Markets Look Past War Risks as Earnings Remain Strong and Broadening Continues

• S&P 500 posted seven record highs in April with broad-based gains including small-caps (+10.4%), emerging markets (+9.2%), and Nasdaq-100 (+15%, best month since April 2020)
• Consumer confidence collapsed to a record low of 49.8 while year-ahead inflation expectations jumped from 3.8% to 4.7%, the sharpest monthly increase since April 2025, threatening discretionary spending
• Q1 2026 earnings are tracking 27% blended growth versus 12% consensus, with AI monetization driving market divergence as Alphabet and Amazon outperformed while Meta and Microsoft fell on heavy capex guidance exceeding $140 billion

Summary: Markets Look Past War Risks as Earnings Remain Strong and Broadening Continues

Market Performance

U.S. equities surged in April despite geopolitical tensions and inflation concerns. The S&P 500 gained over 10%, posting its strongest month since November 2020 with seven record closing highs. The Nasdaq-100 jumped over 15%, its best performance since April 2020. Gains were broad-based: small-caps (+10.4%), emerging markets (+9.2%), and mid-caps (+7.8%) all rallied strongly. High-yield bonds rose 1.7%, while crude oil surged 15.6%.

Federal Reserve Policy

The Fed held rates steady at 3.50%-3.75% for the third consecutive meeting, with an unusually divided 8-4 vote. Core PCE inflation registered 3.2%, above the 2% target, while unemployment stood at 4.3%. Chair Powell cited persistent inflation risks from geopolitical developments and supply-chain disruptions. Markets price a 91% probability of another hold at the June meeting, when Kevin Warsh assumes the Chair role.

Economic Concerns

Brent crude exceeded $100 per barrel, briefly spiking above $120 amid Iran tensions and the UAE's OPEC withdrawal. Consumer sentiment deteriorated sharply, with the University of Michigan Index falling to a record low of 49.8. Year-ahead inflation expectations jumped from 3.8% to 4.7%, the sharpest monthly increase since April 2025.

Earnings Strength

Q1 2026 S&P 500 earnings remain robust, with blended EPS growth reaching 27%—double the initial estimate—as 63% of companies reported. Forward earnings estimates continue rising across market segments, including small-caps, driven by tax cuts, AI investment, and reshoring trends.

Big Tech Divergence

Alphabet and Amazon outperformed with strong AI monetization (Alphabet +10%, Google Cloud revenue +63%; AWS +28%). Microsoft (-4%) and Meta (-8.6%) faced pressure despite solid results, as Meta's $140+ billion capex guidance highlighted continued heavy AI investment without immediate returns.