Middle East Uncertainty in the Face of Fundamental Earnings
Stuart Katz
Executive Summary
Equity Markets traded higher for a sixth consecutive week, extending the rally that began in late March and pushing several major indexes to new highs. A strong employment report bolstered hopes that the U.S. economy remains resilient in the face of higher energy prices as a result of the Iran war. Technology and growth stocks led the advance. The top-performing sectors were technology, consumer discretionary, and communication services, all of which carry significant exposure to the largest companies in the market. A revival of the artificial-intelligence trade fueled an 11% jump in a gauge of chipmakers during the week; oil prices fell. Mid cap (+1.0%) and small cap (+1.4%) stocks also rose for the week. Non-US developed EAFE markets returned +1.1% while Emerging Markets returned +6.9%.
Rates were mostly unchanged across the curve. 2-year rates rose 1bp to 3.89%; 10-year rates fell 1basis point (bps) to 4.36%. Rates fell slightly in other developed markets. The U.S. 5-year breakeven inflation expectations fell 8bps to 2.63% (recent low of 1.88% on Sept 10, 2024) while 10-year breakeven inflation expectations fell 4bps to 2.55% (recent low of 2.03% on Sept 10, 2024). For 2026, the market ascribes ~10% probability of one cut vs. the Fed’s guidance of 1 cut. At yearend 2026, the market expects the Fed Funds rate to be 3.66% vs. the Fed’s guidance of 3.25%-3.5%. Ten-year yields rose around 40 basis points (bps) since the war began. The increase is attributable to the Iran inflation shock and stronger than expected growth.
Key Takeaways
1. The Middle East Conflict, Now in its 10th Week
The week opened with Iran’s most serious provocation since the April ceasefire, including strikes on the UAE and attacks on commercial ships in the Strait of Hormuz. The tone shifted quickly as regional allies pressed for de-escalation, and reports emerged of a framework agreement to end the conflict. Oil fell nearly -10% early in the week, trading near $90 per barrel for the first time since mid-April. Why it matters: The acute market stress from earlier in the conflict has eased, but the situation continues to drive significant swings in oil prices and broader market sentiment. Progress toward a resolution would be a positive development for markets; a breakdown in talks could trigger more market volatility.
2. Major U.S. Equity Indices Continue to Set New Highs
U.S. stocks extended their rally to six consecutive weeks, with three of the four major indexes reaching new highs. Most of the week’s gains came in a single session, following reports of progress on an Iran deal. Why it matters: The pattern has been consistent through this stretch of geopolitical uncertainty: headlines create short bursts of volatility, but the market has recovered as conditions stabilize. Six consecutive weeks of gains, including new highs across multiple broad equity indexes, reflects a market that continues to look through near-term uncertainty toward the underlying fundamentals.
3. Leading Tech Companies Report Strong Earnings & Increasing AI Capital Expenditures Earnings growth are an important equity return driver. We are now past peak earnings season with only one major semiconductor company to report. The S&P 500 is seeing nearly 28% earnings growth (Q1 2026 vs. Q1 2025) accelerating past the original estimates of 13% where full year S&P500 growth expectations remain in the low to mid-teens vs. 2025 earnings. The largest technology companies reported earnings over the past two weeks, and their commitment to AI infrastructure spending continues to grow. Alphabet, Amazon, Meta, and Microsoft all beat estimates, but the capital spending figures drew attention. Meta raised its full-year capital spending guidance to $125-145 billion; Microsoft spent nearly $32 billion in a single quarter; and Alphabet’s cloud backlog nearly doubled. Combined, the top four U.S. cloud providers are now projected to spend over $660 billion on infrastructure in 2026. Why it matters: The spending isn’t speculative in the way it once appeared, with the group posting strong revenue growth. Given these companies’ large index weights, the reported growth is one of the forces pushing broad market indexes higher.
4. Economic Growth Rebounded in Q1 2026
The global economy has so far held up reasonably well supported by inventory drawdowns (both on land and at sea) and domestic fiscal stimulus (tax refunds subsidizing gas price increases). The U.S. economy grew at a +2.0% annualized rate in Q1, rebounding from the +0.5% pace in Q4 when the government shutdown weighed on activity. The recovery was broad. Business investment led the way, with strength in equipment and software tied to the AI infrastructure buildout. Inventory restocking and a rebound in government spending after the shutdown also contributed, and while the pace of growth slowed from Q4, consumer spending increased with households drawing on savings. Why it matters: The economy showed resilience in the first quarter, which included the first month of the conflict. The question heading into the second quarter is whether the conflict begins to weigh on economic activity and whether elevated energy costs create inflation pressures.
5. Federal Reserve Holds Interest Rates Steady
The Federal Reserve held rates steady at 3.50-3.75% in April, but the vote revealed a divided committee. Four members dissented, the most since the early 1990s. Three preferred to remove the easing bias from the statement, while one voted for an immediate rate cut. The split captures the challenge facing policymakers: an economy that continues to expand, an oil shock pushing prices higher, and a labor market that remains stable. The statement acknowledged the uncertainty, citing Middle East developments that could impact inflation. Why it matters: Rate cuts aren’t on the horizon. Market pricing shows no change expected through the end of 2026, with only a modest probability of a cut later in the year.
Weekly Commentary
Middle East Uncertainty in the Face of Fundamental Earnings
Stuart Katz
Executive Summary
Equity Markets traded higher for a sixth consecutive week, extending the rally that began in late March and pushing several major indexes to new highs. A strong employment report bolstered hopes that the U.S. economy remains resilient in the face of higher energy prices as a result of the Iran war. Technology and growth stocks led the advance. The top-performing sectors were technology, consumer discretionary, and communication services, all of which carry significant exposure to the largest companies in the market. A revival of the artificial-intelligence trade fueled an 11% jump in a gauge of chipmakers during the week; oil prices fell. Mid cap (+1.0%) and small cap (+1.4%) stocks also rose for the week. Non-US developed EAFE markets returned +1.1% while Emerging Markets returned +6.9%.
Rates were mostly unchanged across the curve. 2-year rates rose 1bp to 3.89%; 10-year rates fell 1basis point (bps) to 4.36%. Rates fell slightly in other developed markets. The U.S. 5-year breakeven inflation expectations fell 8bps to 2.63% (recent low of 1.88% on Sept 10, 2024) while 10-year breakeven inflation expectations fell 4bps to 2.55% (recent low of 2.03% on Sept 10, 2024). For 2026, the market ascribes ~10% probability of one cut vs. the Fed’s guidance of 1 cut. At yearend 2026, the market expects the Fed Funds rate to be 3.66% vs. the Fed’s guidance of 3.25%-3.5%. Ten-year yields rose around 40 basis points (bps) since the war began. The increase is attributable to the Iran inflation shock and stronger than expected growth.
Key Takeaways
1. The Middle East Conflict, Now in its 10th Week
The week opened with Iran’s most serious provocation since the April ceasefire, including strikes on the UAE and attacks on commercial ships in the Strait of Hormuz. The tone shifted quickly as regional allies pressed for de-escalation, and reports emerged of a framework agreement to end the conflict. Oil fell nearly -10% early in the week, trading near $90 per barrel for the first time since mid-April. Why it matters: The acute market stress from earlier in the conflict has eased, but the situation continues to drive significant swings in oil prices and broader market sentiment. Progress toward a resolution would be a positive development for markets; a breakdown in talks could trigger more market volatility.
2. Major U.S. Equity Indices Continue to Set New Highs
U.S. stocks extended their rally to six consecutive weeks, with three of the four major indexes reaching new highs. Most of the week’s gains came in a single session, following reports of progress on an Iran deal. Why it matters: The pattern has been consistent through this stretch of geopolitical uncertainty: headlines create short bursts of volatility, but the market has recovered as conditions stabilize. Six consecutive weeks of gains, including new highs across multiple broad equity indexes, reflects a market that continues to look through near-term uncertainty toward the underlying fundamentals.
3. Leading Tech Companies Report Strong Earnings & Increasing AI Capital Expenditures
Earnings growth are an important equity return driver. We are now past peak earnings season with only one major semiconductor company to report. The S&P 500 is seeing nearly 28% earnings growth (Q1 2026 vs. Q1 2025) accelerating past the original estimates of 13% where full year S&P500 growth expectations remain in the low to mid-teens vs. 2025 earnings. The largest technology companies reported earnings over the past two weeks, and their commitment to AI infrastructure spending continues to grow. Alphabet, Amazon, Meta, and Microsoft all beat estimates, but the capital spending figures drew attention. Meta raised its full-year capital spending guidance to $125-145 billion; Microsoft spent nearly $32 billion in a single quarter; and Alphabet’s cloud backlog nearly doubled. Combined, the top four U.S. cloud providers are now projected to spend over $660 billion on infrastructure in 2026. Why it matters: The spending isn’t speculative in the way it once appeared, with the group posting strong revenue growth. Given these companies’ large index weights, the reported growth is one of the forces pushing broad market indexes higher.
4. Economic Growth Rebounded in Q1 2026
The global economy has so far held up reasonably well supported by inventory drawdowns (both on land and at sea) and domestic fiscal stimulus (tax refunds subsidizing gas price increases). The U.S. economy grew at a +2.0% annualized rate in Q1, rebounding from the +0.5% pace in Q4 when the government shutdown weighed on activity. The recovery was broad. Business investment led the way, with strength in equipment and software tied to the AI infrastructure buildout. Inventory restocking and a rebound in government spending after the shutdown also contributed, and while the pace of growth slowed from Q4, consumer spending increased with households drawing on savings. Why it matters: The economy showed resilience in the first quarter, which included the first month of the conflict. The question heading into the second quarter is whether the conflict begins to weigh on economic activity and whether elevated energy costs create inflation pressures.
5. Federal Reserve Holds Interest Rates Steady
The Federal Reserve held rates steady at 3.50-3.75% in April, but the vote revealed a divided committee. Four members dissented, the most since the early 1990s. Three preferred to remove the easing bias from the statement, while one voted for an immediate rate cut. The split captures the challenge facing policymakers: an economy that continues to expand, an oil shock pushing prices higher, and a labor market that remains stable. The statement acknowledged the uncertainty, citing Middle East developments that could impact inflation. Why it matters: Rate cuts aren’t on the horizon. Market pricing shows no change expected through the end of 2026, with only a modest probability of a cut later in the year.
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