Economy & Markets
Overview
The United Arab Emirates announced its exit from OPEC last week (Organization of the Petroleum Exporting Countries) in a move that could undermine the cartel’s ability to collectively influence the global oil supply and pricing. The move signals a deep rift with Saudi Arabia over the UAE’s desire to sell its oversupply rather than remain under the quotas imposed by OPEC. The impact on the price of oil in the short term has been muted given the restrictions present in the Strait of Hormuz. However, in the longer term, increased supply by the UAE will likely reduce the price of oil worldwide while diminishing the impact of OPEC’s pricing ability.
The Strait of Hormuz remains essentially closed and will be one of the main negotiating points for any type of peace agreement. According to Strategas, “Both sides, however, have vastly different definitions of what it means for the Strait to be open and negotiations are trying to bridge these points. Until then, Trump has decided to continue the current approach, which is to enforce the blockade on one end and apply economic pressure on the other end. The goal is to squeeze the regime to the point that it runs out of crude oil storage and money, forcing Iran to compromise its positions on the Strait and its uranium. Iran is doing the same, keeping the Strait closed to apply pressure to a president with diminishing political support, rising gasoline prices, an upcoming China meeting, and a wave election forming against Trump’s party. Taken together 1) neither side’s demands have been met; 2) negotiations are at a standstill; 3) both sides believe they have the upper hand and are unwilling to compromise; and 4) at the same time, neither side is seeking to escalate.”1
Despite the ongoing closure of the strait and elevated gas prices across the U.S., U.S. equity markets rallied during April hitting new all-time highs with the S&P 500 closing above 7,000 for the first time. The S&P finished up 10.5% for the month bringing its year-to-date return to 5.7%. Strong corporate earnings growth expectations and resilient consumer spending are supporting the markets. As stated previously, however, a prolonged increase in the price of oil, especially one that results in oil of $150 per barrel, will be a significant headwind to global economic growth and could cause a material selloff in global equity markets.
Investor Sentiment vs Consumer Sentiment
Investors may find it difficult to reconcile equity markets that are currently at all-time highs with a consumer sentiment reading that is currently at all-time lows. However, the reason for this may be rather straightforward. Consumer sentiment is driven by surveys of consumers across all income levels while investor sentiment and markets are driven those who own the majority of stocks in the United States – a mere 10% of the population. According to the Federal Reserve, the top 10% by net worth own more than 80% of stocks. This same group of investors are also the ones who drive consumer spending.
Since the price of gasoline weighs much more heavily on lower income Americans living check to check, it stands to reason that consumer sentiment is at an all-time low. While projected tax refunds should help, they will only temporarily cover the higher living expenses resulting from higher prices at the pump.
Ironically, and at the same time, corporate earnings are projected to grow at double digits this year. With that said, if the war in Iran persists and pushes oil prices towards $150 or more a barrel, corporate earnings will most certainly fall short of expectations, and stocks will likely experience a pullback. A similar situation was observed during COVID when the S&P 500 kept making new all-time highs even as unemployment was surging and businesses were closing. Hence, the K-shaped economy.
U.S. Equities
Corporate earnings continue to drive U.S. stocks higher. According to FactSet, with 63% of companies having reported, “for Q1 2026, the blended (year-over-year) earnings growth rate for the S&P 500 is 27.1%. If 27.1% is the actual growth rate for the quarter, it will mark the highest earnings growth rate reported by the index since Q4 2021 (32.0%) and the 6th consecutive quarter of double-digit (year-over-year) earnings growth for the index.”
The chart below indicates a reversal from recent years in that the non-Mag 7 stocks are expected to finally outpace six of the Mag 7 stocks, excluding Nvidia. This increased breadth reflects a positive trend for a healthy market with breadth.
Technology and AI
Speaking of tech, an interesting development has been the divergence in performance of its two largest underlying components – semiconductors and software. In this scenario, semiconductor stocks have emerged as beneficiaries of the AI buildout by powering the computational advancements leading to stronger and more efficient AI models. At the same time, many software companies will now be potentially displaced by AI despite continuing to report record profits.
This can be seen in recent stock market trends. Year to date, software stocks are down nearly 21% while the overall tech index has returned 11%, due mostly to semiconductor stocks that are up a whopping 41%. As a result, semiconductors have grown to be around 16.9% of the S&P 500, while software stocks have fallen to 8.8% of the index. It will be key to see how software stocks can get ahead of the AI disruption by integrating AI into their own products and utilizing their own proprietary data to create a moat for defense against new AI-driven competitors.
As tech continues its strong streak of performance, it is important to remember that not all tech is created equal, and while AI is a major market theme driving many stocks higher, many other companies will find themselves having to defend against fears of disruption.
Federal Reserve
Last month, the Department of Justice (DOJ) removed the final impediment to Kevin Warsh’s confirmation as the next Chairman of the Federal Reserve by announcing it is dropping its probe of Chairman Powell. This was precipitated by North Carolina Senator Thom Tillis’ refusal to move forward with a full senate confirmation of Warsh unless the probe against Powell was dropped.
Despite the expectation that Warsh will support an accommodative monetary policy, markets are still projecting zero cuts during the rest of 2026 as Warsh will have to build consensus among voting members for further cuts. Warsh will have challenges as evidenced by the results of the Fed decision last week to leave rates steady. At the meeting on April 29, 2026, there was a high level of disagreement resulting in 4 “dissents” – this marked the highest number of dissents since 1992, signaling a major rift among officials regarding the future of interest rates and inflation. (See CAQ for more discussion regarding Warsh)
As expected, the Fed did not cut rates last week. During his expected last press conference as Fed Chairman, Powell stated that “You know, the thing to remember is we have always had vigorous debates, and they’re excellent debates. I have to say, they’re — they’ve been really good. And we’re in an unusually difficult situation so we’ve really had four supply shocks. You can — actually, you can say more than four, but, at a minimum, we’ve — we had the pandemic, we had the invasion of Ukraine, we had tariffs, and now we have Iran and the oil — you know, the oil spike. So those — every — every supply shock has the capability of, right, driving inflation up and unemployment up. And what do you do? You know, you’re — it’s — the central bank has a really hard time knowing what to do. So the right thing to do is to try to balance the achievement of those two goals. And that’s what our framework calls for us to do. But these are really tough, difficult judgments. You’ve got to have a forecast for each variable. You’ve got to think how long it’s going to take to get back to target. You’ve got to think how restrictive or not is policy. So it’s only natural that you have a range of views on the Committee. You know, people are going to see it different ways, they’re going to have different risk tolerances and that kind of thing. I mean, if everybody agreed, that would be — that would be surprising. And I think it’s only — it’s partly a function of the extraordinarily challenging set of supply shocks that we’ve been dealing with now for five, six years.”2 During the press conference, Powell did announce that he intended to stay on as a Fed governor through the end of his term in January 2028.
Geopolitics
The current geopolitical environment is unusually interconnected, with the wars in Ukraine and Iran now influencing each other and broader global dynamics. In Ukraine, the conflict remains a stalemate on the battlefield, with heavy casualties and limited territorial changes on either side. Recent diplomacy has centered on the possibility of a temporary ceasefire, though major obstacles remain—particularly Russia’s demand that Ukraine cede territory. At the same time, Ukraine has stepped up drone strikes and adapted its military strategy, while also being affected by shifting global priorities as attention and resources are diverted toward the Middle East.
The conflict with Iran has rapidly become the central geopolitical flashpoint. The ongoing U.S.–Iran war has disrupted global energy markets with blockades and tensions in the Strait of Hormuz pushing oil prices sharply higher and threatening global trade. Negotiations remain fragile and talks have stalled as Iran has not been willing to address its nuclear ambitions to satisfy the U.S. The war is also reshaping alliances as Russia is benefiting economically from higher oil prices and leveraging the conflict to strengthen its position in Ukraine, while U.S. allies in Europe and the Middle East are increasingly divided over strategy.
Looking ahead, the anticipated summit between China’s President Xi Jinping and Trump adds another critical layer to the current state of geopolitics. Both sides have signaled a desire to stabilize relations, but tensions are rising ahead of the meeting due to trade disputes, supply chain pressures, and competition over technology and energy, particularly tied to Iranian oil flows and global AI leadership. Recent high-level talks between U.S. and Chinese officials have been described as “candid” but underline deep disagreements, suggesting the summit will be less about breakthroughs and more about managing rivalry. (See CAQ for additional discussion regarding the Iran War and China)
Markets
⮚After ending Q1 2026 in the red, U.S. equities rallied during April. The S&P 500 rose 10.5% during the month, bringing its year-to-date (YTD) return to 5.7%. International stocks also rallied during April and ended the month up 8.2% YTD.
⮚The yield on the U.S. 10-year Treasury ended April where it started the month near 4.4%. Treasury yields continue to face pressure from a mix of inflation concerns, heavy Treasury supply, and shifting expectations for Federal Reserve policy. Stronger-than-expected economic data—particularly on inflation and consumer spending—led investors to push back the timing of rate cuts, keeping yields elevated as markets repriced for a “higher for longer” environment.
Economic Trends
⮚The University of Michigan consumer sentiment fell to an all-time low in April. The final reading of 49.8 marked the lowest level in the survey’s 50+ year history. This record low was driven by concerns regarding the war with Iran and high inflation resulting from higher oil prices.
⮚Headline CPI jumped in March to 3.3% from 2.4% in February, driven by the effects of higher oil prices as a result of the war in Iran and closure of the Strait of Hormuz. Core inflation, which excludes energy and food prices, only increased 0.1% to 2.6% from the previous month. Energy prices will continue to put upward pressure on inflation as long as oil prices remain elevated.
⮚The initial reading of the Q1 GDP real growth rate came in at 2%, slightly below consensus forecasts. This was an acceleration from the 0.5% growth in the previous quarter. Government spending rebounded by growing 4.4%, recovering from a 5.6% contraction in Q4 2025 caused by the government shutdown.
SFG’s Take:
If the war with Iran continues for an extended period of time, higher oil prices will weigh on consumers and corporations. Higher prices at the pump will be a headwind to consumer spending, and profit margins for corporations could be negatively impacted, especially for energy intensive businesses. It is likely that stock market volatility will remain elevated during this conflict.
SFG continues to focus on diversification across asset classes, including private alternatives such as infrastructure, real estate, private equity and private credit. Public stock valuations are elevated relative to history, but strong earnings growth, positive investor sentiment and a decent economy continue to provide support for stock markets. Eventually AI productivity growth should help maintain strong profit margins.
As we have discussed, it is imperative that investors be in the correct risk tolerance for their own personal situation. If you have concerns, please do not hesitate to reach out to your wealth advisor.
Sources:
1Policy Outlook – Iran’s Hot War Is Becoming A Frozen Conflict With Both Sides Trying To Apply Maximum Pressure, Strategas, April 29, 2026.
2Transcript of Chair Powell’s Press Conference, Federal Reserve, April 29, 2026.
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