LaSalle St. Market Mile Markers – May 2026
Key Takeaways:
• U.S. equities staged a powerful ceasefire-driven rebound in April, fully erasing March’s losses. The S&P 500 gained +10%, the Nasdaq surged +15%, and the Russell 2000 rallied +10%, with all three posting new all-time highs. Nearly all of the S&P 500’s gain was compressed into two brief windows around the April 8 U.S. and Iran ceasefire and the April 17 Israel and Lebanon ceasefire. Growth outpaced Value by +8%, reversing Q1’s rotation. Semiconductors led the rally, with the SOXX ETF gaining +40% on a 17-day winning streak, while the equal-weight S&P 500 underperformed the cap-weighted index by nearly -4.5%, reflecting narrow, mega-cap-concentrated breadth.
• Gains were uneven across different parts of the market. Technology returned +19% but masked a stark internal divide: semiconductors surged while software declined due to AI disruption concerns. All ten remaining sectors underperformed the S&P 500, with Energy and defensive sectors lagging the most. International equities underperformed U.S. markets, weighed down by their limited exposure to the growth and AI trade. Emerging markets gained +12%, while developed markets returned +5%, with Europe and Japan impacted by the continued oil supply disruption.
• Fixed income markets diverged beneath the surface. Treasury yields rose across the curve as the Federal Reserve held rates steady and rate-hike fears receded. High-yield spreads tightened nearly 50 basis points to 2.85%, reversing almost all of Q1’s spread expansion in a single month. Investment-grade spreads tightened 10bps to 0.80%. The MOVE Index collapsed 29 points. Treasuries produced a modest loss as yields rose, while corporate bonds outperformed as spread tightening drove returns. The speed and magnitude of the credit rally is notable given the backdrop, with the physical disruption unresolved and oil prices still elevated.
• Oil markets were among the most volatile in the post-pandemic era. WTI crude rose +7% on the month, but the headline obscures extreme intra-month volatility, with a trading range from a high near $115 to a low near $80 – the widest since the COVID-19 pandemic. Ceasefire announcements triggered sharp single-day selloffs before re-escalation pushed prices back above $105. Total absolute movement across the month approached 83%. The Strait of Hormuz, which carried approximately 20 million barrels per day before the conflict, remains functionally closed, with daily tanker crossings falling from hundreds to just 3–5 daily. The Pentagon has warned that mine-clearing could take months.
• Federal Reserve policy expectations shifted in April. The minority expectation at each remaining 2026 Fed meeting flipped from a rate hike to a rate cut, driven largely by oil’s intra-month pullback reducing near-term inflation concerns. The base case remains a hold at every meeting, with the probability of a cut below 15%. Separately, the DOJ dropped its investigation of Fed Chair Powell, clearing the path for Kevin Warsh’s confirmation as Powell’s successor. Powell’s term expires May 15, introducing a period of policy and communication uncertainty as markets adjust to new leadership.
Ceasefire Relief Rally Masks an Unresolved Physical Disruption
April’s equity rally was broad-based and largely sentiment-driven, occurring despite several fundamental developments that have yet to be fully resolved. Progress on diplomatic fronts, including dialogue between the U.S. and Iran, the extension of an existing ceasefire, the continuation of the Israel–Lebanon ceasefire, and de-escalatory public rhetoric contributed to a reduction in the geopolitical risk premium that had weighed on equities during Q1. Major indices, including the S&P 500, Nasdaq, and Russell 2000, closed the month at new all-time highs. Asset manager positioning in S&P 500 futures rose to its highest absolute level since late 2024, while equity ETFs recorded notable inflows as investors increased market exposure.
At the same time, developments on diplomatic and military fronts appear misaligned. Physical energy supply disruptions remain unresolved. The U.S. naval blockade of Iranian ports remains in place, and transit through the Strait of Hormuz continues to be severely constrained. The IEA has described the situation as the largest energy supply disruption on record. Retail gasoline prices remain above $4 per gallon, while headline CPI rose 0.9% month over month in March, which the largest increase since June 2022 and brings in year-over-year inflation to 3.3%. Core PCE inflation stands at 3.2% year over year, above the Federal Reserve’s 2% target and trending higher. Producer prices also continue to rise, with headline PPI at 4.0% year over year.
Credit markets exhibited a significant tightening in financial conditions during April. High-yield spreads narrowed by nearly 50 basis points over the month, reversing most of the widening seen in Q1, despite ongoing energy supply constraints and elevated oil prices. The MOVE Index declined sharply, falling 29 points. Investment-grade spreads tightened by approximately 10 basis points to 0.80%. The pace and scale of spread compression suggest that markets are discounting a favorable resolution to current disruptions that has not yet occurred.
Equity valuations recovered part of the prior decline but remain below pre-conflict levels. The S&P 500 forward P/E increased to 21x from 19.7x at quarter-end, though it remains below late-February levels. The multiple recovery has been supported in part by upward earnings revisions rather than solely by multiple expansion. With approximately half of S&P 500 constituents having reported results, blended Q1 earnings growth is tracking a sixth consecutive quarter of double-digit growth, exceeding the five-year average. Net profit margins reached 13.4%, the highest level recorded since FactSet began tracking the data in 2009. Consensus estimates call for approximately 18% earnings growth over the next 12 months. Market reactions show that median one-day stock price responses to earnings beats are smaller than reactions to earnings misses, indicating heightened sensitivity to downside surprises.
Macroeconomic data have generally been supportive of the rebound in risk assets. The U.S. Business Cycle Indicator moved back into expansion territory in April after remaining in contraction since May 2025. The ISM Manufacturing PMI remained above 50 for a third consecutive month, indicating continued manufacturing expansion. Real GDP grew at an annualized rate of 2.0% in Q1 2026, rebounding from 0.5% growth in Q4 as the effects of the government shutdown reversed. Labor market conditions continue to soften gradually, with unemployment declining to 4.3% in March after peaking at 4.5% in Q4, without signs of sharp deterioration.
Looking ahead, key uncertainties center on whether ongoing supply disruptions redirect capital toward real economic activity or back into financial markets, and whether sustained energy price pressures prompt a more restrictive policy response from the Federal Open Market Committee. Investor flows have recently favored U.S. mega-cap technology companies, reflecting relatively higher earnings visibility among AI infrastructure providers compared with AI adopters. However, if capital formation fails to recover following a reopening of the Strait of Hormuz, it would raise questions about confidence in AI-driven productivity gains being sufficient to meet return expectations for 2027–2028. Historical precedent suggests that transformational technologies can coexist with prolonged periods of market repricing, as demonstrated during the early stages of the internet era.
Why It Matters for Markets and Investors
• Breadth remains narrow despite new all-time highs. Stock Market Breadth for the S&P 500 sits near record levels. The rally has been concentrated in semiconductors and mega-cap technology stocks, with the equal-weight S&P 500 underperforming the cap-weighted index by nearly -4.5%. Sustained rallies require broadening participation; the current leadership concentration leaves the index vulnerable if sentiment around the AI and growth trade shifts.
• Earnings are strong, but the bar continues to rise. With 50% of S&P 500 companies reported, Q1 blended earnings growth is on pace for a sixth consecutive quarter of double-digit growth, with net profit margins hitting a record 13.4%. Analysts forecast +18% earnings growth over the next 12 months. The pace of positive revisions is running significantly above historical averages. While the near-term picture is constructive, the elevated bar for continued beats represents a growing source of downside risk if macro headwinds materialize.
• Federal Reserve transition introduces policy uncertainty. Fed Chair Powell’s term expires May 15, and Kevin Warsh is expected to succeed him following the DOJ’s dropping of its investigation. Warsh inherits a complicated environment as the market is pricing zero cuts in 2026 and the administration has expressed a preference for rate reductions, as the oil shock has introduced inflation risk. Beyond policy decisions, markets will need to adjust to a new leadership style at a time when the Fed’s independence is already under scrutiny.
• Inflation risk lingers despite near-term relief. Headline CPI surged to +0.9% month-over-month in March, pushing the year-over-year rate to +3.3%. Core PCE remains at +3.2% year-over-year, 1.2% above the Fed’s 2% target. Gasoline remains above $4 per gallon, and producer prices continue to rise at +4.0% year-over-year. The oil repricing in late April reduced near-term inflation concerns, but the continued closure of the Strait of Hormuz means the inflationary backdrop remains structurally uncertain.
• Economic recovery is broadening but uneven. The US economy returns to expansion territory for the first time since May 2025. GDP grew at +2.0% in Q1 2026, and the ISM Manufacturing PMI held above 50 for a third consecutive month. However, the labor market is softening, with monthly job growth volatile and job openings declining to 6.9 million. Consumer sentiment remains near historic lows despite continued spending. The recovery is real but fragile, and elevated energy prices represent a direct risk to its durability. However, productivity growth remains a potential catalyst for corporate profits.
• Traditional diversification continues to face structural challenges. April’s bond performance reinforced a key theme from our 2026 Outlook: Treasury yields rose while equities rallied, producing positive correlation between the two asset classes in a risk-on environment, but also removing the cushion in risk-off scenarios where inflation fears prevent bonds from rallying. With the Fed unlikely to cut rates and the oil disruption keeping inflation uncertainty elevated, the traditional stock-bond diversification relationship remains unreliable. Investors should continue to emphasize non-traditional diversification and peak diversification strategies in portfolio construction.
Important Disclosures
Securities are offered through LaSalle St. Securities, LLC (LSS), member FINRA/SIPC. Advisory services offered through LaSalle St. Investment Advisors, LLC, a Registered Investment Advisor affiliated with LSS. This material has been prepared by LaSalle St. Securities, LLC and/or its affiliated registered investment adviser. As such, the firm and its affiliates have a financial interest in providing investment advisory and brokerage services. This creates a conflict of interest, as the firm or its affiliates may benefit financially if a reader chooses to engage their services. The views expressed may reflect the interests of the firm and its affiliates and should not be viewed or relied upon as independent or impartial research or analysis.
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