Stocks have shrugged geopolitical worries and elevated oil prices lately and are currently at or near record levels.
Many in the market believe that the worst is behind us and that the ongoing stock market momentum reflects favorable and enduring fundamental realities. High oil prices are undoubtedly a net negative for consumer spending, but the U.S. economy is far less vulnerable to elevated energy prices than is the case for markets in Europe and Asia.
A constructive view of the economy is that while geopolitics-induced uncertainty will likely affect near-term growth trends, the U.S. economy's fundamentals remain rock-solid. This view acknowledges the lingering negative effects of the Trump administration’s tariffs regime, but sees plenty of offsetting positives from the administration's non-trade policy and regulatory reform agenda. On top of this all is the ongoing AI-centric spending boom that is largely independent of fiscal and monetary policy.
Market bears see this optimism as lacking a fundamental basis. This line of thinking sees the oil price spike to have long-lasting inflationary effects that will weigh on Fed policy and the U.S. economy’s growth trajectory.
Market bears see the combined effects of the ongoing geopolitical standoff and the pre-existing tariff-induced uncertainty as severe enough to push the economy close to a recessionary growth level. Worries about macroeconomic fiscal imbalances and stock market valuations also appear in the bearish view of the market.
The interplay of these competing views will determine how the market performs in the coming months and quarters. To that end, let's examine the landscape of bullish and bearish arguments to help you make up your own mind.
Let's talk about the Bull case first.
The Economy's Strong Foundation: The U.S. economy has literally been the envy of the world over the last few years, and those fundamentals are still intact despite continuing worries about their durability. It is this inherent resilience that allowed the U.S. economy to continue growing in the face of the post-Covid and Ukraine war supply shocks and the Fed’s extraordinary policy tightening. This accounting of the recent past should assure us of the economy’s ability to smoothly navigate the current environment.
While near-term growth is expected to decelerate, as we saw with the advance read on the Q1 GDP report, we have to keep in mind that the U.S. economy entered the current period of uncertainty in excellent shape with the economy’s underlying growth drivers remaining intact.
A stable consumer and business spending backdrop, supported by a still-strong labor market, ensures that growth remains positive, albeit at a lower trajectory. Tied to all this is the secular boom in AI-centric spending, which is expected to remain in place for at least the next two years before starting to decelerate.
This is beneficial to the central bank's fight against inflation, with moderating economic growth pushing inflation readings toward the Fed's 2% target. The Fed’s pause decision at the latest meeting was no surprise to anyone in the market, but the expectation remains that the overall policy bias will continue to favor easing.
All in all, the strong pillars of the U.S. economic foundation run contrary to the typical signs of trouble ahead.
The Fed's Easing Cycle: The pause to interest rate cuts at the latest Fed meeting is justifiably getting interpreted as reflecting the central bank’s comfort with the state of the economy and inflation. Downside risks to the labor market’s health prompted the central bank to ease monetary policy three times last year. But with recent data showing marked stabilization in the economy’s growth trajectory, they can remain in a wait-and-see mode while otherwise maintaining an overall easing stance.
The current pause notwithstanding, bulls see the inflation issue as headed toward a resolution that satisfies the central bank, allowing the Fed to continue easing policy. This view doesn't see the ongoing strength in oil prices as inherently inflationary, but acknowledges that the prudent course for the new Fed Chair will be to stick with his predecessor’s policy pause.
The market was earlier expecting two rate cut decisions this year. But the prospect of slower progress towards the Fed’s 2% inflation target as a result of geopolitical uncertainties has pushed those easing actions into next year.
Continued . . .
------------------------------------------------------------------------------------------------------
5 Stocks Set to Double: Sunday Deadline
There's still time to get in on our just-released 5 Stocks Set to Double Special Report. Each pick is the single favorite of a Zacks expert with the best chance to crush the market and gain +100% and more in the months ahead:
Stock #1: Energy Company with Technology That Can Put It On Top
Stock #2: Engineering Firm That Has Bulls Salivating
Stock #3: High Conviction Buy with Strong Growth Momentum
Stock #4: A Strong Play In the AI Revolution
Stock #5: Vertically Integrated Powerhouse with a Key Product Portfolio
We can’t guarantee future performance, but previous editions have racked up gains of +143.1%, +175.3%, and even +340.3%.¹
The deadline to download the new report is midnight on Sunday, May 3.
See Stocks Now >>
------------------------------------------------------------------------------------------------------
Valuation & Earnings: Tied to the economic and interest rate outlook is the question of stock market valuation that still looks reasonable given the expected interest rate trajectory.
The S&P 500 index is currently trading at 21.9X this year’s earnings estimates, up from 20.6X following the April 2025 sell-off and 15.7X at the end of September 2022. This is more than 10% below the market’s 10-year high multiple but 15% above the 10-year median for the market, which is feeding the ‘AI bubble’ narrative. We should keep in mind that the index peaked at 26X at year-end 1999 in the Tech bubble.
The appropriateness or otherwise of valuation multiples has to be seen in the context of the interest rate outlook. Valuation multiples typically expand when the Fed is easing policy, particularly when the catalyst for the loosened policy is confidence on the inflation front instead of growth fears.
Earnings outlook is a key part of the valuation discussion. Contrary to the earlier doom-and-gloom fears, the ongoing 2026 Q1 earnings season is showing a steadily improving earnings outlook for the coming periods. You can clearly see this in earnings expectations for 2026 Q2 and the following periods.
What we are seeing this earnings season is that while companies in a few industries are experiencing margin pressures such as high fuel and freight expenses, there are many others that continue to drive sales and earnings growth without losing a beat. We are seeing many of these leaders from a variety of sectors, including Finance and Technology, come out with strong quarterly results and describe trends in their businesses in reassuring terms despite uncertainties related to tariffs and geopolitics.
Current consensus expectations for this year and next reflect strong growth that is broad-based and not driven by one or two sectors. While estimates had come down sharply following the April 2025 tariff announcements, the revisions trend stabilized in the following months and remains consistently positive.
In the absence of a nasty economic downturn, the earnings picture can actually serve as a tailwind for the stock market in an environment of easing Fed policy.
Let's see what the Bears have to say in response.
The Market's Fed Exuberance: The Fed’s pause decision at the latest meeting was largely expected, but many in the market are discounting the inflationary effects of the oil price spike resulting from the Persian Gulf blockade.
The blockade will eventually end as a result of ongoing negotiations, helping oil prices to get back to normal levels. But many energy industry analysts predict some residual risk premium in prices even when shipping through the Strait of Hormuz completely goes back to normal, keeping oil prices structurally higher than they were before the conflict. This has inflation and Fed policy implications.
Inflation has remained above the Fed’s 2% target for more than 5 years now and is most likely expected to trend in the opposite direction even after oil prices have ‘normalized’. The consensus view appears to be that a wait-and-see approach with an overall easing bias is the appropriate Fed posture at this stage. But it is hardly out of the realm of possibilities that the Fed’s next move is to tighten policy, particularly if data starts showing that persistently elevated energy prices are starting to bleed into ‘core’ prices.
Tied to the inflation risk is the prospect that the economy's true health may be far more fragile than recent GDP readings suggest. Low-income households have been struggling for a while, but anecdotal evidence from earnings calls suggests that even better-off consumers are becoming more cautious in their spending plans. On top of this is the diminished outlook for business spending beyond the AI space due to policy uncertainty, at least in the near term. This represents the so-called 'stagflation' scenario.
The Valuation Reality Check: Given the bears' view that the prudent course for the Fed is to be either on pause or raise rates to fight inflation, they see no fundamental reason for valuation multiples to expand beyond current record levels.
Higher-for-longer interest rates should have a direct impact on prices across all asset classes, including stocks. Everything else constant, investors will use a higher discount rate, driven by interest rates, to value the future cash flows of the companies they want to invest in.
This means lower stock values in a higher-interest-rate environment.
The Earnings Growth Question: Current consensus estimates show +17.4% earnings growth this year and +16.3% growth in 2027, following the +13.2% growth in 2025.
Market bears see these earnings growth expectations as inconsistent with an economy facing a significant jump in oil prices and the lingering effects of tariffs, even if questions about the sustainability of the ongoing AI-centric spending boom are overlooked. It is hard to envision that the combined effect of the oil shock and higher tariffs will be benign on inflation, economic growth, or corporate earnings.
Notwithstanding the tough going in the manufacturing sector and the growth implications of elevated Treasury yields, earnings expectations for this year and next will need to come down significantly to get them in line with economic reality.
Where Do I Stand?
While I acknowledge that the Fed will likely need to remain in the ‘pause mode’ given the uncertain inflation path, I am skeptical that they will need to change their posture from easing to tightening. It is hardly wishful thinking to expect inflation to remain well behaved, particularly once the Persian Gulf situation normalizes.
The current Fed Funds rate is still above the level that central bank officials and economists consider the 'neutral' policy rate. At the 'neutral' policy rate, Fed policy is neither 'stimulating' nor 'restricting' economic activity. In other words, the prospect of a rate hike is nothing more than a very low probability event.
Regular readers of my earnings commentary know that the earnings picture remains strong and steadily improving, with estimates for the current and coming periods consistently moving higher. Importantly, the earnings growth thrust is expanding beyond its Tech core, with all sectors participating in this year’s strong expectations.
We strongly believe that the market’s rebound from the March lows reflect this upbeat earnings outlook.
What’s the Next Step for Investors?
You can take advantage by building positions in great stocks with solid fundamentals and clear growth prospects.
That's why I'm inviting you to download our just-released Special Report, 5 Stocks Set to Double. A Zacks expert handpicked each stock as their personal favorite to have the best chance of gaining +100% and more in the months ahead:
Stock #1: Energy Company with Technology That Can Put It On Top
Stock #2: Engineering Firm That Has Bulls Salivating
Stock #3: High Conviction Buy with Strong Growth Momentum
Stock #4: A Strong Play In the AI Revolution
Stock #5: Vertically Integrated Powerhouse with a Key Product Portfolio
While we can’t guarantee future performance, previous editions of this report have racked up gains of +143.1%, +175.3%, and even +340.3%.¹
Your total cost to see all five new tickers is only $1, and there's no obligation to spend a cent more.
Please note, your opportunity to download our 5 Stocks Set to Double Special Report for $1 ends at midnight on Sunday, May 3.
See our 5 Stocks Set to Double now for $1 >>
Good Investing,
Sheraz
Sheraz Mian serves as the Director of Research and manages the entire research department. He also manages the Zacks Focus List and Zacks Top 10 Stocks portfolios.
¹ The results listed above are not (or may not be) representative of the performance of all selections made by Zacks Investment Research's newsletter editors and may represent the partial close of a position. Access grants you a comprehensive list of all open and closed trades.
View the Zacks #1 Rank List
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How to Make the Most of Today's Market
Stocks have shrugged geopolitical worries and elevated oil prices lately and are currently at or near record levels.
Many in the market believe that the worst is behind us and that the ongoing stock market momentum reflects favorable and enduring fundamental realities. High oil prices are undoubtedly a net negative for consumer spending, but the U.S. economy is far less vulnerable to elevated energy prices than is the case for markets in Europe and Asia.
A constructive view of the economy is that while geopolitics-induced uncertainty will likely affect near-term growth trends, the U.S. economy's fundamentals remain rock-solid. This view acknowledges the lingering negative effects of the Trump administration’s tariffs regime, but sees plenty of offsetting positives from the administration's non-trade policy and regulatory reform agenda. On top of this all is the ongoing AI-centric spending boom that is largely independent of fiscal and monetary policy.
Market bears see this optimism as lacking a fundamental basis. This line of thinking sees the oil price spike to have long-lasting inflationary effects that will weigh on Fed policy and the U.S. economy’s growth trajectory.
Market bears see the combined effects of the ongoing geopolitical standoff and the pre-existing tariff-induced uncertainty as severe enough to push the economy close to a recessionary growth level. Worries about macroeconomic fiscal imbalances and stock market valuations also appear in the bearish view of the market.
The interplay of these competing views will determine how the market performs in the coming months and quarters. To that end, let's examine the landscape of bullish and bearish arguments to help you make up your own mind.
Let's talk about the Bull case first.
The Economy's Strong Foundation: The U.S. economy has literally been the envy of the world over the last few years, and those fundamentals are still intact despite continuing worries about their durability. It is this inherent resilience that allowed the U.S. economy to continue growing in the face of the post-Covid and Ukraine war supply shocks and the Fed’s extraordinary policy tightening. This accounting of the recent past should assure us of the economy’s ability to smoothly navigate the current environment.
While near-term growth is expected to decelerate, as we saw with the advance read on the Q1 GDP report, we have to keep in mind that the U.S. economy entered the current period of uncertainty in excellent shape with the economy’s underlying growth drivers remaining intact.
A stable consumer and business spending backdrop, supported by a still-strong labor market, ensures that growth remains positive, albeit at a lower trajectory. Tied to all this is the secular boom in AI-centric spending, which is expected to remain in place for at least the next two years before starting to decelerate.
This is beneficial to the central bank's fight against inflation, with moderating economic growth pushing inflation readings toward the Fed's 2% target. The Fed’s pause decision at the latest meeting was no surprise to anyone in the market, but the expectation remains that the overall policy bias will continue to favor easing.
All in all, the strong pillars of the U.S. economic foundation run contrary to the typical signs of trouble ahead.
The Fed's Easing Cycle: The pause to interest rate cuts at the latest Fed meeting is justifiably getting interpreted as reflecting the central bank’s comfort with the state of the economy and inflation. Downside risks to the labor market’s health prompted the central bank to ease monetary policy three times last year. But with recent data showing marked stabilization in the economy’s growth trajectory, they can remain in a wait-and-see mode while otherwise maintaining an overall easing stance.
The current pause notwithstanding, bulls see the inflation issue as headed toward a resolution that satisfies the central bank, allowing the Fed to continue easing policy. This view doesn't see the ongoing strength in oil prices as inherently inflationary, but acknowledges that the prudent course for the new Fed Chair will be to stick with his predecessor’s policy pause.
The market was earlier expecting two rate cut decisions this year. But the prospect of slower progress towards the Fed’s 2% inflation target as a result of geopolitical uncertainties has pushed those easing actions into next year.
Continued . . .
------------------------------------------------------------------------------------------------------
5 Stocks Set to Double: Sunday Deadline
There's still time to get in on our just-released 5 Stocks Set to Double Special Report. Each pick is the single favorite of a Zacks expert with the best chance to crush the market and gain +100% and more in the months ahead:
Stock #1: Energy Company with Technology That Can Put It On Top
Stock #2: Engineering Firm That Has Bulls Salivating
Stock #3: High Conviction Buy with Strong Growth Momentum
Stock #4: A Strong Play In the AI Revolution
Stock #5: Vertically Integrated Powerhouse with a Key Product Portfolio
We can’t guarantee future performance, but previous editions have racked up gains of +143.1%, +175.3%, and even +340.3%.¹
The deadline to download the new report is midnight on Sunday, May 3.
See Stocks Now >>
------------------------------------------------------------------------------------------------------
Valuation & Earnings: Tied to the economic and interest rate outlook is the question of stock market valuation that still looks reasonable given the expected interest rate trajectory.
The S&P 500 index is currently trading at 21.9X this year’s earnings estimates, up from 20.6X following the April 2025 sell-off and 15.7X at the end of September 2022. This is more than 10% below the market’s 10-year high multiple but 15% above the 10-year median for the market, which is feeding the ‘AI bubble’ narrative. We should keep in mind that the index peaked at 26X at year-end 1999 in the Tech bubble.
The appropriateness or otherwise of valuation multiples has to be seen in the context of the interest rate outlook. Valuation multiples typically expand when the Fed is easing policy, particularly when the catalyst for the loosened policy is confidence on the inflation front instead of growth fears.
Earnings outlook is a key part of the valuation discussion. Contrary to the earlier doom-and-gloom fears, the ongoing 2026 Q1 earnings season is showing a steadily improving earnings outlook for the coming periods. You can clearly see this in earnings expectations for 2026 Q2 and the following periods.
What we are seeing this earnings season is that while companies in a few industries are experiencing margin pressures such as high fuel and freight expenses, there are many others that continue to drive sales and earnings growth without losing a beat. We are seeing many of these leaders from a variety of sectors, including Finance and Technology, come out with strong quarterly results and describe trends in their businesses in reassuring terms despite uncertainties related to tariffs and geopolitics.
Current consensus expectations for this year and next reflect strong growth that is broad-based and not driven by one or two sectors. While estimates had come down sharply following the April 2025 tariff announcements, the revisions trend stabilized in the following months and remains consistently positive.
In the absence of a nasty economic downturn, the earnings picture can actually serve as a tailwind for the stock market in an environment of easing Fed policy.
Let's see what the Bears have to say in response.
The Market's Fed Exuberance: The Fed’s pause decision at the latest meeting was largely expected, but many in the market are discounting the inflationary effects of the oil price spike resulting from the Persian Gulf blockade.
The blockade will eventually end as a result of ongoing negotiations, helping oil prices to get back to normal levels. But many energy industry analysts predict some residual risk premium in prices even when shipping through the Strait of Hormuz completely goes back to normal, keeping oil prices structurally higher than they were before the conflict. This has inflation and Fed policy implications.
Inflation has remained above the Fed’s 2% target for more than 5 years now and is most likely expected to trend in the opposite direction even after oil prices have ‘normalized’. The consensus view appears to be that a wait-and-see approach with an overall easing bias is the appropriate Fed posture at this stage. But it is hardly out of the realm of possibilities that the Fed’s next move is to tighten policy, particularly if data starts showing that persistently elevated energy prices are starting to bleed into ‘core’ prices.
Tied to the inflation risk is the prospect that the economy's true health may be far more fragile than recent GDP readings suggest. Low-income households have been struggling for a while, but anecdotal evidence from earnings calls suggests that even better-off consumers are becoming more cautious in their spending plans. On top of this is the diminished outlook for business spending beyond the AI space due to policy uncertainty, at least in the near term. This represents the so-called 'stagflation' scenario.
The Valuation Reality Check: Given the bears' view that the prudent course for the Fed is to be either on pause or raise rates to fight inflation, they see no fundamental reason for valuation multiples to expand beyond current record levels.
Higher-for-longer interest rates should have a direct impact on prices across all asset classes, including stocks. Everything else constant, investors will use a higher discount rate, driven by interest rates, to value the future cash flows of the companies they want to invest in.
This means lower stock values in a higher-interest-rate environment.
The Earnings Growth Question: Current consensus estimates show +17.4% earnings growth this year and +16.3% growth in 2027, following the +13.2% growth in 2025.
Market bears see these earnings growth expectations as inconsistent with an economy facing a significant jump in oil prices and the lingering effects of tariffs, even if questions about the sustainability of the ongoing AI-centric spending boom are overlooked. It is hard to envision that the combined effect of the oil shock and higher tariffs will be benign on inflation, economic growth, or corporate earnings.
Notwithstanding the tough going in the manufacturing sector and the growth implications of elevated Treasury yields, earnings expectations for this year and next will need to come down significantly to get them in line with economic reality.
Where Do I Stand?
While I acknowledge that the Fed will likely need to remain in the ‘pause mode’ given the uncertain inflation path, I am skeptical that they will need to change their posture from easing to tightening. It is hardly wishful thinking to expect inflation to remain well behaved, particularly once the Persian Gulf situation normalizes.
The current Fed Funds rate is still above the level that central bank officials and economists consider the 'neutral' policy rate. At the 'neutral' policy rate, Fed policy is neither 'stimulating' nor 'restricting' economic activity. In other words, the prospect of a rate hike is nothing more than a very low probability event.
Regular readers of my earnings commentary know that the earnings picture remains strong and steadily improving, with estimates for the current and coming periods consistently moving higher. Importantly, the earnings growth thrust is expanding beyond its Tech core, with all sectors participating in this year’s strong expectations.
We strongly believe that the market’s rebound from the March lows reflect this upbeat earnings outlook.
What’s the Next Step for Investors?
You can take advantage by building positions in great stocks with solid fundamentals and clear growth prospects.
That's why I'm inviting you to download our just-released Special Report, 5 Stocks Set to Double. A Zacks expert handpicked each stock as their personal favorite to have the best chance of gaining +100% and more in the months ahead:
Stock #1: Energy Company with Technology That Can Put It On Top
Stock #2: Engineering Firm That Has Bulls Salivating
Stock #3: High Conviction Buy with Strong Growth Momentum
Stock #4: A Strong Play In the AI Revolution
Stock #5: Vertically Integrated Powerhouse with a Key Product Portfolio
While we can’t guarantee future performance, previous editions of this report have racked up gains of +143.1%, +175.3%, and even +340.3%.¹
Your total cost to see all five new tickers is only $1, and there's no obligation to spend a cent more.
Please note, your opportunity to download our 5 Stocks Set to Double Special Report for $1 ends at midnight on Sunday, May 3.
See our 5 Stocks Set to Double now for $1 >>
Good Investing,
Sheraz
Sheraz Mian serves as the Director of Research and manages the entire research department. He also manages the Zacks Focus List and Zacks Top 10 Stocks portfolios.
¹ The results listed above are not (or may not be) representative of the performance of all selections made by Zacks Investment Research's newsletter editors and may represent the partial close of a position. Access grants you a comprehensive list of all open and closed trades.