Earnings drive the rally as risks linger
Read time: 7 minutes
The S&P 500 rebounded sharply in April, rising 10.5% and bringing year-to-date returns to 5.7%.
Looking across major indices, emerging markets and small cap stocks outperformed the S&P 500, while developed international equities posted solid, albeit less robust, gains. Across styles, growth rebounded with a vengeance, returning 11.9% versus value’s 8.2% gain. However, zooming out to the first four months of the year, value remains firmly in the lead, with the Russell 1000 Value up 10.4% year-to-date compared to Growth’s more modest 1% return.1
Source: FactSet
It’s fair to ask why markets have rebounded so aggressively in the face of persistent negative headlines and a growing wall of worry. These include tensions surrounding the Strait of Hormuz, uncertainty around Federal Reserve leadership and the usual noise associated with mid-term election cycles.
Offsetting these concerns, however, is a backdrop of strong underlying fundamentals. Recent data has shown resilience in both manufacturing and services PMIs, alongside better-than-expected Q1 earnings results. In addition, credit spreads have begun to stabilize, suggesting that financial conditions, while tighter than earlier in the year, are not deteriorating further.
At the core of this resilience is the strength of earnings, which we think is the right place to start before stepping back to frame the broader environment through our Risk Awareness and Diversification 2.0 (RAD) lens and a more measured look at risks as we move forward.
Earnings in focus
With nearly two-thirds of the S&P 500 having reported, a clearer picture of Q1 is beginning to emerge and results so far are quite positive. In fact, 84% of companies have beaten earnings expectations, and by a wide margin. In aggregate, companies have reported earnings that are 20.7% above estimates so far. If that pace holds through the remainder of the quarter, it will mark the highest surprise percentage since Q1 2021.
These earnings beats are supported by strong top-line growth, with a blended revenue growth rate of 11.1%.2 Given this backdrop, it’s not surprising that the S&P 500 P/E multiple, which briefly compressed below 20x during the initial Iran-related volatility, has moved back up to around 21x, still below the roughly 22x level where we began the year.
This reinforces that earnings growth, rather than multiple expansion, continues to drive the market, a dynamic that aligns with our broader outlook and sets the stage for our discussion of the RAD framework next.
RAD: Broadening opportunity
This dynamic ties directly into our 2026 theme of RAD. The broadening we’re seeing across regions, sectors and styles is not a short-term anomaly, but rather a reflection of a structural shift in market leadership.
RAD is about recognizing that returns are becoming less concentrated and that opportunity is expanding beyond traditional leadership areas. It also reinforces the importance of being intentional with portfolio construction, understanding exposures, managing concentration risk and positioning for a wider set of outcomes. In our view, this is an environment well-suited for active management.
Our message has been consistent: stick to your normal equity allocation targets and look to diversify where appropriate. While year-to-date returns reflect this broadening trend, we also recognize that the geopolitical backdrop, particularly the potential for higher commodity prices, may create uneven outcomes. Emerging economies may benefit, while developed international markets could face additional pressure. Our Chief Economist Bill Greiner explores the impact on Europe in this month’s economic commentary.
A word of caution
While we have reiterated our targets for the S&P 500 and welcome the healthy returns supported by strong fundamentals, we think it’s prudent to introduce a bit of caution. Just because the market has digested this pullback doesn’t mean we are off to the races.
The foundation remains solid, but there are a few technical factors that, while not yet concerning, have our attention. Notably, the percentage of stocks trading above their 200-day moving average is not as strong as one might expect with the index pushing toward new highs. Interestingly, other indices appear healthier by this measure.
Similarly, the advance-decline line is trending higher, but only marginally so. We will become more concerned if that begins to diverge meaningfully from index performance. For now, these are not red flags, but they are worth monitoring.
Beyond the technicals, the geopolitical backdrop adds another layer of uncertainty. Disruption in the Strait of Hormuz remains a real risk, particularly as it relates to global energy supply. We can’t predict how long this conflict will persist, but the longer it does, the greater the likelihood that higher oil prices begin to filter into the fundamental data, impacting inflation, consumer spending and broader economic activity. That, in turn, could complicate the path forward for monetary policy.
On that front, the transition to a new Fed Chair introduces an additional variable. While Kevin Warsh brings experience, his policy framework and communication style are less familiar to markets than his predecessor’s, and that uncertainty can influence expectations around inflation and rate policy at the margin.
At the end of the day, we don’t try to predict the predictors. Instead, we stay focused on the data and will continue to monitor these dynamics, along with others, as they evolve.
Conclusion
April was a strong reminder that markets can move quickly when supported by fundamentals, even in the face of a growing wall of worry. Earnings remain the foundation, and the broadening we’re seeing across regions, sectors and styles continues to reinforce our RAD framework.
At the same time, this is not an environment to become complacent. Technical signals are mixed, geopolitical risks remain elevated, and the path for inflation and monetary policy is less certain than it was just a few months ago. These are not reasons to retreat, but they are reasons to stay disciplined.
Our approach remains unchanged: stay balanced, remain diversified and avoid overreacting to short-term noise. The opportunity set is expanding, but so is the need for thoughtful positioning. We’ll continue to monitor the data closely and adjust as conditions evolve.
Sources:
1 Return data sourced from FactSet
2 https://insight.factset.com/sp-500-earnings-season-update-may-1-2026
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