Market Thoughts: The Tide is high

There are pockets across equity markets where adrenaline’s spiking. Space stocks by way of example. To call some of those names overbought is a disservice to moonshot investing. For stock operators, trade cautiously. The tide’s high for risk-taking.

Strength across the broad U.S. equity market remains an earnings story. Analysts continue to ratchet up targets on the S&P 500, driven by earnings revisions. In round numbers, consensus seems to be anchoring on +25% earnings growth this year. Mid-teens next year. Low-teens the following.

If I ground earnings growth next year in the mid-teens, I can back into the S&P 500 forecasts being bandied about. Analysts seem to be converging around an ‘8000-ish’ (plus or minus) target. If earnings prove accurate, we get there without a meaningful expansion in the market multiple. Like last year, it will be earnings doing the heavy lifting. Not run-away exuberance.

That’s good news that positively reinforces risk-taking. But there’s a lot riding on earnings, the market’s principal driver. Until proven otherwise, we’re in a bull market. But I kicked off my note with an observation about space stocks for a reason. It’s a parable for how investor psyche can swiftly shift to euphoria. Rational turning irrational? Eventually… but we’re not there yet.

Markets don’t only move in straight lines. We’ve been moving higher since the end of March. A pause seems in order. That said, the path of least resistance is up. That’s especially the case if we have an armistice hold between the U.S. and Iran, and the Strait reopens.

Regardless, there’s complacency about the lagging effects of higher energy prices on inflation and growth ahead. We saw a bit of that creep into April economic data. The headline personal consumption expenditures index (PCE) rose 30bps, to 3.8% year-over-year. Core PCE, the Federal Reserve’s (Fed) preferred inflation measure, increased 10bps to 3.3%. Both readings far away from the Fed’s 2% target.

Major central banks meet in June to discuss monetary policy. We’re likely to see the European Central Bank and Bank of Japan raise rates. The Bank of England may hike, but it’s a close call. The Fed will welcome in a new Chair, Kevin Warsh. I believe they’ll keep policy rates on hold.

AI-related trades are at the center of bullish sentiment. Again, for the right reasons… it’s earnings driven. A key question for investors? How long it takes for macro models to begin to incorporate the productivity boost we’ll recognize looking back at this period. Time will tell.

Investors won’t get twitchy until earnings wobble. Until then, animal spirits reign. Path dependent on the next headline or tweet. Keep a close eye on energy prices, they’re the leading indicator for where risk appetite pivots to next.

For now, we maintain our overweight to U.S. equities and extended credit, funded from core bonds. Procyclically positioned, with the risks we’re taking well-diversified across portfolios.

“The tide is high, but I’m holdin’ on / I’m gonna be your number one...” Blondie

Unless explicitly stated otherwise, all data is sourced from Bloomberg, Finance LP, as of 5/28/26

Opinions, estimates, forecasts, and statements of financial market trends that are based on current market conditions constitute our judgment and are subject to change without notice. We believe the information provided here is reliable but should not be assumed to be accurate or complete. The views and strategies described may not be suitable for all investors.