April showers bring May flowers. There were not a lot of showers in April, but the flowers seemed to bloom in May anyway. May was about investing despite the noise as the S&P 500 and Nasdaq pushed to fresh record highs even as inflation ran hot, the Iran conflict...
4M: Market Macro & Market Musings
So much for “April Showers.”
April was about resilience: equities recovered from a geopolitics-driven drawdown and pushed to fresh highs, even as energy shocks and a fractured Fed kept macro uncertainty elevated.
The market message looks less like “recession soon” and more like “growth is intact, but the inflation is the wildcard.” That has favored equities and been a challenge for bonds.
Macro: What Mattered in April
Growth: I’m Still Standing
The U.S. economy entered 2026 with a relatively solid baseline with 2025 growth coming in at around 2%. Most importantly, it was supported by productivity gains despite policy shifts.
Looking forward, our expectation is towards a modest acceleration in 2026. Even with the recent spike in oil prices, it would not be surprising to see real economic growth of around 2.4% to end the year.
The bigger question isn’t “is growth collapsing?”, it’s how much the energy shock can sap momentum from consumers and business confidence.
What we’re watching next:
- Whether, and how long, higher energy costs remain a tax on consumers; or does it soon fade into the background.
- Whether manufacturing “re-accelerates” while services soften, which seemed to be the trend that was forming as we entered the year.
Figure 1: Services growth has slowed while manufacturing has turned from contraction to growth.
Figure 2: Gasoline sales make up 2.6% of consumer spending, but the amount spent has surged 21%.
Inflation: Oil Slick
Inflation progress is best described as having taken a step backwards. Tariffs helped push goods prices higher while services inflation moderated. The forward-looking narrative is that tariff-related inflation should wane, and if oil cools from elevated levels, core inflation can drift back toward 2%, but likely not quickly. Critically, getting back on track to 2% inflation requires a more favorable energy price backdrop. Inflation risk is less about “overheating demand” and more about supply shocks.
Figure 3: Oil supply shocks can linger, like in 1979, or they can be relatively short-lived. The economic costs depend critically on how long high prices last.
Energy & Geopolitics: The Macro Shock That Won’t Stop
The defining shock of 2026 has been the U.S.–Iran conflict and its spillovers into commodity markets. The key macro mechanism is straightforward: supply disruption + shipping risk = higher energy costs, which raises inflation risks, saps growth, and constrains central banks. It’s not a great equation, but it’s been fine for equity markets. Companies are less sensitive to energy prices than consumers (especially lower income consumers) and markets can look through the fog of war if the fog is likely to lift within a reasonable amount of time. The economy, and earnings, can react very differently than market prices. Market prices embed expectations about the near and distant future. The future is more important to markets than the present.
Even with some moderation from peaks, oil remained dramatically higher than at the start of the year. The forecasted path for the macroeconomy assumes disruptions ease eventually and shipping normalizes gradually. The key is recognizing that what is happening is for now, not forever. That’s easy to forget when you’re living through the “for now” part.
Figure 4: Tanker crossings through the Strait of Hormuz has collapsed. Some are making it through, though. Opening it is not like flipping a switch. It will take time to restore the normal flow.
Fed: On Hold… But Not in Harmony
The Fed held its policy rate steady in April at 3.50%–3.75%, but the bigger story was the degree of internal disagreement. The policy statement only had the support of eight of the 12 members of the committee. Importantly, the dissenters didn’t dissent about holding rates steady. They dissented over the language in the statement that hinted at the next move—whenever it happens—being a cut rather than a hike.
The Fed is trying to balance inflation that remains elevated (with energy explicitly cited) against signs of labor market cooling and growth uncertainty. Markets are effectively priced for a prolonged pause.
When inflation is sticky and the committee is split, the hurdle for major policy shifts rises. That increases the odds of a policy “hold” regime, even with an incoming Fed Chair that may argue for cuts. He will likely argue for cuts coordinated with a shrinking of the balance sheet, so it’s a debate that could play out over many meetings. We wouldn’t expect any actual changes to the Fed’s policy stance anytime soon.
Figure 5: Rate cuts helped pull other yields lower, but now that the Fed is on pause and the outlook is less certain, longer-term yields have migrated higher.
Markets: What the Tape Said in April
U.S. Equities: A Near Correction, a Recovery, and a Message
Despite a volatile backdrop, U.S. large caps were resilient. The S&P 500 recovered from a geopolitics-driven near-correction (roughly ~9% peak-to-trough in March) and hit a new high to finish April up ~5.7% year-to-date through April 30. This looks like a market that is more focused on earnings durability than Middle East drama.
Figure 6: The S&P 500 has been on a wild ride, but so far it has paid to hold on. The tariff shock of 2025 caused a near-bear market, but the bounce-back was aggressive when the starting point of tariffs weren’t the ending point of the negotiations. Similarly, the oil shock of 2026’s effects will depend on whether high oil prices are “for now” or “forever.”
Leadership: Growth Revived
April sector leadership favored Communication Services and Information Technology, consistent with a “risk-on recovery.” This is consistent with our belief that market corrections (drops of 10% or more) are driven by fears and they only become bear markets (drops of 20% or more) when the fears become a reality. Since earnings resilience flies in the face of there being a recession, it shouldn’t be too surprising that the rebound has been so aggressive. We’re not out of the woods, yet. The market could be getting the narrative wrong, but the data so far supports the story of the economy (and earnings) continuing to advance.
The year’s broader and healthier theme remains: small caps and non-U.S. equities holding up well. This reinforces the idea that leadership is not trapped in one narrow pocket.
Figure 7: By S&P 500 sector, Energy has done the best year-to-date with the surge in oil prices. For April, the big story was the rebound for big tech.
Figure 8: Small Caps (the Russell 2000) and Emerging Markets have been the outperformers despite the recession fears that crept into markets.
Yields: The Quiet Before the Storm?
Another stabilizing signal is that despite Treasury yields being unstable—between 4.25% and 4.5% on the 10 year Treasury—they do appear to be contained, for now. Financing conditions are not great, but they are also not horrible. This is important as many firms will likely want to spend a lot on property, plant, and equipment due to the growth outlook and the tax incentives from the One Big Beautiful Bill Act. That spending will need to be financed.
Many firms can do it with cash they generate from operations, but it is often cheaper to finance it with debt. There is a risk that yields move higher due to not only elevated inflation expectations (investors require a higher yield to compensate for inflation), but also due to a deluge of bond issuance. With inflation and issuance issues, we could continue to see heightened yield volatility.
Figure 9: Yields have been unstable, but relatively contained. It would not be surprising to see a bias towards a move higher with inflation and issuance concerns.
What This Means for Positioning: Main Takeaways
- Energy is the swing factor. If oil prices retreat, it’s disinflationary and supportive for both stocks and bonds.
- The Fed is on hold, but less predictable. A split committee + energy-driven inflation risk can keep rates higher for longer than markets would prefer.
- Market breadth is a feature, not a bug. Small caps and international performance have been constructive—a reminder that diversification still earns its keep.
- Yields are attractive, but they could get more attractive. For those who think they missed out on locking in decent yields on their investment, there may be more opportunities ahead.