The US stock market has returned to pre-war levels, turning a blind eye to the Fed’s interest rate hike, the oil crisis, and the threat of stagflation. Brent is trading $30 a barrel above levels before the Middle East conflict, Treasury bond yields are 35 to 40 basis points higher, and traders have all but given up hope that the Fed will cut rates in 2026. Conditions are far worse than at the end of February, yet the S&P 500 is at the same levels.
Expectations of strong corporate earnings, a robust economy and peace in the Middle East underpin the rally in the broad stock index. Despite the continuing uncertainty in the region, investors are buying into rumours of an agreement between the US and Iran. Markets are tired of geopolitics and are switching to fundamentals.
According to Wall Street analysts’ forecasts, earnings per share for S&P 500 companies will rise by 12.5% in Q1, the sixth consecutive quarter of double-digit growth. Meanwhile, the number of companies issuing upbeat corporate earnings forecasts is set to reach its highest since 2021.
Strong earnings are impossible without a robust economy. Experts at the Wall Street Journal have slightly lowered their forecast for US GDP in 2026, from 2.2% to 2%, which broadly matches the average growth rate of 2.1% over the past six years. The likelihood of a recession in the next 12 months has also risen only slightly, from 27% to 33%, despite the devastating impact on the economy from events over the past month and a half. All this is thanks to artificial intelligence and the subsequent productivity gains.
Although Fed rates are high by historical standards, the real yield on US Treasury bonds, against a backdrop of accelerating inflation, does not suggest that monetary policy is too tight.
The S&P 500 correction in March lowered companies’ fundamental valuations. This includes the price-to-forward-earnings ratio. Shares now appear undervalued and attractive, which is stimulating buying.
