Fixed Income & Equities Markets Week in Review

US equities extended their rally this week, supported by a strong first quarter (Q1) earnings season and improving sentiment. While geopolitical headlines tied to the US-Iran conflict remained fluid, market expectations continued to lean toward a diplomatic resolution. At the same time, Q1 earnings continued to support bullish sentiment; the Q1 blended earnings growth rate for the S&P 500 now stands well above 20%. From an index perspective, the Nasdaq Composite was this week’s performance leader, up 2.8% through Thursday’s close, as the AI trade has continued to see renewed traction in recent weeks.

The US market opened the week on softer footing with market sentiment taking a hit from geopolitical developments. Reports the UAE had intercepted Iranian missiles triggered an early week risk-off tone. Monday saw a rise in both US Treasury yields and the price of WTI crude. The yield on the 10-year approached 4.5% and the yield on the 30-year topped 5%. WTI traded above $105/barrel. However, as the week progressed, sentiment improved, driven in part by a report suggesting the US and Iran could be close to an agreement. Indications of potential progress on the peace front helped stabilize markets and saw Treasury yields modestly retreat and WTI ease back toward the mid-$90/barrel range. While geopolitical risk remains a potential overhang, markets continue to price in a high probability of further de-escalation.

Q1 earnings and bullish AI compute demand updates remain key catalysts underpinning US equities’ performance. Per FactSet, Q1 S&P 500 blended earnings growth is now tracking at 27.7%, well above the 13.1% growth expected at the end of the quarter. Results from the likes of Alphabet, Amazon, and Meta Platforms have been meaningful contributors to the jump in Q1 earnings growth. Hyperscalers have highlighted robust demand for AI compute with both Alphabet and Amazon reporting large increases to their respective cloud backlogs. This demand, in conjunction with AI capex outlooks, have translated into some notable gains across the AI stack. Semiconductor stocks have been a huge part of that move with the iShares Semiconductors ETF (SOXX) higher by 58.9% between March 30th and May 7th. Shares of individual names such as Intel have posted exceptional returns over that same timeframe, those shares were higher by 166.1%. Additionally, equities tied to data center infrastructure and power, such as Caterpillar and Quanta Services, have also delivered strong performance as beneficiaries of massive AI capex spending.

Despite the strong performance for US equity indices in recent weeks, market breadth has seemingly narrowed as capital has rotated back to the AI trade. Narrowing market leadership is something to monitor. That said, looking at year-to-date gains, small cap equities have outperformed, with the Russell 2000 up nearly 15% which may suggest investor interest beyond the AI trade.

Monetary policy no longer looks like a 2026 tailwind for US equities. Entering the year, investors anticipated multiple Federal Reserve rate cuts, those expectations have since been largely dissipated. Current probabilities suggest the policy rate will remain unchanged through year-end, with a moderate probability of a rate increase even. With the US-Iran conflict still ongoing, the ultimate impact on growth and inflation remains unknown. Robust AI investment has become an additional inflationary risk to consider as well. Despite ongoing geopolitical volatility and related economic uncertainties, currently, the path of least resistance appears to be higher for US equities.