Key Wealth Investment Brief

Key Takeaways

Market performance has shifted away from the “Magnificent 7.”

Since the launch of ChatGPT, the Magnificent 7 stocks (Apple, Amazon, Alphabet, Meta, Microsoft, Nvidia, Tesla) have been the primary driver of returns in the S&P 500. Beginning in the last few months of 2025, returns have broadened out to now include areas such as Energy, Industrials, and parts of Information Technology beyond the Magnificent 7.

In addition, different equity styles beyond large-cap growth stocks have outperformed, with small-cap and value stocks posting significant gains year-to-date (YTD). The growth in returns has been most noticeable in semiconductors as the artificial intelligence (AI) buildout has driven demand for chips, boosting some shares up more than 100% YTD.

The rise in semiconductors has led to index concentration both at home and abroad.

Emerging Market equities have been one of the top performing assets this year, with a return of 25.4% YTD as of May 29, 2026. Looking deeper, two countries, Taiwan and South Korea, are driving the majority of the returns, while larger countries in the Index, namely China and India, have negative returns for the year.

The Index returns are not only concentrated in countries, but in just a handful of companies. The top five contributors to the performance of the MSCI Emerging Markets Index accounted for 76% of the YTD return; all five of the companies are part of the AI buildout. For comparison, the top five contributors to the S&P 500 Index’s YTD performance accounted for 45% of the total return; of those top five, four of the companies are producers of semiconductors.

The rise in retail investors and passive investment funds is impacting the market.

While earnings have been the primary driver of equity returns this year, the rise in retail investors and passive investment vehicles are becoming a larger influence. Not only has the number of retail traders grown in the past decade, but their use of options and leverage has also seen a significant rise over recent years, according to Bianco Research and Citadel.

Since 2021, the number of call options on the S&P 500 has risen 5x. The use of options, especially the Zero Days to Expiration (0DTE) ones, can be seen as a proxy for speculation, and seeing a rise of this magnitude shows just how optimistic retail investors are.

Are we in a bubble?

With this rise in speculation, it is normal to wonder if we are experiencing a bubble. Based on history, we are probably in the midst of a financial bubble to some degree, but bubbles can last much longer than people think they should. This does not mean you should get out of the market, as it is incredibly difficult to know when or if a bubble will pop. The best way to handle the rising speculation in the market is to stay invested, stay diversified, and consider "dollar cost selling" when positions become outsized.

Bottom Line – how to invest now.

We expect volatility to remain elevated, and we continue to advocate for robust diversification. Bonds may continue to struggle to add ample diversification amidst an environment of larger federal deficits and higher interest rates. Bonds may show higher correlations with stocks in such an environment, leading to less portfolio diversification.

Even before the Iran War, we held the view that inflation could be persistent (due to rising nationalism along with other forces). The Iran crisis adds a material new source of risk, and although we don’t see history repeating itself in lock-step with the 1970s, investors may want to maintain allocations to real assets after the conflict ends.

Another argument for diversification: the S&P 500 index has become much more concentrated. In 2006, the S&P 500 had approximately 35% exposure to growth stocks, 39% blend, and 26% value, according to data from Bank of America (BofA). In 2026, the S&P 500 holds 46% growth stocks, 42% blend, and only 11% value stocks, according to BofA.

In sum, real investors need real assets, and U.S. investors need exposure beyond U.S. financial assets and concentrated indexes.

Markets generally “settle up” over time. Long-term investors should not become too bearish. Short-term and downside volatility is the price paid to earn long-term outperformance: in the past 75 years, the S&P 500 experienced an intra-year decline of 14% on average, but historically still finished the year positive 78% of the time, according to Creative Planning.

Equity Takeaways:

Stocks were mixed in early Monday trading. The S&P 500 rose approximately 0.2%, to 7580, while the tech-heavy Nasdaq fell approximately 0.1%. Small caps fell approximately 0.1%. Non-U.S. stocks were mixed.

After finishing higher again last week, the S&P 500 extended its winning streak to nine weeks, its longest streak since 2023. The rally continues to be driven by earnings announcements significantly outperforming expectations. As of May 29, 2026, Q1:2026 earnings have grown 28.6% year-over-year, the fastest quarterly growth since 2021.

As previously noted, within non-U.S. stocks, emerging markets have been a standout. Emerging countries with high exposure to certain technology sectors (chips / memory) have been leading the MSCI Emerging Markets Index higher. Worth noting, however, is the fact that certain emerging market indices have also become quite concentrated, similar to what is evident within the S&P 500 Index. Risk management, therefore, is warranted.

Fixed-Income Takeaways:

Yields fell across the curve last week as hope rose that an agreement to open the Strait of Hormuz would be finalized. Specifically, 10-year yields moved 12 basis points (bps) lower to close the week at 4.44%, while 30-year yields moved 9 bps lower to close the week at 4.97%. At the short end, 2-year yields moved 12 bps lower, closing the week at 4.00%.

In early Monday trading, yields were higher across the curve: 2-year Treasury yields were trading at 4.07%, 5-year Treasury yields at 4.21%, 10-year Treasury yields at 4.50%, and 30-year Treasury yields at 5.02%.

The market slightly pared back expectations for interest rate increases due to some signs of weakening economic momentum. However, the market is still biased towards hiking, pricing in an approximately 80% chance of a rate hike by the end of January 2027; at the start of the week, those odds were 100%.

Credit spreads continued to tighten last week in both investment grade and high yield due to an improvement in investor risk appetite. Spreads are hitting their tightest level in decades despite the increased supply of bonds, higher use of leverage, and tightening monetary policy. In this environment, strong security selection is paramount.

Upcoming National Call

Please join Key Wealth for our Mid-Year Update, where our Chief Investment Office shares timely insights on the forces shaping markets and portfolios in the second half of 2026. We’ll explore how we’re navigating a complex environment marked by geopolitical uncertainty, rapid advances in artificial intelligence, evolving private markets, and a more cautious U.S. consumer, all against the backdrop of the upcoming congressional midterm elections.

Key Wealth's National Call: 2026 Mid-Year CIO Update
June 9, 2026 | Time: 1:00 p.m. ET, 10:00 a.m. PT

Key Wealth National Client Call 6/9 Webinar Registration Link - Zoom

Key Takeaways

Strong earnings are driving the market higher despite the ongoing Iran War.

First quarter 2026 earnings continue to come in well above expectations. With 90% of the S&P 500 having reported, the blended earnings growth rate is sitting above 28% year-over-year, up from analysts’ expectations of 13% earnings growth at the beginning of the quarter, on track for the best quarter since the Covid pandemic recovery. The rapid growth in earnings is expected to continue into next quarter as analysts forecast growth of 21%, which would be the second-best quarter since the pandemic.

Earnings growth received a significant boost from “Other Income” this quarter, as this category accounted for more than a third of Net Income (historically it accounts for 5%–10%), according to Andreessen Horowitz (a16z). The jump in “Other Income” primarily came from hyperscalers’ unrealized gains in private investments. This strong earnings growth has allowed equities to reach new all-time highs despite the uncertainty around the Iran War, although there is some risk that if the value of these private investments deteriorates, earnings for the market as a whole could falter.

Market concentration is high and expected to grow with the SpaceX IPO.

Artificial intelligence (AI) continues to be the driver of the market, leading to levels of concentration on par with notable past market peaks. The “AI Big 10” (the “Magnificent 7” + Advanced Micro Devices, Broadcom, and Micron) makes up 40% of the S&P 500 market capitalization, according to Bank of America (BofA). This concentration is likely to grow with the impending initial public offering (IPO) of SpaceX. The company is expected to be valued at between $1.5 and $2 trillion, making it one of the 10 largest companies in the world and the largest IPO in history.

Oil inventories are falling quickly, causing bond yields to rise.

There are reports of progress on a deal to end the Iran War, but the U.S. conducted defensive attacks on Iran over the weekend. Oil inventories around the globe have helped blunt some of the price shock caused by the war’s disruption, but those have fallen rapidly – meaning prices will likely rise further if the conflict is prolonged. Inflation has already jumped as a result and could reach more than 4% in the coming months. With inflation this high, it is unlikely the Fed will cut rates this year and instead may actually raise rates; this dynamic has led to a steady increase in bond yields. 

Bottom Line – how to invest now.

We expect volatility to remain elevated, and we continue to advocate for robust diversification. Bonds may continue to struggle to add ample diversification amidst an environment of larger federal deficits and higher interest rates. Bonds may show higher correlations with stocks in such an environment, leading to less portfolio diversification.

Even before the Iran War, we held the view that inflation could be persistent (due to rising nationalism along with other forces). The Iran crisis adds a material new source of risk, and although we don’t see history repeating itself in lock-step with the 1970s, investors may want to maintain allocations to real assets after the conflict ends.

Another argument for diversification: the S&P 500 Index has become much more concentrated. In 2006, the S&P 500 had approximately 35% exposure to growth stocks, 39% blend, and 26% value, according to data from Bank of America (BofA). In 2026, the S&P 500 holds 46% growth stocks, 42% blend, and only 11% value stocks, according to BofA.

In sum, real investors need real assets, and U.S. investors need exposure beyond U.S. financial assets and concentrated indexes.

Markets generally “settle up” over time. Long-term investors should not become too bearish. Short-term and downside volatility is the price paid to earn long-term outperformance: in the past 75 years, the S&P 500 experienced an intra-year decline of 14% on average, but historically still finished the year positive 78% of the time, according to Creative Planning.

Equity Takeaways:

Stocks were mixed in early Tuesday trading. The S&P 500 rose approximately 0.5%, to 7519, while the tech-heavy Nasdaq rose approximately 0.9%. Small caps rose approximately 1.2%. Non-U.S. stocks were mixed.

After finishing higher again last week, the S&P 500 extended its winning streak to eight weeks, its longest streak since 2023. The rally has been driven by the earnings announcements significantly outperforming expectations. The Index’s valuation has actually fallen from the start of the year, currently sitting at 21x earnings, compared to 22x in January.

Within non-U.S. stocks, emerging markets have been a standout. Emerging countries with high exposure to certain technology sectors (chips / memory) have been leading the MSCI Emerging Markets Index higher. Worth noting, however, is the fact that certain emerging market indices have also become quite concentrated, similar to what is evident within the S&P 500 Index. Risk management, therefore, is warranted.

Fixed-Income Takeaways:

Yields fell modestly at the long end of the curve last week. Specifically, 10-year yields moved 3 basis points (bps) lower to close the week at 4.56%, while 30-year yields moved 6 bps lower to close the week at 5.06%. At the short end, 2-year yields moved 5 bps higher, closing the week at 4.12%.

In early Tuesday trading, yields were lower across the curve: 2-year Treasury yields were trading at 4.05%, 5-year Treasury yields at 4.18%, 10-year Treasury yields at 4.48%, and 30-year Treasury yields at 5.00%.

The market is coming to terms with a “higher-for-longer” environment, as investors are now pricing in late cycle interest rate increases. Fed Governor Christopher Waller distanced himself from the interest rate easing camp last week. Waller had previously been firmly in the easing camp; hence, many market participants view this as a sign that rate hikes may be enacted at a Federal Reserve meeting sometime during the next 12 months.

Credit spreads tightened across the board, with high yield being the biggest beneficiary. The high yield spread relative to Treasuries fell 11 bps last week, bringing it to a nearly 20-year low. High yield bonds are outperforming investment grade bonds by 1.6% for the year, the widest margin of the year to this point.

On Friday, May 22, 2026, Kevin Warsh took the oath of office as the new Chairman and member of the Board of Governors of the Federal Reserve System, replacing Jerome Powell as Fed Chair. Differing from historical transitions, Powell has chosen to remain on the Board of Governors for an undetermined period of time, with his stated intention to support Federal Reserve independence.

Upcoming National Call

Please join Key Wealth for our Mid-Year Update, where our Chief Investment Office shares timely insights on the forces shaping markets and portfolios in the second half of 2026. We’ll explore how we’re navigating a complex environment marked by geopolitical uncertainty, rapid advances in artificial intelligence, evolving private markets, and a more cautious U.S. consumer, all against the backdrop of the upcoming congressional midterm elections.

Key Wealth's National Call: 2026 Mid-Year CIO Update
June 9, 2026 | Time: 1:00 p.m. ET, 10:00 a.m. PT
Key Wealth National Client Call 6/9 Webinar Registration Link - Zoom

Key Takeaways

Stocks have performed very well year-to-date (YTD) across the globe. Bonds are facing the headwind of increasing inflation.

We are in a “run it hot” economy. Equities and commodities are rising together, while bonds are languishing. Year-to-date through May 14, 2026, oil is up 77.5%, non-U.S. emerging market stocks are up approximately 23%, and most other stock indices are up between 7 and 13%. Bond total returns are essentially flat to slightly lower.

Inflation, as measured by the consumer price index (CPI), is heading higher. Headline CPI, which includes food and energy, touched 3.8% in April, up from 3.3% in March and 2.4% in February. Core CPI (excluding food and energy) reached 2.8% in April, up from 2.5% in February. If inflation continues to rise, the Federal Reserve (Fed) will have a difficult time cutting interest rates.

Approximately 48% of the S&P 500 Index’s market capitalization is tied to artificial intelligence (AI), AI utilities, and AI capital equipment, according to Bianco Research. AI-related spending is driving very fast earnings growth. Earnings for Q1:2026 are tracking to grow more than 27% and are poised to exceed estimates by 15 percentage points, according to Bianco Research.

Extremely fast earnings growth occurring when the economy is not emerging from a recession is highly unusual and is why stocks are doing so well in the face of higher inflation. How long can this dynamic continue?

Commercial real estate has begun to bounce back after its 2022–2024 drawdown. The residential housing market is stable, with prices cooling in some areas.

The ODCE Index, a widely tracked commercial real estate index maintained by the National Council of Real Estate Investment Fiduciaries (NCREIF), rose 3.8% in the 1-year period ending March 31, 2026. The Index rose sharply in the post-COVID period, before pulling back as interest rates rose in 2022.

Performance continues to be led by the industrials sector, which is showing double-digit 5-year and 10-year returns, supported by structural demand for e-commerce, logistics, etc.

Retail has become a quiet turnaround story, benefiting from supply discipline and improving tenant health. Apartment supply is peaking after elevated deliveries and is expected to decline meaningfully, setting up a recovery in occupancy and rent growth. Finally, office properties are recently showing a modest rebound, but the recovery remains fragile and uneven amid persistent work-related headwinds.

Within residential housing, national home prices are still rising nominally, but appreciation has slowed meaningfully. In February 2026, the latest reported month, the Case-Shiller Home Price Index showed a 0.7% year-over-year gain.

More than half of U.S. metros are now seeing year-over-year price declines according to Case-Shiller, and real (inflation-adjusted) home prices have fallen for nine consecutive months. The market remains highly fragmented.

Bottom Line – how to invest now.

We expect volatility to remain elevated, and we continue to advocate for robust diversification. Bonds may continue to struggle to add ample diversification amidst an environment of larger federal deficits and higher interest rates. Bonds may show higher correlations with stocks in such an environment, leading to less portfolio diversification.

Even before the Iran War, we held the view that inflation could be persistent (due to rising nationalism along with other forces). The Iran crisis adds a material new source of risk, and although we don’t see history repeating itself in lock-step with the 1970s, investors may want to maintain allocations to real assets after the conflict ends.

Another argument for diversification: the S&P 500 Index has become much more concentrated. In 2006, the S&P 500 had approximately 35% exposure to growth stocks, 39% blend, and 26% value, according to data from Bank of America (BofA). In 2026, the S&P 500 holds 46% growth stocks, 42% blend, and only 11% value stocks, according to BofA.

In sum, real investors need real assets, and U.S. investors need exposure beyond U.S. financial assets and concentrated indexes.

Markets generally “settle up” over time. Long-term investors should not become too bearish. Short-term and downside volatility is the price paid to earn long-term outperformance: in the past 75 years, the S&P 500 experienced an intra-year decline of 14% on average, but historically still finished the year positive 78% of the time, according to Creative Planning.

Equity Takeaways:

Stocks were mixed in early Monday trading. The S&P 500 rose approximately 0.1%, to 7414, while the tech-heavy Nasdaq fell approximately 0.1%. Small caps rose approximately 0.8%. Non-U.S. stocks were generally higher.

After finishing higher again last week, the S&P 500 extended its winning streak to seven weeks. Strong earnings growth, combined with positive corporate outlooks, typically leads to higher prices over the long term. Positive earnings revisions have been especially prevalent in the technology sector.

Within non-U.S. stocks, emerging markets have been a standout. Taiwan and South Korea are emerging markets that have high exposure to certain technology sectors (chips / memory), helping index performance.

The SOX semiconductors index is approximately 62% above its 200-day moving average, a very extended level. For historical context, the dot-com bubble peaked with the Nasdaq index approximately 55% above its 200-day moving average, according to data from BofA, Bloomberg, and GFD Finaeon. We are not market timers, but the semiconductor trade is showing signs of froth.

Fixed-Income Takeaways:

Treasury yields moved sharply higher last week across the curve due to hotter-than-expected inflation data. Specifically, 10-year Treasury yields moved 24 basis points (bps) higher to close the week at 4.59%; 30-year yields moved 18 bps higher, crashing through the 5.00% level to close the week at 5.12%. Lastly, 2-year yields moved higher as well, closing the week at 4.07%.

In early Monday trading, yields were stable to slightly lower across the curve. Overall, 2-year Treasury yields were trading at 4.05%, 5-year Treasury yields at 4.24%, 10-year Treasury yields at 4.58%, and 30-year Treasury yields at 5.12%.

Rising inflation expectations will put more pressure on longer-dated bonds, all else equal. In particular, 10-year Treasury yields are at their highest level in over a year, while 30-year yields are at their highest level since 2007. The long end of the yield curve is at risk of becoming unanchored. If 30-year yields continue rising, 10-year yields will likely also face upward pressure.

Market participants are now expecting possible rate hikes, as opposed to rate cuts, this year or early next year. Between one and two rate hikes (0.25% to 0.50%) are priced into the forward curve over the next 10 months. The current fed funds rate is the target range of 3.50% to 3.75%.

With last week’s selloff in Treasuries, bond market volatility has increased. That said, corporate bonds have been very resilient. Investment-grade (IG) credit spreads tightened last week, to 73 bps, and are approaching their tightest levels of the year. High-yield spreads moved approximately 4 bps wider last week, to 267 bps.

Key Takeaways

The labor market is in fine shape for now, although artificial intelligence (AI) is beginning to change its underlying composition.

In April, 115,000 jobs were added to the economy, exceeding forecasts – a further sign of economic resilience in the face of the Iran war and the first time payrolls posted positive gains in consecutive months since April/May 2025. The unemployment rate was unchanged at 4.3%.

Wages have not kept up with inflation in recent months, a situation that could put strain on many consumers. Inflation has risen in recent weeks, driven by rising energy prices. 

U.S. national retail gasoline prices have risen from below $3.00/gallon at the start of the year to $4.55/gallon on May 7, according to Evercore ISI. Average hourly earnings growth was unchanged in April, rising 0.2% month-over-month. Wages rose approximately 3.6% year-over-year in April, according to Evercore ISI.

Since the launch of ChatGPT in November 2022, the composition of the labor market has begun to shift. Sectors like health care, utilities, state government, construction, and leisure & hospitality have seen the most growth, according to data from the Federal Reserve Bank of St. Louis. The information technology, transportation, federal government, and manufacturing sectors have lost the most jobs.

On the construction side, non-residential construction employment growth has significantly outpaced residential construction employment growth since the launch of ChatGPT. The data center buildout is requiring significant resources. Utilities have also seen strong employment growth, as AI requires a large amount of power. 

Since the most recent low on March 31, 2026, global equity markets have staged a sharp rally, while oil prices have moderated.

From March 31 through May 8, 2026, non-U.S. emerging market stocks rose 20.4%, U.S. large growth stocks rose 18.5%, and the S&P 500 rose 13.0%. Over the same timeframe, U.S. small caps rose 12.2%, non-U.S. developed market stocks rose 7.1%, and U.S. large value stocks rose 6.2%. Gold rose slightly, while oil fell 12.1%.

Year-to-date (YTD) through May 8, non-U.S. emerging market stocks have risen 24.2%, U.S. small caps have risen 15.3%, the S&P 500 have risen 8.4%, and non-U.S. developed market stocks have risen 8.3%. U.S. large growth stocks have risen 10.4%, and U.S. large value stocks have risen 6.2%. 

Oil prices, despite their decline over the past 5 weeks, were still up 65.2% YTD through May 8. Gold has risen approximately 9% YTD. Bonds have generally risen 1–2% YTD, while the U.S. dollar has been essentially unchanged YTD.

Bubble watch is back on, but given the extraordinary level of capital spending by the hyperscalers, maybe it’s not a bubble.

By 2027, AI hyperscaler spending on AI capital expenditures is set to eclipse defense spending as a percentage of GDP, according to company filings, the Congressional Budget Office (CBO), and Morgan Stanley. Hyperscaler capital expenditures are projected at 3.3% of GDP in 2027, versus 2.7% for defense spending.

The impact of AI on the economy and markets is outweighing major disruptions caused by immigration, trade, and the war with Iran, and AI’s impact may grow even larger over time. We continue to advise tilting towards “AI adopters” over “AI enablers,” while continuing to own critical “AI infrastructure” companies.

We also acknowledge a degree of humility, for the future is highly uncertain and bubbles are never apparent until they burst.

Thus, we also continue to advocate for robust diversification and recommend “dollar cost selling” when positions become outsized.

Bottom Line – how to invest now.

We expect volatility to remain elevated, and we continue to advocate for robust diversification. Bonds may continue to struggle to add ample diversification amidst an environment of larger federal deficits and higher interest rates. Bonds may show higher correlations with stocks in such an environment, leading to less portfolio diversification.

Even before the Iran War, we held the view that inflation could be persistent (due to rising nationalism along with other forces). The Iran crisis adds a material new source of risk, and although we don’t see history repeating itself in lock-step with the 1970s, investors may want to maintain allocations to real assets after the conflict ends.

Another argument for diversification: the S&P 500 index has become much more concentrated. In 2006, the S&P 500 had approximately 35% exposure to growth stocks, 39% blend, and 26% value, according to data from Bank of America (BofA). In 2026, the S&P 500 holds 46% growth stocks, 42% blend, and only 11% value stocks, according to BofA.

In sum, real investors need real assets, and U.S. investors need exposure beyond U.S. financial assets and concentrated indexes.

Markets generally “settle up” over time. Long-term investors should not become too bearish. Short-term and downside volatility is the price paid to earn long-term outperformance: in the past 75 years, the S&P 500 experienced an intra-year decline of 14% on average, but historically still finished the year positive 78% of the time, according to Creative Planning.

Equity Takeaways:

Stocks were mixed in early Monday trading. The S&P 500 rose approximately 0.2%, to 7413. The tech-heavy Nasdaq rose approximately 0.1%, while small caps fell approximately 0.2%. International shares were mixed.

The S&P 500 set another new high last week and is in the midst of a 6-week winning streak that began in late March. The rally has been driven by significant earnings beating expectations.

Earnings growth has surged. At 27.7% year-over-year, Q1:2026 earnings growth is on pace to be the strongest since the pandemic, according to FactSet. Just five weeks ago, Q1:2026 earnings growth was projected at 13.1%.

Micro-cap stocks staged an upside breakout last week on an absolute basis, as well as on a relative basis compared to the S&P 500. Micro-cap strength is a sign of expanding breadth, a healthy signal.

After lagging during the first quarter, the momentum and growth factors have recovered and are once again leading the markets higher. The dividend and value factors are consolidating.

Fixed-Income Takeaways:

Treasury yields were relatively stable last week. Long-term yields declined several basis points (bps), while short-term yields rose slightly.

In early Monday trading, Treasury yields were 2–3 bps higher across the curve: 2-year Treasuries were yielding 3.92%, 5-year Treasuries 4.05%, 10-year Treasuries 4.39%, and 30-year Treasuries 4.97%.

Since the start of the Iran war, front-end yields have risen as investors have attempted to gauge the impact of the war on future inflation. The next move by the Federal Reserve (Fed) has come into question, as Fed governors have expressed divergent views in recent weeks. The near-term path for rates is uncertain. The current fed funds rate is the target range of 3.50% to 3.75%.

Fed Chair Jerome Powell’s term is expected to end this week. Kevin Warsh is expected to be sworn in as his successor, with Powell staying on as governor for an indefinite period. Warsh is expected to be more inclined to rate cuts than Powell. Warsh will still need to build a consensus amongst his colleagues however, which may be difficult in the current environment. 

Credit spreads remained relatively stable last week, also CCC-rated bonds (the lowest-rated credits) widened by 16 basis points. Higher-rated bonds outperformed lower-rated bonds last week. On an absolute basis, credit spreads remain tight.

Key Takeaways

Economic growth rebounded in the first quarter, but the outlook remains clouded by the war in Iran and spiking energy prices.

Real U.S. GDP grew 2.0% in Q1:2026, up from 0.5% in the fourth quarter of 2025. Q4:2025 growth was negatively impacted by the federal government shutdown. Department of Government Efficiency (DOGE) layoffs also went into effect in Q4:2025. 

Consumer spending is slowing somewhat, while investment in technology is booming, according to data from the Bureau of Economic Analysis (BEA). The housing market is slowing.

Increased technology capital expenditures are flowing directly into certain sectors, such as chipmakers. Productivity is increasing for companies that adopt AI. That said, large capital expenditures entail increased risk as we move from the enablement phase of AI to the adoption phase.

Weekly jobless claims plummeted close to all-time lows last week, dropping to just 189k. The last time claims were this low was in the 1960s, when the labor market was much smaller. Layoffs remain very low, even as job growth continues to slow.

Wages, as measured by the Employment Cost Index (ECI), are slowing, according to data from the Federal Reserve Bank of St. Louis. Inflation is rising, driven by the recent sharp increase in oil prices, suggesting that inflation-adjusted wages are under pressure.

Federal Reserve (Fed) independence is alive and well. Energy prices are becoming more prominent in the Fed’s thinking.

Last week, the Fed kept the fed funds rate target range at 3.50% to 3.75%. Last week’s press conference was Fed Chair Jerome Powell’s final appearance as chair. Kevin Warsh is set to assume the role of Fed Chair going forward. Powell will stay on as a governor in an unusual move; the last time a retiring chairperson stayed on the Committee was in 1947.

Four Fed officials dissented during last week’s meeting, the largest number of dissenters since the early 1990s. Three officials objected to the easing bias in the latest Fed statement, preferring more neutral language. One official dissented in favor of rate cuts. The Fed specifically called out the recent rise in energy prices in their statement.

Bottom Line – how to invest now.

We expect volatility to remain elevated, and we continue to advocate for robust diversification. Bonds may continue to struggle to add ample diversification amidst an environment of larger federal deficits and higher interest rates. Bonds may show higher correlations with stocks in such an environment, leading to less portfolio diversification.

Even before the Iran War, we held the view that inflation could be persistent (due to rising nationalism along with other forces). The Iran crisis adds a material new source of risk, and although we don’t see history repeating itself in lock-step with the 1970s, investors may want to maintain allocations to real assets after the conflict ends.

Another argument for diversification: the S&P 500 index has become much more concentrated. In 2006, the S&P 500 had approximately 35% exposure to growth stocks, 39% blend, and 26% value, according to data from Bank of America (BofA). In 2026, the S&P 500 holds 46% growth stocks, 42% blend, and only 11% value stocks, according to BofA.

In sum, real investors need real assets, and U.S. investors need exposure beyond U.S. financial assets and concentrated indexes.

Markets generally “settle up” over time. Long-term investors should not become too bearish. Short-term and downside volatility is the price paid to earn long-term outperformance: in the last 75 years, on average, the S&P 500 experienced an average annual decline of 14% but historically still finished the year higher 78% of the time, according to Creative Planning.

Equity Takeaways:

Stocks were mixed in early Monday trading. The S&P 500 was essentially flat at 7228. The tech-heavy Nasdaq rose approximately 0.1%, while small caps fell approximately 0.2%. International shares were mixed.

The S&P 500 rose approximately 10.5% in April, a very strong rebound after the March selloff. Strong Q1:2026 earnings continued to help drive the market higher, and investors continue to look past the conflict in Iran.

After the sharp rebound rally in April, many market participants are looking for a period of consolidation, but the market carries strong momentum into May. We believe the current rally likely has more room to run, led by technology (specifically semiconductors). Conversely, within technology, the software sector remains under pressure.

Small caps outperformed large caps, and value stocks outperformed growth stocks year-to-date (YTD) through the end of April. Small value stocks have risen 15.2% YTD, while small growth stocks have risen 11.5% YTD. Large value stocks are up 10.4% YTD, while large growth stocks are up 0.9% YTD.

The energy sector (a value sector) is up approximately 33% YTD and is leading the market. Industrials and materials are next, each rising approximately 13% YTD. The two worst sectors have been healthcare and financials, down 5.3% and 4.5% YTD, respectively.

Fixed-Income Takeaways:

Treasury yields moved higher across the curve last week. 2-year yields rose approximately 10 basis points (bps) and have risen more than 40 bps YTD. 10-year yields rose approximately 7 bps last week.

In early Monday trading, Treasury yields rose another 3–4 bps across the curve. 2-year Treasuries were yielding 3.93%, 5-year Treasuries 4.07%, 10-year Treasuries 4.42%, and 30-year Treasuries 5.01%.

Before the war, market participants were expecting about 75 bps of Fed rate cuts by early to mid-2027. Now, traders expect the Fed to remain on hold for at least a year. Rising energy prices and the ensuant risk of higher inflation have caused a change in sentiment. The current fed funds rate is 3.50% to 3.75%.

Inflation is not localized to the United States. Longer-term bond yields are rising across the globe. Since the start of the Iran War, UK 10-year yields have risen almost 80 bps, German and U.S. 10-year yields have risen more than 40 bps, and Japanese 10-year yields have risen 30–40 bps.

Corporate bond spreads (both investment-grade and high-yield) remained stable last week with a tightening bias even as Treasury yields continue to rise. Corporate bond investors remain enticed by high all-in yields, despite tight spreads relative to history.