economic Data and Labor Market Signals The April employment report, released during the week, provided a mixed but overall supportive signal for markets. U.S. payrolls increased by 115,000 jobs, exceeding expectations, while the unemployment rate held steady at 4.3%.2 However, softer wage growth and a slight uptick in unemployment suggested the labor market could be gradually stabilizing rather than reaccelerating, an environment that could help ease inflation pressures over time. Investors largely interpreted the report as consistent with a “soft landing” scenario, supporting risk appetite while reinforcing the Federal Reserve’s cautious policy stance. Geopolitical Developments and Oil Market Impact Geopolitical developments, particularly in the Middle East, have remained a central influence on markets. Early in the week, renewed tensions between the U.S. and Iran led to a sharp increase in oil prices, with crude temporarily rising above $106 per barrel, ultimately weighing on equities.
Sentiment improved as the week progressed, with reports of continued diplomatic engagement and the possibility of renewed negotiations providing some relief to the markets. This shift helped drive oil prices lower into the end of the week. Despite these improvements, geopolitical risks remain elevated, given the ongoing importance of energy supply routes and their influence on inflation and economic stability. Inflation Inflation trends remained closely tied to developments in energy markets. Elevated oil prices early in the week reinforced concerns that inflation could remain sticky, complicating the Federal Reserve’s policy path.
However, moderating energy prices later in the week, combined with softer wage growth, helped ease some near-term inflation pressures. Investors are now focused on upcoming inflation data releases, including the Consumer Price Index (CPI), which are expected to provide further insight into the trajectory of price pressures. Overall, the week reinforced the balance between strong corporate fundamentals and a complex macroeconomic backdrop. Solid earnings continue to support equity markets, while geopolitical developments, inflation trends, and Federal Reserve policy remain key uncertainties. As May progresses, investors will likely focus on incoming economic data, along with geopolitical developments that could impact energy prices and broader market sentiment. | 
