May CRU: Earnings Fuel Recovery Amid Interest Rate Uncertainty

We’ve said it before, but what a difference a month (call it six weeks) makes. March was painful for investors as higher interest rates drove declines in both stocks and bonds. The disappointment was palpable – the Federal Reserve had been expected to lower interest rates two or three times in 2026, supporting stocks and bonds. Instead, the conflict with Iran and higher oil prices put rate cuts on hold. By March 30, the S&P 500 was off almost 10% from its all-time high at the end of January. 

Since then, the US equity market has experienced one of the sharpest performance reversals on record, with the tech-heavy Nasdaq 100 Index up 27%. Led by technology stocks, the S&P 500 closed at a new all-time high last week, and the Nasdaq finished its best six-week gain since 2009 as it rebounded from the financial crisis.

The explanation, in a word, is earnings. Combining realized (past) results and consensus estimates (about the future), S&P 500 year/year earnings per share (EPS) growth is tracking at 25%, more than twice the consensus estimate of 12% coming into this (Q1) earnings season. In fact, future earnings expectations are rising so fast that the valuation of the S&P 500 (measured as price / earnings) has declined despite the significant runup in price.

So what’s not to like?  For one, the expected earnings growth is extremely concentrated in technology companies participating in the AI infrastructure build-out. Micron alone accounts for over half of the expected 2026 S&P 500 earnings growth due to demand for its high bandwidth memory. Adding chipmaker Nvidia explains almost all of the expected growth.

Perhaps even more important, the markets’ hope for interest rate cuts has turned into a fear of rate increases. After a surprisingly high inflation report this week, futures markets suggest a higher probability of two rate increases by the end of 2026 than of a single rate cut. To be fair, both are seen as unlikely – markets think rates will probably stay the same, with a smaller chance of a rate increase. But the shift in expectations from just a few months ago is striking.

The new normal has Main Street in the doldrums. After hitting a record low in March, consumer sentiment (as captured by the University of Michigan’s long-running consumer sentiment survey) fell even farther in April, to another new low in the series’ history – it was higher even during the Global Financial Crisis and the depths of the 1979 recession. Interestingly, inflation expectations among survey respondents declined, suggesting that the extremely weak sentiment may be fueled by a confluence of factors, not just high gasoline prices.

Disclaimer: The information provided is for educational purposes only and is not intended as investment advice. Past performance does not guarantee future results. Investors should consult with a qualified financial professional before making any investment decisions.