April came and went, and the war raged on. The month was sort of a blur with tax-day right in the middle of the month and very negative sentiment concerning the conflict and the world stock markets teetering on media induced shocks. All of this seems to loom large and make things incredibly difficult to decipher as one needs to separate the goings on in the world from what the equity markets are saying.
Welcome to the paradox of 2026. War in the Gulf has created “the biggest energy crisis in history”, according to the International Energy Agency. Violence has consumed other parts of the Middle East, as well as Sudan and Ukraine; populism, nationalism and angry polarization are rising in the west; debt burdens are sky-high; climate change is accelerating; and the AI revolution that so thrills Silicon Valley titans is also threatening to destroy jobs. Meanwhile, American consumer confidence has slumped to its lowest level on record.
But that is only one side of the story. We live in a golden age of science, which is not only unleashing a widely discussed revolution in AI but less-noticed miracles in life sciences and green tech. The global economy is still growing by more than 3 per cent a year. And perhaps most surprisingly, America’s stock market has recently been hitting record highs.
Yes, really: the US equity markets as measured by the S&P 500 index sits more than 3 per cent above its level in late February, at the start of the Iran war, and almost 30 per cent above its level a year ago. European, UK and Japanese equity indices have had a rockier ride, but remain fairly buoyant too, but are clearly very negatively affected by oil prices and the lack of goods moving through the Straits of Hormuz. So, what does the market really show now, as we ponder that soaring S&P? In recent weeks, I have had discussions with numerous people- throughout the world, posing this question, “What gives?” — and heard all manner of different answers. On the West Coast, the explanation for the bull run was clear: everyone is so exuberant about our golden age of science in general, and AI innovations in particular, that it seems entirely natural to them that the markets keep rising, even amid geopolitical gloom.
I believe that the opinions I heard out of New York truly illustrate what is creating this incredible bifurcation today: the related variant of this explanation for soaring stock prices: corporate profits. Bloomberg data suggests that 84% of the S&P 500 companies that reported first-quarter results this month beat analyst earnings estimates and have guided higher at an acerating rate to the last three years. This partly reflects the strength of Big Tech. But if you peer into the data, what is notable about recent months is that many non-tech companies are performing well too. Most predict this will continue, not least because they claim that AI will unleash productivity increases. That might be bad news for workers, since that often equates to lay-offs. But since rising profits boost share prices, another way to explain the rally — and its contrast with consumer sentiment — is that capital is gaining over labor.
A crucial wrinkle about 2026 is that today — unlike 2006 (post Dot Com bubble and prior to the Great Financial Crisis)— investors and corporate leaders have had plenty of recent practice at coping with nasty shocks. “Over the past few years, the global economy has endured the Russia-Ukraine war, central bank rate hikes and renewed trade tensions, yet growth has continued near trend, and inflation has come back down toward pre-pandemic norms.” Citi recently told its clients. “Once again, resilience may prevail.”
Divergences were notable this past week: the market made new highs while declines outnumbered advances and more stocks made new lows than highs. That’s not confirmation – it’s thinning participation beneath the surface. Another headwind is the Breadth within the market. While the index, itself, might be at new highs, the number of S&P stocks that closed Friday at new 52-week highs is well down from what we saw in February – less than half the number in fact. The average stock in the S&P 500 is down 16.54% from its 52-week high, which is also worse than back in mid-February right before the market rolled over. In other words, the broad market is arguably still weaker than it was only about three months ago despite the SPX being higher. Technology, of course, is the big driver of that discrepancy. Since the March 30th bottom in the S&P 500, only Technology and the two rate-sensitive Real Estate and Utilities sectors have actually hit new higher highs despite the S&P 500 rocketing to its own new high. There is time for that to change, of course, but so far the gains, while broad, have been disproportionately led by Tech, and, to a lesser degree, the rate-sensitive sectors.
The truly negative, historically important, market statistic is seasonality in a midterm election year. The Election Cycle and “Sell in May and Go Away” anomaly, popularized by the Stock Trader’s Almanac, effectively boil down to two six-month regimes:
Midterm May to October – the S&P 500 has delivered an annualized price return of -3.3% since 1930, the only negative window in the four-year cycle.
Midterm November to April – annualized price returns average +23.4%, with no down periods since 1950.
This brings me to the points that I am focused on currently. These are the issues that I think could derail the robust earnings growth that corporate America is exhibiting in glorious fashion. I say “corporate America” because apart from the other global markets we seem to be virtually unaffected by oil, its escalating and damaging price rise, and the inflation that could ultimately act as a cancer to the consumer as a result.
As we now see from the recent economic reports, the US is doing well economically. Inflation adjusted GDP of 2% is good. Negative commentaries about jobs was proven false Friday with data showing the lowest new unemployment claims since 1969. Wages are rising. While inflation is rising for now, this could easily reverse should the Iran situation gets resolved in the next 60 days. Oil prices are not high on an inflation adjusted basis. The increases in energy costs does hurt, but not to the extent the naysayers would like you to believe. Consumers continue to spend, although increased gas prices seem to be the biggest reason, and that does not build economic growth. We need more spending on goods. Note that tariffs no longer get much mention as a problem. In focusing on oil, Mark Newton of Fundstrat Direct put out a cycle study this past Friday after the markets were closed. Virtually nobody in the media picked this up. Mark says that this week or next oil could hit its high point in price and then decline. He believes this decline could take oil down to the high $50’s. Wow! Here is his cycle study:
Note the spike up that looks much like other price spikes (for clearly different reasons) going back to 2004. In every case the cycle work prevailed showing a calming in prices and a reversion back to the around the $60 level. Imagine the increased consumption of the US consumer when gas prices drop and the ability of the industrial side of the economy to redeploy the money spent on petroleum-based product elsewhere for the benefit of their companies.
The increased demand for US produced oil now beginning, might last after the straits reopen as the US is the safe reliable source. We have the ability to produce a lot more, but the drillers will need to see long term demand actually materialize before they step up production. Meantime they, and the US government through royalties, are making huge profits. Due to technology the real cost to produce a barrel in the US is said to range from around the mid-forties per barrel, to in the fifties, depending on who is drilling and where. Gyana is now in major production, and Venezuela is coming back slowly. We will see over the next few weeks if demand does really remain growing for US oil and gas, and if it does, then US producers will increase production. The real issue now is there is so much excess gas being produced as part of pumping oil that it is priced to nothing because there are insufficient pipelines to move it thanks to the climate crazies under Biden. This is the cleanest burning fuel and if we can collect and use it for the energy generation needed this could be very helpful.
In closing, I wanted to show how the technology centric NASDAQ 100 has been acting. As can be seen, it bottomed at the initiation of the conflict, and has not looked back. Why? I believe it is all about earnings, earnings, earnings, and of course forward forecasts. Whatever the case, it has been on quite a tear and if you were on vacation for a couple of weeks you totally missed it!
Sell in May and go away” is one of those pieces of “sage” market advice that doesn’t really hold up to scrutiny. As I mention around this time every year, "sell in May" is a historical quirk that doesn’t often play out as well in practice as the catchy rhyme would have us believe. When we look back at the S&P 500 over the past 20 years, there was, on average, a slight dip from early May into the end of the month, but that was fleeting and prices soon continued higher. And even that tendency to pause around this time of year has gone away over the past 5-10 years. Since COVID, the two main periods of market weakness have tended to be around February and then again in September. Otherwise, it’s been full steam ahead, on average. Of course, we should never base decisions solely on something like seasonality. Each year is different and must be treated as such.
Ken South, Tower 68 Financial Advisors, Newport Beach
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