Markets Roar Back: Why Earnings, Consumers, and Fundamentals Are Driving the Rally

Markets have staged a remarkable recovery since the Middle East conflict began in February.

The drawdown was sharper than most historical geopolitical events, and the rebound has been stronger.

Most major asset classes now sit above where they were at the start of the conflict.

The whiplash was real, but so is the recovery.

We see three forces driving this recovery.

First, investor behavior has changed structurally.

Market participants have been conditioned to be nimble during geopolitical stress as risk dislocations from initial headline shocks have often been short lived.

Second, the economy has proved resilient.

Third, corporate fundamentals remain strong.

On the macro side, the picture is more nuanced.

Inflation remains sticky, particularly in services, and most major economies are still running above central bank targets.

The rate cut narrative many investors were positioning around heading into 2026 has essentially evaporated.

Expect more "wait and see" from the Fed at this week's meeting, and in some markets, rate hikes are back on the table.

If your portfolio positioning is dependent on near-term policy accommodation, we believe now is the time to reassess.

Consumer activity, however, remains a genuine bright spot.

Same-store sales are near the top of their historic range.

TSA traveler throughput, restaurant dining, and hotel occupancy are all holding firm, even with gas prices above $4 a gallon.

Based on these compelling data points, we do not see many durable signs of consumer stress in the high frequency data.

Since the start of earnings season, we have seen a few compelling themes around AI capex, productivity gains from Tech investment, and multi-speed consumers.

The S&P 500 is tracking 14% year-over-year (YOY) earnings per share (EPS) growth for Q1, and the magnitude of beats so far could push that figure into the high teens if the trend holds.

Analysts typically spend earnings season revising numbers down.

This season, the opposite appears to be happening.

Technology continues to lead the market with expected 48% YOY EPS growth, driven in large part by phenomenal earnings from semiconductors.

Over the past two years, the structural $1.5 trillion surge in AI-related capex into data centers and chips has powered this sector.

We expect the spend to continue and even move higher.

Beyond Tech, some nascent productivity gains are flowing through to companies in sectors ranging from Healthcare to Consumer Staples.

We expect management teams to continue to highlight AI productivity improvements over the course of 1Q26 reporting.

This week is exceptionally important.

Nearly half the S&P 500 by market cap reports earnings.

The Fed, the Bank of England (BoE), and the European Central Bank (ECB) will convene.

We expect the Fed will leave forward guidance to its June policy meeting, which will bring an updated Summary of Economic Projections and a new Fed Chair.

The BoE and ECB are expected to hold rates steady this week, but markets lean toward rate hikes from these two central banks in June.

The Bank of Japan (BoJ) left rates unchanged this week, but three policymakers voted for a rate hike, the highest level of dissent in ten years.

The data and guidance that comes out of this week's meetings will set the tone for sentiment through the summer.

We recently added to U.S. equity risk when markets felt oversold during the peak of geopolitical volatility.

We remain constructive, and the fundamental evidence continues to support that positioning.

Bottom line: Equity markets are back at all-time highs because the forces driving them – changed investor behavior, a resilient economy, and strong fundamentals – remain firmly in place.

Uncertainty and volatility are not going away, but neither are the structural tailwinds pushing risk assets higher.