In Short

• Risk assets staged a sharp recovery in April as resilient consumer spending, a stronger-than-expected labor market, and broad-based earnings strength outweighed persistent inflation concerns.
• Our confidence in U.S. large-cap equities has increased, supported by a strong Q1 earnings season; but we are watching consumer discretionary and financials closely, as sustained energy price pressures and a less accommodative rate environment could weigh on margins and temper the broader positive outlook.
• We maintain an overweight to global equities, and see compelling opportunities in front-end rates and investment grade credit, while private equity and credit sit at target amid AI disruption risks and refinancing pressures.

The Month in Markets

The malaise under which the markets were operating in February and March stemming from AI disintermediation and the war in the Middle East seemingly lifted as the calendar turned to April, with risk assets shooting higher across the board. This sharp snapback, quite similar to the one experienced last year following the announcement of several key trade deals, comes even as there is no clear plan to renew traffic through the Strait of Hormuz and, in turn, lower energy prices. In addition, software stocks have been unable to mount a strong recovery, an indication that short-term concerns are likely to translate into longer-term dispersion in the industry. Technology stocks broadly, however, have delivered in this most recent rally, as investors acknowledge the continued earnings strength of these companies.

In addition, there is little evidence that a downshift in consumer spending is threatening the overall strength of the U.S. economy. While, admittedly, consumer confidence remains subdued—University of Michigan consumer sentiment posted its lowest reading ever—retail sales were strong, with the control group besting expectations and growing +0.7% month-over-month in April. Spending has been supported by a stable labor market, as March nonfarm payrolls came in well above expectations at +178,000, driven largely by a rebound in health care, along with solid gains in leisure and hospitality, construction and manufacturing—pushing the three-month average to +68,000 and anchoring the unemployment rate at 4.3% on lower participation. In addition, U.S. manufacturing expanded for the fourth straight month in April, with the ISM PMI holding steady at 52.7—the highest since August 2022—as strong new orders and production offset a weaker employment reading.

What we are watching most closely, then, is inflation. March headline CPI surged to +3.4% year-over-year, driven almost entirely by a historic spike in energy prices—gasoline alone jumped +21%—as Middle East supply disruptions pushed overall energy costs up nearly +11% in a single month. The good news is that core CPI came in cooler than expected at +2.6% year-over-year, with continued progress in medical care, used cars and household furnishings suggesting that, outside of energy, underlying inflation remains on a constructive path. April PCE was a bit hotter than CPI, given the lower contribution of shelter (which is experiencing continued disinflation) to this measure; headline PCE rose by +3.5% year-over-year with core climbing to approximately +3.2%.

With higher energy prices and better-than-expected payrolls, it was not surprising to see the Federal Reserve hold rates steady at 3.50 – 3.75% in their April meeting—likely Jerome Powell’s last as Fed chair. More surprising were the four dissents to the decision—the most since 1992—revealing a committee far more fractured than the market had anticipated, and Powell's decision to stay on as a governor after his chair term ends on May 15. While Powell was candid that higher energy prices will continue to weigh on the global economy, he was also clear that labor market softness is acting as a buffer against a repeat of the 2022 inflation regime—and that, combined with his neutral rate estimate in the 3 – 4% range, it could keep the door open for further easing. The combination of dissents and Powell’s decision to stay in his seat potentially complicates the transition to Kevin Warsh, who is on a clear path to Senate confirmation ahead of May 15. Our view is that the Fed is likely to remain in the spotlight, as investors will be watching for how Warsh will grapple with the emergence of a hawkish cohort, and how he will balance his desire for a more nuanced approach to both balance sheet reduction and inflation, viewing gradual shrinkage and front-end rate cuts as complementary—all while responding to calls for lower rates from the White House.

Looking for More From U.S. Large Cap

The longer-term argument for investing in U.S. large-cap equities has remained strong, particularly over the last 15 years as globalization and technology innovation have delivered meaningful gains for companies able to drive margin improvement. After leading all major equity and fixed income benchmarks in 2023 and 2024, large caps (particularly the Magnificent 7 stocks) had, in our view, reached stretched valuations, particularly given the increased cost of AI-related capital expenditures. As a result, we increased our conviction in other areas of the equity market—namely, U.S. small and midcaps and non-U.S. equities, both in developed and emerging markets. However, we recently upgraded our conviction level on U.S. large caps based on a confluence of still-supportive economic data and continued strength in earnings.

The expectations for 2026 S&P 500 earnings, as outlined in the graph below, are strongly positive—and have been revised upward since the beginning of the year by approximately +5% based in part on solid guidance and Q1 results. Breaking it down, through May 1, according to FactSet, 63% of companies in the S&P 500 have reported, with a whopping 84% of companies delivering an upside earnings surprise and posting an average year-over-year earnings growth rate of +27.1%. In addition, 81% of companies beat revenue estimates—well above the five-year average of 70%—and delivered an average of +11.1% revenue growth for the quarter, an indication that companies are driving gains on both the top and bottom lines in this environment. With nine of the 11 S&P 500 sectors reporting earnings growth, it is not surprising to see that, through the end of April, the performance attributed to the Magnificent 7 on a year-to-date basis as a percentage of overall S&P 500 is much lower than it was in 2025; dispersion within those seven companies certainly plays a role as well. While admittedly there are still some bellwethers yet to report, we believe that the acceleration in earnings growth for U.S. companies is attributable to continued economic momentum and, as such, can continue.

But what will this next phase of growth look like? The S&P 500 remains a highly concentrated index, with the technology and communications services sectors accounting for 46% of the index, and therefore, strong earnings in these two sectors could be the only thing that matters if looking solely at index performance. And they are expected to deliver, with 2026 earnings growth estimated at +41% and +22%, respectively. But there are strong expectations for other sectors as well, with energy and materials earnings expected to grow +49% and +37%, respectively, in 2026. In fact, importantly, while we have become more constructive on U.S. earnings, small caps are likely to benefit from the same economic backdrop while many large-cap sectors should see more favorable earnings comparisons; as such, S&P 600 companies are expected to grow their earnings by +16.7% this year. Earnings are also expected to grow over the next two years in Japan, China and India; our overweight to Asia versus Europe considers this momentum along with in the potential benefits of stronger growth and inflation in Japan, attractive valuations in India, and the potential for massive AI capex in China over the coming years, which should drive both business activity and productivity gains.

There are risks to this positive view. A tenuous Middle East ceasefire is unlikely to drive energy prices sustainably lower, and profit margins outside of the energy sector are likely to be biased lower without a lasting resolution as higher costs transmit through the broader global economy. Specifically, consumer discretionary earnings could be at risk should consumer behavior shift in response to higher energy costs; a decrease in goods spending would likely portend this shift. In addition, a less accommodative rate environment could weigh on the financial sector, as the Fed and other central banks weigh the potential for a structural uptick in inflation. Combining slower loan growth with concerns around private market valuations and credit quality could translate to a weaker earnings outlook; the sector is only expected to grow earnings at +10% at this point. Potential downward pressure on these two sectors is noteworthy, as they account for a greater percentage of the index than the better performing energy and materials names. Finally, we acknowledge the threat of further policy disruption, particularly as we march quickly towards midterms; this would likely result in dampened business confidence and potentially slower activity.

Portfolio Implications

Equities. We maintain an overweight to global equities, despite the potential for higher energy prices and continued political uncertainty to weigh on investor sentiment. We are overweight U.S. equities and have become more constructive as of late around U.S. large-cap equities, as referenced above. While we still value the Japan story, centered on structural reform and strong growth, Europe's energy vulnerability and deteriorating growth prospects have pushed us to downgrade it to underweight. We maintain overweights in China, India and Brazil, where structural growth themes and attractive valuations continue to outweigh their reliance on energy imports.

Fixed Income. Fears of interest rate hikes in response to higher inflation have created opportunities at the front end of global yield curves, most notably in the U.S. curve, where we think markets have gotten ahead of themselves on tightening. We believe there is also opportunity in investment grade credit and non-U.S. developed market bonds, maintaining overweights in European and Japanese government and corporate debt. In emerging markets (EM), a stronger dollar and energy-driven headwinds have taken some of the shine off, prompting us to trim back to at target on EM sovereign bonds—though our longer-term constructive view on EM currencies remains intact.

Private Markets. Private equity has been moved to an at-target position, given the risk of AI disruption, rising refinancing costs and geopolitical uncertainty. Private credit, too, remains at target as redemptions from retail focused products dominate the narrative, but may translate into opportunities for long-term, institutional investors to allocate higher spreads. We remain constructive on commodities, as energy markets have been repriced, and the asset class offers both return potential and diversification to other risk assets.

Index Returns as of April 2026

Source: Bloomberg, Total returns as of April 30th, 2026. S&P 500 Index is represented by S&P 500 Total Return Index. Nasdaq Composite NASDAQ-Composite Total Return Index. Dow Jones is represented by Dow Jones Industrial Average TR. Large Cap is represented by Russell 1000 Total Return Index. Mid Cap is represented by Russell Midcap Index Total Return. Small Cap is represented by Russell 2000 Total Return Index. All Cap is represented by Russell 3000 Total Return Index. Large Cap Growth is represented by Russell 1000 Growth Total Return. Large Cap Value is represented by Russell 1000 Value Index Total Return. Small Cap Growth is represented by Russell 2000 Growth Total Return. Small Cap Value is represented by Russell 2000 Value Total Return. ACWI is represented by MSCI ACWI Net Total Return USD Index. ACWI ex US is represented by MSCI ACWI ex USA Net Total Return USD Index. DM Non-U.S. Equities is represented by MSCI Daily TR Gross EAFE USD. EM Equities is represented by MSCI Daily TR Gross EM USD. Cash is represented by ICE BofA US 3-Month Treasury Bill Index. U.S. Aggregate is represented by Bloomberg US Agg Total Return Value Unhedged USD. Munis is represented by Bloomberg Municipal Bond Index Total Return Index Value Unhedged USD. Munis Short Duration is represented by Bloomberg Municipal Bond: Muni Short (1-5) Total Return Unhedged USD. Munis Intermediate Duration is represented by Bloomberg Municipal Bond: Muni Intermediate (5-10) TR Unhedged USD. Investment Grade is represented by Bloomberg US Corporate Total Return Value Unhedged USD. High Yield is represented by Bloomberg US High Yield BB/B 2% Issuer Cap Total Return Index Value Unhedged USD. Short Duration is represented by Bloomberg US Agg 1-3 Year Total Return Value Unhedged USD. Long Duration is represented by Bloomberg US Agg 10+ Year Total Return Value Unhedged USD. Global Aggregate is represented by Bloomberg Global-Aggregate Total Return Index Value Unhedged USD. EMD Corporates is represented by J.P. Morgan Corporate EMBI Diversified Composite Index Level. EMD Sovereigns – USD is represented by J.P. Morgan EMBI Global Diversified Composite. Commodities is represented by Bloomberg Commodity Index Total Return. Commodities ex Energy is represented by Bloomberg Ex-Energy Subindex Total Return. U.S. 10-Year Yield is represented by US Generic Govt 10 Yr.