Despite continued geopolitical gridlock that has kept the Strait of Hormuz largely closed—and pushed West Texas Intermediate crude oil above $100 last week for the first time since the April 8 ceasefire announcement—U.S. equities continued to climb. The S&P 500 closed at a record high on Friday as investors looked through higher energy prices and focused on an economy that, for now, is still holding together: resilient first-quarter growth, signs that the labor market is stabilizing, strong earnings, and interest rates that have drifted higher only modestly.
That backdrop made last Wednesday’s Federal Reserve meeting stand out. Policymakers held the Fed funds rate steady, but the meeting produced the largest number of dissents since October 1992, with four of 12 voting members opposing the decision. The timing was notable as well: It was Jerome Powell’s final meeting as chair, closing an eight-year tenure defined by unusually strong consensus. Governor Stephan Miran again dissented in favor of rate cuts, while three regional Fed presidents dissented for a different reason—objecting to policy language that they felt signaled an easing bias at a time when inflation risks remain elevated. In other words, the disagreement wasn’t about where rates are today but about how much the Fed should be considering to cuts while the economy is facing potential supply shocks from the Middle East and inflation is proving sticky.
This gets to the delicate balance we continue to highlight. Real gross domestic product (GDP) growth in Q1 came in at a resilient 2 percent (seasonally adjusted annual rate), a sharp rebound from the prior quarter’s 0.5 percent reading that was weighed down by the government shutdown. But the details also suggest a narrower growth backdrop than the headline implies. The quarter benefited from supportive fiscal dynamics—both the stimulative impulse from the One Big Beautiful Bill Act and deferred government spending from Q4 that was expected to provide a meaningful lift (the Hutchins Center at Brookings estimated this fiscal impulse alone could add roughly 2.1 percent to Q1 growth). Even with larger tax refunds, consumer spending rose 1.6 percent, down from 1.9 percent in Q4 and among the slower prints of the past two years. The personal saving rate fell to 3.6 percent in March—a level exceeded only in the immediate aftermath of the post-COVID spending splurge and, before that, in October 2008 in the final months of the Great Financial Crisis signaling that households are increasingly prioritizing spending over saving and have less financial cushion if conditions soften.
Read more: Earnings Drive Stock Prices
Another important takeaway from the GDP report is how concentrated the growth impulse remains. AI-adjacent investment continues to do a disproportionate amount of the heavy lifting, with information processing equipment up 43.4 percent and intellectual property products up 13 percent, driven by software. Together, these categories—about 13 percent of the economy—accounted for 1.53 of the 2 percent overall growth, after contributing 0.96 percent of Q4 2025’s 0.5 percent growth, reinforcing why continued heavy spending on artificial intelligence has mattered not just for a narrow slice of the equity market but for the broader macro picture as well. It also helps explain why some policymakers remain reluctant to tighten financial conditions further, especially with a labor market that has been narrow and slowing since the beginning of 2025.
In his press conference, Chair Powell appropriately described current economic conditions as an "unusual and uncomfortable labor market balance where if you don’t have a job, you don’t get one unless someone quit." From that perspective, keeping the door open to cuts in 2026 can look like risk management. From another perspective, particularly with inflation still above target, the bigger risk is cutting too soon.
Inflation data released the same day reinforced why that debate is intensifying. Headline prices rose 0.7 percent month over month, helped by higher energy, but core inflation still ran at a firm 0.3 percent, pushing the year-over-year measure to 3.2 percent, the highest since January 2024. More importantly, the Fed has now been above its 2 percent target for more than five years with no progress since the end of 2024. The ongoing risk is that what begins as an energy and tariff-related impulse bleeds into the service sector of the U.S. economy and becomes more embedded in the behaviors and actions of consumers and corporations. This report did little to ease this growing concern: Services inflation rose 0.32 percent and is up 3.4 percent year over year. A narrower measure the Fed prefers, “supercore” services ex-shelter, rose 0.35 percent, lifting three- and six-month annualized rates to roughly 4.5 percent and 4.2 percent, respectively. With inflation momentum still running hot in the parts of the economy that are typically slow to cool, it is understandable why some Fed officials are uncomfortable continuing to signal an easing bias.
Against that backdrop, Federal Reserve Chair nominee Kevin Warsh advanced in the confirmation process this week, passing a key vote in the Senate Banking Committee. A full Senate vote is expected in the week of May 11, ahead of Powell’s term ending on May 15. Warsh would inherit a Fed that appears more divided about the path forward at the same time as the White House continues to press for lower rates. If confirmed, Warsh—who has argued for less forward guidance—may welcome the push from dissenters to avoid language that reads like a promise to cut. Either way, the policy environment is shifting, and while we believe the bar for rate hikes remains high, the bar for rate cuts appears to be moving higher as well.
Looking ahead, this week’s focus shifts back to the labor side of the mandate, where recent data has suggested a market that remains steady. Our base case remains that the U.S. economy is resilient—but operating with a narrower margin for error: Growth is increasingly dependent on a concentrated set of investment drivers, consumer spending is slowing, and a low saving rate leaves households with less buffer if inflation stays higher for longer. The constructive takeaway for investors is that opportunities remain. As AI continues to diffuse beyond a handful of headline names such as those in the Magnificent Seven, we continue to see an expanding set of companies, both large and small, that benefit not only from enabling the build-out of AI but also from using it to increase the productivity and profitability of their workers.
Wall Street wrap
AI boosts GDP in Q1: An advance estimate for first-quarter 2026 GDP from the Bureau of Economic Analysis (BEA) released last week showed the economy growing at a solid 2 percent in the first quarter of 2026, a notable and reassuring acceleration from last quarter’s modest 0.5 percent growth.
Contributing to that growth were themes of technological transformation and shifting consumer attitudes. For the second straight quarter, two AI-tied segments of the economy did the heavy lifting, with information processing contributing 0.83 percentage points to the overall 2 percent growth and intellectual property adding another 0.7 percentage points. While these two segments represent only about 13 percent of the overall GDP, they are the primary engines driving economic expansion, echoing Q4 2025, when these same tech-driven segments contributed 0.95 percentage points to the 0.5 percent total growth.
Meanwhile, consumer spending was up 1.6 percent, contributing 1.08 percentage points to the 2 percent GDP figure. While the consumer is still participating in the economy, that spending pace has noticeably slowed.
Improved employment outlook clashes with ongoing inflation concerns: The latest consumer confidence data from the Conference Board last week reflected improving attitudes surrounding the labor market, counter to the most recent University of Michigan Consumer Sentiment Index, which, as discussed last week, hit historic low due to inflation concerns.
The headline Consumer Confidence Index edged higher to 92.8 in April, a modest increase of 0.6 points from March’s upwardly revised reading of 92.2. A significant driver of this improved sentiment was the temporary ceasefire in the Middle East conflict, helping spark a rebound in the equity markets and offering a much-needed reprieve for consumers.
Importantly, the labor market differential, a key indicator of economic health that measures the percentage of consumers who believe jobs are “plentiful” minus those who say jobs are “hard to get,” increased to 7.5 percent from the 6.1 percent recorded in March. In a more optimistic development, the number of respondents who reported jobs were hard to get dropped to 19.8 percent, down from 21.3 percent the previous month, while the number who reported jobs as plentiful remained virtually unchanged at 27.3 percent.
Consumers also became less negative about the future of the job market, with the percentage of those expecting fewer jobs in six months decreasing to 26.9 percent (down from 27.8 percent in March), while the number of those expecting more jobs rose to 16.1 percent, up from 15.4 percent.
PCE inflation spikes amid Middle East conflict: Headline Personal Consumption Expenditures (PCE) inflation accelerated to an annual rate of 3.5 percent in March, according to the latest Personal Income and Outlays report from the BEA, a significant rise from the 2.8 percent recorded in February and the highest level of headline inflation in nearly three years. The surge was heavily driven by energy costs, as a spike in global oil prices pushed monthly goods prices up by 1.4 percent.
Notably, the core PCE price index—which excludes more volatile food and energy costs and serves as the Federal Reserve’s preferred inflation gauge—rose 3.2 percent year over year, the highest level we have seen since January 2024. On a month-over-month basis, core inflation increased by 0.3 percent, down slightly from the 0.4 percent seen in March.
Meanwhile, the three-month annualized pace of core PCE, which lends insight into the speed at which underlying inflation has been accelerating, is 4.4 percent, while the six-month pace is 3.7 percent, both of which remain above the current year-over-year pace of 3.2 percent. This tells us that, in the near term, inflation is moving in the wrong direction rather than cooling toward the Fed's target.
When we look under the hood at what is driving these numbers, a clear divergence emerges between goods and services. Goods inflation was up 1.4 percent, largely driven by the recent energy shock. But while energy prices and the impact of recent tariffs can cause temporary pain, the more pressing challenge for the Fed comes as these inflationary pressures are passed onto the services sector, which tends to be stickier in the long term.
Manufacturing activity continues to expand despite stubborn inflation: The April 2026 Institute for Supply Management (ISM) Manufacturing report showed expanding activity, highlighting the ongoing push-and-pull between economic growth and lingering inflation. Headline ISM Manufacturing Purchasing Managers’ Index (PMI) held steady at 52.7 percent, marking the fourth consecutive month of expansion in the manufacturing sector after eight months of contraction. The New Orders Index rose to 54.1 percent, and the Customers' Inventories Index dipped to 39.1 percent, signaling strong future production demand.
However, the Prices Paid Index surged to 84.6 percent, marking the highest level since April 2022 in a sign of lingering inflation and supply chain pressures, while the Employment Index contracted for the 31st consecutive month to 46.4 percent, showing that hiring within the sector remains soft despite the growth in new orders.
The week ahead
Tuesday: The April 2026 ISM Services PMI report is scheduled to publish at 10:00 a.m. EST, providing key insights into the health of the U.S. services sector. We will be watching to see how impacts of tariffs and higher oil prices resulting from the Middle East conflict may have impacted service-sector costs and activity.
Wednesday: The ADP National Employment Report for April 2026 is scheduled to be published at 8:15 a.m. EST. We will be monitoring to see the pay metrics of those who are in their jobs versus changed employment. Last month, annual pay for continuous employees was up 4.5 percent. If this number accelerates, it could come as a sign that rising wages are transferring into the services sector and driving up prices.
Friday: The preliminary University of Michigan five- to-10-year inflation expectations for May 2026 are scheduled for release at 10:00 a.m. EST, offering valuable insight into whether consumers believe high inflation is a permanent fixture rather than a temporary spike and whether these expectations are encouraging a “buy ahead” mentality that could embed inflation further into the economy.
Finally, the Bureau of Labor Statistics will release its April U.S. jobs report at 8:30 a.m. EST. While recent labor market data shows improvement, we are watching this report for confirmation. We will also monitor job composition closely, as growth since early 2025 has been concentrated on noncyclical healthcare and social assistance services. Consensus estimates sit at 65,000 for nonfarm payroll growth, with the unemployment rate expected to hold at 4.3 percent.
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