Monthly Update
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Review
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"In the short run, the market is a voting machine, but in the long run it is a weighing machine." — Benjamin Graham
Economic Update
GDP & Growth
Q1 2026 Real GDP
1.6%
Annualized growth rate
Final Sales Range
1.8–3.4%
8 consecutive quarters
Q1 2026 Final Sales
2.4%
Down from 3.3% in Q3 2025
The headline number tells you something, but the story lies in what it hides. Q1 2026 real GDP grew at an annualized rate of 1.6% — moderate on its face, but wildly distorted by trade flows moving in both directions simultaneously. Strip out the inventory swings and net export volatility and look at real final sales to private domestic purchasers — what households and businesses actually bought domestically. That figure has been strikingly consistent: between 1.8% and 3.4% across eight consecutive quarters.
Despite a tariff rollercoaster, a regional war, and an AI investment supercycle, underlying domestic demand has barely moved. The quarterly GDP rollercoaster is mostly a trade data story. That slight drawdown in final sales over the past two quarters — from 3.3% in Q3 2025 to 2.4% in Q1 2026 — is the actual signal worth watching. And it points squarely at the consumer.
Economic Update
Employment: 4 Stories in the Labor Market
The Healthcare Machine
Roughly 65% of all jobs added in 2025 came from healthcare, and the pace isn't slowing. All baby boomers are now 60+, and healthcare utilization jumps significantly at that age threshold. This isn't cyclical demand — it's a structural transformation.
65% of 2025 job growth from healthcareThe Low-Hire, Low-Fire Stalemate
JOLTS quits are at the lowest level since August 2020. Workers aren't leaving jobs they can't afford to leave, and layoffs are near record lows at 1.7M. Hiring is also muted at 5.1M — leverage has shifted from employee power to employer power.
Layoffs near record low: 1.7MWhite-Collar & AI Disruption
The information sector is now down 342,000 jobs (–11%) from its November 2022 peak, with 16 consecutive months of net job loss. Tech, finance, consulting, and media are all shedding headcount. The April JOLTS surge to 7.6M openings was driven almost entirely by professional services — a barbell effect as companies build AI teams while shedding traditional roles.
Info sector: –342K jobs (–11%) since Nov 2022Immigration Enforcement Supply Shock
An NBER study found deportation surges led to job losses for both immigrant and U.S.-born workers. Construction and agriculture were hit hardest — agriculture employment fell 155K between March and July 2025 vs. a +2.2% gain in the same period in 2024. The predicted wage lift for native workers has not yet materialized.
Agriculture: –155K jobs Mar–Jul 2025Economic Update
Inflation: Three Stories Behind the Data
Tariff Pass-Through
Apparel prices moved from –0.9% to +4.2% YoY in a near-straight line — a textbook tariff pass-through. PPI core goods have climbed from 2.4% to 4.6% YoY every month this year. This has not yet peaked.
Retailers Expanding Margins
PPI Trade Services — the margin wholesalers and retailers earn per unit sold — rose 8.1% YoY in April. This is businesses choosing to raise prices faster than costs, using tariff and energy narratives as cover. This behavioral inflation won't automatically reverse when energy cools.
Oil: "Higher for Longer"
In March 2026, oil jumped from ~$70 to $120 as the U.S.–Iran conflict ignited. Prices partially retreated to ~$94, but remain dramatically higher than 2025's $60s average. Rebuilding damaged infrastructure could take 3–5 years. The inflation echo will ring until ~March 2027 when base comparisons normalize.
Shelter Inflation Easing
Owners' Equivalent Rent — the single largest CPI component at ~26% of the basket — peaked at 8.12% YoY in April 2023 and has declined to 3.3% today. Today's elevated headline numbers are driven by the most volatile components, not the stickiest. That distinction matters for the Fed's path.
Market Update
Equity Markets
S&P 500 May Gain
+5.3%
286 of 500 members declined
S&P Net Margins Q1
13.4%
Highest in 15+ years
EPS Growth Streak
6 qtrs
Double-digit YoY EPS growth
May's 5.3% S&P gain looks deceptively broad — but 286 of 500 index members declined during the month. AI infrastructure earnings almost entirely drove the rally. Crucially, unlike April, this wasn't a sentiment-driven re-rating. The S&P's forward P/E actually contracted in May, meaning stocks rose because earnings rose. That's a healthier signal.
May Winners & Losers
Top Performers
Dell Technologies — AI server demand
Micron Technology — HBM memory
Cybersecurity ETF
Software ETF — earnings beats
Underperformers
Zoetis — cut full-year guidance
AutoZone — LIFO inventory charge
Energy ETF — oil prices softened
The AI "Brain" Revolution: The revenue cascade is already visible. The first dollars in this AI cycle flowed overwhelmingly to compute. That spending is now spreading into high-bandwidth memory, networking, power & cooling infrastructure, and cybersecurity — where every new AI deployment expands the attack surface. Q1 blended net margins of 13.4% are the highest in 15+ years, expanding despite revenue growth rather than because of it, suggesting AI may already be compressing costs before that story has fully played out.
Market Update
Bond Market
10-Year Treasury
4.45%
Briefly touched 4.56% in May
30-Year Treasury
4.99%
Crossed 5% intramonth
Rate Hike Odds
51%
By year-end (CME Group)
China Treasury Holdings
$652B
18-year low
The bond market has delivered a clear message in May: it no longer believes the Fed is done tightening. Markets began the month with no cuts priced in and ended it with an 85% probability of a rate hike by year-end — a complete reversal from January, when two cuts were consensus.
Foreign demand for U.S. Treasuries is weakening. China's holdings are at an 18-year low ($652B) and Japan shed $47B in March alone. Beneath the surface, credit fundamentals continue to hold — investment-grade spreads remain historically tight, and the high-yield option-adjusted spread near 2.7% is less than half its 20-year historical average. The gap between BB and CCC spreads at 545 basis points remains the early-warning signal to watch.
Municipal Bonds: A quiet winner in May, returning +0.8% even as Treasuries sold off. The muni yield curve offers 130–170 basis points of pickup from 10–20 years versus 60–65 basis points for comparable Treasuries, making intermediate- and longer-duration munis compelling on a tax-adjusted basis. Issuance is on track for a potential record $600B in 2026.
Key Takeaways
Rate Hike?
Signals of strength in the labor market, rising inflation, and strong growth have shifted rate cut expectations to a 51% chance of a hike by year-end (CME Group) — a complete reversal from January consensus.
Inflation Isn't Over
The Iran oil shock echoes through CPI until March 2027. Tariff pass-through in goods hasn't peaked yet. Behavioral inflation from expanding retail margins adds a layer that won't reverse automatically.
AI Is Already in the Margins
S&P net margins hit a 15-year high. AI productivity gains may already be compressing costs across the economy — and the next inning, driven by efficiency and consumption recovery, still needs to be earned.
Common Questions
Frequently Asked Questions
How did the U.S. economy grow in Q1 2026?
Q1 2026 real GDP grew at an annualized rate of 1.6%, though this was heavily distorted by trade flow volatility. The more reliable signal — real final sales to private domestic purchasers — has stayed between 1.8% and 3.4% for eight consecutive quarters, suggesting underlying demand remains stable despite headline noise.
Will the Federal Reserve raise interest rates in 2026?
As of June 2026, markets are pricing in a 51% chance of a Fed rate hike by year-end (CME Group). This is a dramatic reversal from January 2026, when two rate cuts were the consensus forecast. The shift is driven by stronger labor data, persistent oil-driven inflation, and tariff pass-through effects that haven't peaked yet.
How are tariffs affecting inflation in 2026?
Tariffs are driving a textbook pass-through effect on goods prices. Apparel prices moved from –0.9% to +4.2% year-over-year in a near-straight line. PPI core goods climbed from 2.4% to 4.6% YoY every single month in 2026 — and this effect has not yet peaked. Compounding this, some retailers appear to be expanding margins beyond their actual cost increases, using tariff narratives as cover.
Is AI driving S&P 500 earnings growth?
Yes. Q1 2026 S&P 500 blended net margins hit 13.4% — the highest in over 15 years — marking six consecutive quarters of double-digit year-over-year EPS growth. May's 5.3% S&P gain was almost entirely driven by AI infrastructure names, particularly Dell (+101%) and Micron (+88%). Importantly, the S&P's forward P/E actually contracted in May, meaning the rally was earnings-driven, not sentiment-driven — a healthier signal.
What is happening in the U.S. bond market?
The bond market is signaling that the Fed may not be done tightening. The 10-year Treasury briefly touched 4.56% and the 30-year crossed 5% in May before partially pulling back. Foreign demand is weakening — China's Treasury holdings are at an 18-year low and Japan shed $47B in March alone. Credit fundamentals remain solid for now, but with 30-year rates at 5%, the cost of capital is rising across the economy.
Which sectors are driving job growth in 2026?
Healthcare dominates, accounting for roughly 65% of all jobs added in 2025. The driver is demographics — all baby boomers are now 60+, and healthcare utilization rises sharply at that age. Meanwhile, information sector employment is down 342,000 jobs (–11%) from its November 2022 peak, with 16 consecutive months of net loss, driven in part by AI-powered operational efficiency replacing traditional white-collar roles.