Earnings Strength Offsetting Inflation and Market Uncertainty

1. Markets Supported by Earnings Rather Than Multiple Expansion Markets were relatively flat last week, though the broader trend remains constructive, with the S&P 500, Nasdaq, and Dow Jones Industrial Average still up approximately 17%, 26%, and 9% from the March 30 lows,¹ respectively. A major driver behind this resilience continues to be improving economic growth expectations, with GDP growth accelerating to roughly 4%,² reinforcing the view that the economy remains on a solid footing despite ongoing geopolitical uncertainty.

Importantly, the rally this year has been driven more by fundamentals than by valuation expansion. Earnings growth across the S&P 500 remains exceptionally strong and broad-based, currently at 25%, well above the longer-term trend closer to 5%.³ Revenue growth has also remained healthy at approximately 11%, while profit margins continue to expand. At the same time, valuation multiples have actually contracted, suggesting the market’s gains have been supported primarily by improving corporate earnings.

2. Inflation Remains Sticky as Supply Constraints Persist Inflation data released last week came in somewhat firmer than expected, reinforcing concerns that price pressures may remain elevated for longer. Core CPI increased 3.8% year-over-year,⁴ while core PPI excluding food, energy, and trade services came in at 4.4%.⁵ The persistence of inflation continues to keep pressure on the bond market, where investors are increasingly focused on the combined impact of geopolitical tensions and the accelerating AI investment cycle.

Part of the inflation challenge stems from ongoing supply constraints tied to the AI buildout. Demand for semiconductors, memory, chemicals, and specialized infrastructure continues to outpace available supply, while labor shortages across key industries are adding additional cost pressures. As a result, the bond market has become increasingly sensitive to inflation risks, particularly as rising AI-related capital spending and ongoing supply constraints continue to put pressure on pricing and input costs.

3. Consumer Earnings Will Be the Next Key Test Looking ahead, investor focus will shift toward the consumer, with several major retailers reporting earnings this week, including Walmart, Target, and The Home Depot. These reports will provide important insight into consumer spending trends, pricing power, and the overall health of household demand.

The consumer has remained a key pillar supporting economic growth, but investors will be watching closely for any signs that higher prices, elevated interest rates, or geopolitical uncertainty are beginning to weigh more meaningfully on spending behavior.

4. Fixed Income U.S. Treasury yields finished the week sharply higher across the curve, driven by renewed inflation fears as escalating U.S.-Iran tensions and hotter-than-expected inflation data propelled Treasury yields higher. By Friday’s close, the 2-year yield rose 18 bps, the 10-year climbed 24 bps to a 12-month high of 4.59%, and the 30-year increased 18 bps to 5.12%, a level last reached in June 2007.⁶

Credit markets proved resilient despite the rates selloff, with tightening evident across both the investment-grade and high-yield sectors. Investment-grade spreads moved 2 basis points tighter to +109, while high-yield spreads narrowed 1 basis point to +322. Concurrently, credit quality also improved with the main rating agencies issuing 104 upgrades compared to 53 downgrades. In the municipal market, tax-exempt yields followed Treasuries higher, albeit at a slower pace, rising 9-12 basis points across the curve.⁷

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Return for Selected Indices⁸

Sources:

1. Bloomberg: As of May 18, 2026 ↩︎
2. Federal Reserve Bank of Atlanta: As of May 14, 2026 ↩︎
3. Bloomberg: As of May 18, 2026 ↩︎
4. Bloomberg: As of May 12, 2026 ↩︎
5. Bloomberg: As of May 13, 2026 ↩︎
6. Bloomberg: As of May 18, 2026 ↩︎
7. Bloomberg: As of May 18, 2026 ↩︎
8. Bloomberg. As of May 18, 2026 ↩︎

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