Economic and Financial Market Update - May 2026

Recent Market News

Following the S&P 500's year-to-date low on March 30^th, equity markets have rebounded sharply as investors have begun to look through fears of further escalation in Iran. Since then, major U.S. indices have climbed steadily to new all-time highs, with the S&P 500 gaining approximately 18% across eight consecutive positive weeks as of May 22^nd.¹ Growth sectors have led the recent rally as the AI megatrend regains traction and much stronger-than-expected corporate earnings continue to drive the market higher, resulting in an earnings-led recovery underpinned by a constructive economic backdrop.

GDP growth accelerated meaningfully in the first quarter of 2026, driven by strength in domestic investment, exports, and resilient consumer spending, as well as a rebound in government spending following the October 2025 federal government shutdown. Meanwhile, labor markets continue to demonstrate stability, with better-than-expected job creation and record-low jobless claims reported in recent weeks. Inflation remains the primary headwind to this otherwise constructive backdrop, as the effects of elevated oil prices begin to materialize in inflationary data. Stubborn inflationary pressures coupled with stability in the labor market have erased the odds of further rate cuts in the near term, with futures markets now pricing in a 25 basis point hike in early 2027. For now, markets appear to be looking past ongoing geopolitical tensions and possible tightening of monetary policy in light of the remarkable growth in corporate earnings and the resilience of the broader economy.

Earnings Season Update

Thus far, earnings results for the S&P 500 have been significantly stronger than initially forecast, and the outlook of industry analysts continues to improve as forward estimates strengthen further. As of May 21^st, 2026, the blended Q1 earnings growth rate for the S&P 500 is 28.4%, which will mark the highest year-over-year earnings growth for the index since Q4 2021 (32.0%). With 94% of the index reporting actual results for Q1 2026, 84% of companies have outperformed earnings estimates and 81% have outperformed revenue estimates. In aggregate, reported earnings are 16.6% above expectations, which is the strongest result since Q1 2021 (22.2%) and much higher than the five and ten-year averages of 7.3% and 7.1%, respectively.² As shown below, the magnitude of upward revisions to earnings growth compared to March 31^st is significant, with only the health care sector reporting a y/y decline in earnings (albeit less than initially forecast).

As Q1 earnings results continue to surprise to the upside, forward operating earnings per share (EPS) have improved at an accelerating pace. Displayed below at left are analyst consensus estimates of S&P 500 earnings growth for each quarter of 2026, which have been revised meaningfully higher in recent months despite ongoing geopolitical turmoil. Current quarterly earnings growth forecasts for the S&P 500 are 20.4%, 19.6%, and 23.7% for Q2-Q4, respectively. Full-year EPS estimates – the best leading indicator of stock price movement – for 2026 and 2027 are shown below at right, currently forecast at $337.11 and $390.86, respectively.

Though earnings growth is led by the technology and communication services sectors, it is important to note that the percentages of S&P 500 companies displaying positive year-over-year changes in earnings (85.6%) and revenue (89.0%) are historically strong and continuing to rise, demonstrating improving breadth in the market.

Strong first quarter results, an improving forward earnings trajectory, and broadening participation across sectors provide a compelling fundamental backdrop for a continued earnings-led melt-up in equity markets. We expect these dynamics to remain the primary driver of stock prices in the months ahead, despite ongoing geopolitical tensions and inflationary pressures stemming from disruptions in global energy markets.³

Economic Growth

The U.S. economy expanded at an annualized rate of 2.0% in Q1 2026, up from 0.5% in Q4 2025, demonstrating resilience despite inflationary impacts stemming from the Iran war and a difficult winter.

Government spending rebounded by 4.4% in the first quarter, recovering from a 5.6% contraction in Q4 2025 as activity resumed following the end of the government shutdown. Notably, private domestic investment increased by 8.7%, compared to 2.3% in the prior quarter, with business investment in equipment and structures surging 10.4% – the fastest pace in nearly three years – driven in part by spending on artificial intelligence technologies and the ongoing buildout of data infrastructure. This strength helped to offset slowing consumer spending, which increased 1.6%, ahead of the consensus estimate of 1.4%, but down from 1.9% growth in the prior quarter.⁴

For the current measured quarter, the Atlanta Federal Reserve GDPNow model estimates Q2 GDP growth of 3.8%, supported by robust consumer spending and nonresidential (i.e., business) fixed investment.⁵

Labor Market Update

The U.S. economy added 115,000 jobs in April, well above expectations of 62,000, while March’s result was upwardly revised to 185,000 from 178,000. While two months of strong results do not constitute a meaningful trend, this report marks the first consecutive monthly increase in employment since April 2025. The unemployment rate remained unchanged at a historically healthy 4.3%, as expected, reinforcing our view that the number of payroll jobs required to maintain a stable unemployment rate has declined as total labor force growth slows, reflecting the retirement of baby boomers and the impact of tightened immigration policy.⁶

In addition to monthly payrolls data, weekly jobless claims – a leading indicator of the employment situation – continue to support our constructive labor market outlook. For the week ending May 16^th, initial jobless claims were 209,000, largely in line with expectations of 210,000. A few weeks prior, initial claims fell to 190,000, their lowest level since 1969.⁷

Meanwhile, continuing claims – a measure of those willing to work who are actively receiving unemployment benefits – have continued to soften in recent months. This combination of declining continuing claims alongside historically low initial claims typically characterizes a tight labor market and tends to support wage growth. For the week ending May 9^th, continuing claims were 1.782 million, up only slightly from the lowest reading since January 2024 and well below the long-run (1967-present) average of 2.728 million.⁸

Our Thoughts

Despite retaliatory strikes amidst the ongoing ceasefire and the Strait of Hormuz remaining functionally closed at the time of writing, recent reports indicate that an updated proposal for peace will restore commercial shipping through the strait to pre-war levels within 30 days and end the U.S. naval blockade. In light of these promising developments, the price of oil (WTI) has retreated to approximately $90 per barrel at the time of writing from over $110/bbl on May 18^th.¹ We expect a period of elevated inflationary pressure in the coming months reflecting the duration of elevated oil prices, but expect strength in corporate earnings, margin improvement driven by productivity gains, and resilience in the broader economy to continue to support equity markets. Stubborn inflationary pressures, coupled with a stable U.S. labor market and a resilient consumer, will shift the focus of the Fed – now led by Chairman Kevin Warsh – toward mitigating rising prices. Warsh believes the current technological boom will boost labor productivity (à la the 1990s internet boom), providing a basis for the Fed to resist premature rate hikes. Productivity growth typically reduces inflationary pressure by allowing businesses to increase wages without raising prices. As such, we anticipate the Fed will maintain the current target range of 3.50%-3.75% through 2026. We acknowledge that rising cost pressures may disproportionately impact the middle and lower-end consumer during this period of elevated energy prices, but maintain our broadly positive outlook on the U.S. economy and markets as geopolitical tensions ease.

We continue to prioritize strategic rebalancing and further diversification within client portfolios to preserve capital and mitigate concentration risk. To this end, we are reviewing with clients the potential to realize long-term capital gains in non-qualified accounts, given the significant equity returns in recent years. We look forward to discussing this with you in greater detail. As always, we believe patience, discipline, and maintaining a long-term perspective are imperative to achieving long-term growth of principal and income. We deeply value our relationship and thank you for the trust you place in our team. We wish you an enjoyable summer and look forward to engaging with you throughout the year.

Sources

1 FactSet Research Systems, Inc

2 https://advantage.factset.com/hubfs/Website/Resources%20Section/Research%20Desk/Earnings%20Insight/EarningsInsight_052126.pdf

3 Yardeni Research

4 https://www.bea.gov/index.php/news/2026/gdp-advance-estimate-1st-quarter-2026

5 https://www.atlantafed.org/research-and-data/data/gdpnow

6 https://www.bls.gov/news.release/empsit.nr0.htm

7 https://tradingeconomics.com/united-states/jobless-claims

8 https://tradingeconomics.com/united-states/continuing-jobless-claims

Disclosures

Securities offered through LPL Financial, Member FINRA/SIPC. Investment advice offered through Stratos Wealth Partners, Ltd., a registered investment advisor. Stratos Wealth Partners, Ltd. and Parkview Partners Capital Management are separate entities from LPL Financial.

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 The opinions voiced in this material are for general information only and not intended to provide specific advice or recommendations for any individual. To determine which investment(s) may be appropriate for you, consult your financial advisor prior to investing. All performance referenced is historical and is no guarantee of future results. Indices are unmanaged and may not be invested into directly. Investing involves risk including loss of principal.

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