Markets have staged an impressive rebound since mid-April, surprising many investors with a sharp move higher fueled by strong corporate earnings and easing geopolitical tensions. While volatility remains part of the landscape, the broader backdrop continues to support equities.
A Market Fueled by Earnings and AI
The most significant driver of the recent rally has been an extraordinary earnings season. The S&P 500 is currently tracking roughly 22% year-over-year earnings growth — far above the long-term historical average of 6–7%. Technology and artificial intelligence remain at the center of this strength, with AI-related capital spending continuing to translate directly into corporate profits and market leadership.
This powerful earnings momentum helped equities recover quickly from April’s turbulence and push back toward record highs. While upcoming earnings reports from major AI leaders such as NVIDIA may influence short-term sentiment, the broader earnings picture remains a key pillar supporting markets.
Economic Growth Remains Resilient
At the same time, economic growth continues to show resilience. The Atlanta Fed’s GDPNow model is currently running near 4%, well above consensus expectations. Whether growth ultimately settles closer to 2% or 4%, the data does not currently point toward a recessionary environment.
That strength, however, comes with a tradeoff: higher interest rates. The 10-year Treasury yield recently climbed above 4.5%, a level that historically begins to pressure equity valuations and financial conditions more broadly.
Inflation and the Federal Reserve
Inflation remains the market’s key macro challenge heading into the second half of the year. Persistent money supply growth suggests inflationary pressures may continue through the summer, creating a difficult backdrop for incoming Fed Chair Kevin Warsh.
Rather than rate cuts, markets may need to prepare for the possibility of additional tightening if inflation remains elevated. That dynamic could create tension between monetary policy and broader political priorities, adding another layer of uncertainty for investors.
Have Markets Already Pulled Forward Future Gains?
Historically, the second year of the presidential cycle tends to be one of consolidation, with markets often moving sideways until greater political clarity emerges later in the year. This year’s powerful rally — driven by easing geopolitical concerns and AI-fueled earnings growth — may have already pulled some of those typical fourth-quarter gains forward.
That does not necessarily signal trouble ahead. After several strong years for equities, a period of consolidation would be both healthy and historically consistent.
At the same time, potential blockbuster IPOs later this year — including several major AI and technology names — could provide another catalyst for market enthusiasm. The balance between innovation-driven optimism and persistent inflationary pressure will likely define the path forward for the remainder of 2026.
Rick Pitcairn is Chief Global Strategist at Pitcairn. The views expressed are those of the author as of the date of publication and are subject to change. This commentary is for informational purposes only and should not be construed as investment advice.