Growth Holds, Inflation Builds, Markets Recalibrate
Weekly Market Update
Takeaways
The global economy is still expanding, and recession is not our base case. The gap between consumer sentiment and consumer behavior bears watching, but we do not see evidence yet of a meaningful shift in activity.
Bond market volatility is running hotter than equity volatility, and the direction of the global rate repricing points toward tighter conditions. We remain underweight duration and see limited near-term upside in the asset class.
S&P 500 earnings are materially outperforming earlier projections, and the upward revision cycle is ongoing. We maintain our overweight to U.S. large caps and see the fundamental case for equities as distinct from the macro headwinds pressuring rates and consumer confidence.
This Week in Charts
Looking Closer
With Europe as an exception, global Purchasing Managers’ Indices (PMIs) remain above 50, indicating that we are still in an economic expansion. Despite slower growth resulting from higher energy prices, we think a near-term contraction is unlikely.
Market and Data Recap
Macro expansion continues, but consumer confidence flashes a potential warning
Global growth remains on solid footing. With Europe as an exception, PMIs across major economies currently sit above 50, signaling expansion rather than contraction (Figure 1). While some indicators have softened since the beginning of the year, the data does not support the recession fears that have grown louder heading into the second half of 2026.
Higher energy prices will likely feed through the economy, and we are watching the secondary and tertiary effects carefully. The boost to consumer goods prices and drag on overall activity is real, but it does not alter our fundamental view that the global economy, and the U.S. economy in particular, remains in solid shape.
A signal worth watching closely is consumer sentiment. The University of Michigan survey released last week registered its lowest reading on record. That is a striking data point, and we are not dismissing it. Yet, as of now, actual consumer behavior has not followed. There remains a disconnect between how consumers feel and how they act.
Our read on this data is much of the decline in sentiment reflects the impact of inflation on personal finances. This view is supported by the more constructive picture painted by Conference Board consumer confidence, which places a higher weight on the labor market than assessments of personal finances (Figure 2).
We are watching for any signs of demand being pulled forward as households and businesses try to get ahead of anticipated price increases. For now, capital expenditure and consumer activity remain strong. The risk is that a sharper inflation move causes a pause in that trajectory.
Bottom line: The global economy is still expanding, and recession is not our base case. The gap between consumer sentiment and consumer behavior bears watching, but we do not see evidence yet of a meaningful shift in activity.
Bond market volatility reflects a world repricing for higher for longer
Bond market volatility has been the defining feature of financial markets this year, and it has been significantly more intense than equity volatility. The MOVE Index1 captures this in fixed income the way the VIX2 does in equities, and it is telling us that the market is in the middle of a substantial repricing of rate expectations.
At the start of 2026, the consensus assumed rate cuts across most major central banks. That consensus view is now unwinding. Expectations have shifted toward tightening or, at minimum, extended holds, for most developed market central banks. The Fed presents a somewhat distinct case given its dual mandate, but even there, the direction of the repricing is clear.
Three structural forces are pushing yields higher. First, central banks face persistent and broadening inflation that limits their ability to ease. Second, fiscal spending is rising across major governments as they respond to geopolitical disruption, supply chain security needs, and defense requirements. Third, the shock of three major global disruptions over the past six years has prompted a sustained policy response that keeps spending elevated. Together, these forces create persistent upward pressure on bond yields.
The energy disruption compounds this. Even if the Strait of Hormuz were to reopen tomorrow, restoring the roughly 14 million barrels per day currently offline would likely take months. Vessel insurance costs, inventory rebuilding, and logistical bottlenecks do not resolve quickly either.
We remain underweight duration and reduced Emerging Market (EM) debt exposure in favor of short duration US fixed income exposure at the beginning of the conflict. We expect to maintain that bias.
Bottom line: Bond market volatility is running hotter than equity volatility, and the direction of the global rate repricing points toward tighter conditions.
Earnings strength justifies overweight to U.S. large caps
Q1 S&P 500 earnings came in at 27% year-over-year growth, well above the 14% projection. The outperformance was broad, but the clearest driver was Technology and Technology-adjacent companies, where momentum exceeded even our bullish expectations.
With most reporting now complete, forward estimates have moved higher again. Next twelve months (NTM) earnings per share (EPS) revision year-to-date (YTD) are up over 14% and net margins for U.S. large caps stand at 15%, roughly three times the level of small-cap peers (Figure 3).
| empty cell | NTM EPS YTD Revision | Net Margin | Interest Coverage Ratio |
|---|---|---|---|
| S&P 500 | 14.5% | 15.2% | 8.7 |
| Russell 2000 | 6.5% | 4.6% | 1.4 |
| Europe | 7.1% | 11.4% | 5.4 |
| Japan | 7.3% | 8.3% | 8.6 |
| Developed Markets ex-US | 7.4% | 11.0% | 5.9 |
| China | 1.4% | 10.9% | 7.6 |
| Emerging Markets | 37.3% | 15.7% | 7.1 |
This table compares the NTM EPS YTD Revision, Net Margin, and Interest Coverage Ratio to various indices/regions.
Most companies we evaluate now incorporate AI into its productivity, efficiency, and growth strategy. If you are assessing the opportunity in equities today, AI exposure is no longer a sector-specific lens. Rather, AI is indispensable for business models and the strength of a company’s AI strategy affects earnings across the market, not just in Technology.
Small caps present a different picture. They generally carry less pricing power, more sensitivity to input costs, and greater exposure to rate-sensitive financing. If portfolio positioning in 2026 assumed small caps would outperform as rates came down, we believe that thesis faces significant headwinds. Combined with weaker fundamentals than U.S. large caps, even holding rates steady at current levels removes the tailwind for the small cap thesis.
The strong earnings trajectory has also produced multiple compression among the market’s strongest companies, which we believe changes the valuation conversation. With EPS expected to grow 23% in 2026, price-to-earnings multiples are contracting even as prices move. That dynamic supports the case for staying long risk assets in U.S. large caps.
Bottom line: S&P 500 earnings are materially outperforming earlier projections, and the upward revision cycle is ongoing. We maintain our overweight to U.S. large caps and see the fundamental case for equities as distinct from the macro headwinds pressuring rates and consumer confidence.
1 The MOVE Index (Merrill Lynch Option Volatility Estimate) tracks market expectations for short-term fluctuations in U.S. Treasury yields.
2 The VIX, or CBOE Volatility Index, measures the market's expected volatility over the next 30 days.
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