I think their methodology is very good. But I wouldn’t say it’s perfect. Most would agree that it has its weaknesses. And admittedly, I couldn’t tell you what perfect would look like.

I do know that rules are rarely perfect the first time they’re written. The U.S. Constitution has been amended 27 times. The NBA regularly updates the rules of the game. Even casual fans of soccer have noticed that FIFA has introduced new rules for World Cup play. And of course, S&P Dow Jones makes changes to inclusion requirements for its many indexes.

Ultimately, I think that if we discover and agree on ways an index can better deliver on its aims, we should make changes.

Changes in methodology don’t have to mean big changes to performance ⚖️

As I mentioned in Wednesday’s newsletter, I’m not crazy about S&P Dow Jones’ requirement for positive GAAP net income for “the most recent quarter, and the sum of the most recent four consecutive quarters.“ It’s a backward-looking metric, and I’m in the camp that believes stocks trade largely on expectations for future profits.

SpaceX is an example of a massive, unprofitable company that’s largely trading on expectations for future profitability. Sure, there’s no guarantee that it ever earns the kind of profits that justify the current valuation. Nevertheless, it’s a bit odd to me to exclude such a large company from indices intended to reflect the broad market. (To be clear, this doesn’t mean I think SpaceX or any other large company should be added right away. More on that here.)

That said, I also don’t know if there’s an elegant solution to this issue that doesn’t lead to people freaking out.

I did stumble across some interesting alternatives while doing some academic reading and earning continuing education credits.

Rob Arnott and Lillian Wu recently published a paper for the CFA Institute Research & Policy Center. Titled “The Active Side of Indexing,” the paper argues that despite being labeled a passive index, the S&P 500’s design makes it more of an active momentum-driven, “buy high, sell low” strategy with hidden costs that cause performance to drag. It’s a great read.

Among other things, they point out how the index doesn’t necessarily include the 500 largest publicly traded U.S. companies.

“On average between 1991 and 2022, the index overlaps with only about 380 of the 500 largest companies in terms of market cap at any point in time,” they noted. “This means that 120 of the true top 500 market-cap names are excluded, and a similar number of smaller-cap firms take their place. This discrepancy is not a trivial rounding error.”

In their work, the authors explored several alternative methodologies for index construction, including simple market cap and five-year average market cap inclusion requirements. Both get around the profitability problem and other subjective judgments made by the folks at S&P Dow Jones Indices.

They tested what past performance would’ve looked like under these alternative approaches. Interestingly, the results weren’t too dissimilar from the S&P 500’s performance. In fact, the returns were slightly better.

Arnott and Wu’s paper has much more, and it left me with a lot to think about. You can read it here.

I found the results of their alternative index study eye-opening. The findings suggest it’s possible to make significant changes to index inclusion methodology without totally altering the performance, which may make implementing such changes more palatable for investors.

Again, I don’t know what the ultimate answer is.

Maybe they keep the S&P 500 as is, but expand alternative, similar offerings that address concerns investors have regarding inclusion requirements.

Whatever happens, this debate is sure to intensify, especially as a growing number of mega-cap companies hit the market while being excluded from what are supposed to be broad market indices.

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Related from TKer:

• Some thoughts on mega IPOs and market indices...🚀

• How Warren Buffett’s disciples have evaded the ‘stealth bear market’ 🤌

• Why permabears seem right even when they’re wrong 🐻

• Stanley Druckenmiller’s No. 1 piece of advice for novice investors 🧐

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Review of the macro crosscurrents 🔀

📈The stock market climbed last week, with the S&P 500 gaining 0.6% to end at 7,431.46. The index is now down 2.3% from its June 2 closing high of 7,609.78 and up 8.6% year-to-date. For market insights, check out the Stock Market tab at TKer. »

There were several notable data points and macroeconomic developments since our last review:

🎈Consumer price inflation rises. The Consumer Price Index (CPI) jumped 4.2% year-over-year in May, up from 3.8% the month prior, as energy prices surged. Adjusted for food and energy prices, core CPI was up 2.9%.

On a month-over-month basis, CPI jumped 0.6%, driven by a 3.9% increase in energy prices. Core CPI rose 0.2%. If you annualize the three-month and six-month figures — a reflection of the short-term trend in prices — core CPI climbed 3.2% and 3.1%, respectively.

While inflation rates have cooled over the years, they remain above the Fed’s 2% target rate.

For more discussion on inflation and monetary policy, read: The other side of the Fed’s inflation ‘mistake’ 🧐 and ‘When will the Fed cut rates?’ is not the right question for investors right now ✂️

🎈 Inflation expectations cool marginally. From the New York Fed’s May Survey of Consumer Expectations: “Median inflation expectations decreased by 0.1 percentage point to 3.5% at the one-year-ahead horizon and were unchanged at 3.1% and 3.0% at the three-year and five-year-ahead horizons in May.”

👎Labor market sentiment worsens. From the New York Fed: “The mean perceived probability of losing one’s job in the next 12 months increased by 0.5 percentage point to 15.1%, above the series’ 12-month trailing average of 14.4%. The mean probability of leaving one’s job voluntarily, or the expected quit rate, in the next 12 months increased by 2.6 percentage points to 20.8%, its highest level since February 2023. The increase was broad-based across age, education, and income groups.”

More: “The mean perceived probability of finding a job if one’s current job was lost decreased by 2.3 percentage points to 43.7%, remaining below its 12-month trailing average of 46.8% and marking the lowest reading since December 2025.“

For more on the outlook for jobs, read: The next couple of years for the job market could be tough 🫤

👎 Consumer vibes remain in the dump, but improve slightly. From the University of Michigan’s May Surveys of Consumers: “This month, consumer sentiment ticked up about four index points, or 9%, with consumers experiencing some relief due to the early-month easing in gasoline prices. This measured improvement in sentiment was widespread, seen across age, education, and political party. Lower-income consumers exhibited a particularly strong sentiment increase, consistent with the fact that gasoline comprises a larger share of their budgets. Overall, assessments and expectations of personal finances and business conditions all rose this month. Even with June’s early gains, however, views of the economy are still relatively dour. Sentiment is currently 13% below January 2026 and 19% below a year ago, as consumers remain focused on kitchen table issues. They feel burdened by the recent escalation in inflation and worry that higher inflation could remain stubborn going forward, particularly in the short run.”

According to the survey, consumers are far more concerned about inflation than they are about jobs.

For more on consumer sentiment, read: What consumers do > what consumers say 🙊

🤔 Recent private job growth is stable. According to payroll processor ADP, private U.S. employers added 29,000 jobs in the four weeks ending May 23.

For more on the labor market, read: Things are looking up in the labor market👍

💼 New unemployment insurance claims, total ongoing claims remain low. Initial claims for unemployment benefits rose to 229,000 during the week ending June 6, up from 225,000 the week prior. This metric remains at levels historically associated with economic growth.

Insured unemployment, which captures those who continue to claim unemployment benefits, ticked up to 1.795 million during the week ending May 30.

For more on the labor market, read: Why mass tech layoffs have little effect on total employment 💾

🛍️ Retail sales may have declined last month. According to the Chicago Fed’s Advance Retail Trade Summary, sales fell 0.3% in May. Adjusted for inflation, sales were down 1.3% from the prior period.

💳 Card spending data is holding up. From BofA: “Consumer spending momentum is remarkably robust, with total card spending rising 5.1% year-over-year (YoY) in May - the strongest growth in nearly four years, according to Bank of America internal card data. Moreover, growth isn’t just gasoline-driven — underlying spending remains firm across both goods and services.“

Consumer spending data has looked a lot better than consumer sentiment readings. For more on this contradiction, read: We’re taking that vacation whether we like it or not 🛫 and Household finances are both ‘worse’ and ‘good’ 🌦️

⛽️ Gas and diesel prices fall but remain elevated. From AAA: “The national average for a gallon of regular has been falling for three straight weeks, delivering some relief to drivers during the busy summer travel season. Since May 21, the national average has dropped from $4.56 to $4.12 thanks to crude oil prices remaining below $100 per barrel. Gas prices typically peak around this time of year, but uncertainty surrounding the Strait of Hormuz makes this year more unpredictable. Pump prices remain at four-year highs, but the national average is currently far from the record set on June 11, 2022, of $5 per gallon.“

Here’s a longer-term look at the trajectory of gas and diesel prices, as tracked by the EIA.

For more on energy prices, read: Our love-hate relationship with rising oil prices in charts 💔🛢️📊

🏚 Home sales rose. Sales of previously owned homes increased 3.2% in May to an annualized rate of 4.17 million units. From NAR chief economist Lawrence Yun: “Improving affordability is helping drive this momentum. Even with mortgage rates ticking up compared to earlier in the year, they remain lower than a year ago and are essentially at the long-term historical average. Income gains are also outpacing home price growth by a small margin in most parts of the country.”

Prices for previously owned homes rose from last month and year-ago levels. From the NAR: “The median existing-home sales price for all housing types in May was $429,300, up 1.3% from one year ago ($423,700) – the 35th consecutive month of year-over-year price increases.”

From Yun: “The new record-high May home price reflects solid fundamentals for homeowners and ongoing supply constraints. Only 1% of all home sales involved a foreclosure or an underwater situation in which the sale price could not cover the outstanding mortgage balance. This shows that homeowners are on solid financial footing.”

🏠 Mortgage rates tick higher. According to Freddie Mac, the average 30-year fixed-rate mortgage rose to 6.52%, up from 6.48% last week. From Freddie Mac: “Stronger employment momentum has helped existing home sales reach a five-month high. Importantly, homebuyers are looking past the short-term rate fluctuations and actively entering the market, signaling renewed confidence in homeownership opportunities.“

As of Q1, there were 147.6 million housing units in the U.S., of which 86.0 million were owner-occupied and about 40% were mortgage-free. Of those carrying mortgage debt, almost all have fixed-rate mortgages, and most of those mortgages have rates that were locked in before rates surged from 2021 lows. All of this is to say: Most homeowners are not particularly sensitive to the small weekly movements in home prices or mortgage rates.

For more on mortgages and home prices, read: Why home prices and rents are creating all sorts of confusion about inflation 😖

👎 Small business optimism ticks higher, remains cool. The NFIB’s Small Business Optimism Index declined to 95.3 in May from 95.9 in April. From the NFIB: “Despite the enthusiasm around AI, the overall picture is divided. More small business owners are struggling with significant and unpredictable hikes in fuel prices, which are more challenging for small businesses to pass on to their customers compared to their larger corporate competitors.”

Keep in mind that during times of perceived stress, soft survey data tends to be more exaggerated than actual hard data.

For more on this, read: What businesses do > what businesses say 🙊 and 4 sometimes-conflicting ways I’m thinking about the economy 😬😞😎🙃

📈 Near-term GDP growth estimates are tracking positively. The Atlanta Fed’s GDPNow model sees real GDP growth rising at a 3.3% rate in Q2.

For more on GDP and the economy, read: It’s too ambiguous to just say ‘the economy’ 🤦🏻‍♂️ and Economic data can often be both ‘worse’ and ‘good’ 🌦️

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Putting it all together 📋

Earnings look bullish: The long-term outlook for the stock market remains favorable, bolstered by expectations for years of earnings growth. And earnings are the most important driver of stock prices.

Demand is positive: Demand for goods and services remains positive, supported by healthy consumer and business balance sheets. Personal spending activity remains at record levels. Core capex orders, which are a leading indicator of business spending, have been trending higher.

Growth rates have cooled: While the economy remains healthy, growth has normalized from much hotter levels earlier in the cycle. The economy is less “coiled” these days as major tailwinds like job openings and excess savings have faded. Job creation, while positive, is not as hot as it used to be. It has become harder to argue that growth is destiny.

Actions speak louder than words: We are in an odd period, given that the hard economic data decoupled from the soft sentiment-oriented data. Consumer and business sentiment has been relatively poor, even as tangible consumer and business activity continues to grow and trend at record levels. From an investor’s perspective, what matters is that the hard economic data continues to hold up.

Stocks are not the economy: There’s a case to be made that the U.S. stock market could outperform the U.S. economy in the near term, thanks largely to positive operating leverage. Since the pandemic, companies have aggressively adjusted their cost structures. This came with strategic layoffs and investment in new equipment, including hardware powered by AI. These moves are resulting in positive operating leverage, which means a modest amount of sales growth — in the cooling economy — is translating to robust earnings growth.

Mind the ever-present risks: Of course, we should not get complacent. There will always be risks to worry about, such as U.S. political uncertainty, geopolitical turmoil, energy price volatility, and cyber attacks. There are also the dreaded unknowns. Any of these risks can flare up and spark short-term volatility in the markets.

Investing is never a smooth ride: There’s also the harsh reality that economic recessions and bear markets are developments that all long-term investors should expect as they build wealth in the markets. Always keep your stock market seat belts fastened.

Think long-term: For now, there’s no reason to believe there’ll be a challenge that the economy and the markets won’t overcome. The long game remains undefeated, and it’s a streak that long-term investors can expect to continue.

For more on how the macro story is evolving, check out the previous review of the macro crosscurrents. »

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Key insights about the stock market 📈

Here’s a roundup of some of TKer’s most talked-about paid and free newsletters about the stock market. All of the headlines are hyperlinked to the archived pieces.

10 truths about the stock market 📈

The stock market can be an intimidating place: It’s real money on the line, there’s an overwhelming amount of information, and people have lost fortunes in it very quickly. But it’s also a place where thoughtful investors have long accumulated a lot of wealth. The primary difference between those two outlooks is related to misconceptions about the stock market that can lead people to make poor investment decisions.

The makeup of the S&P 500 is constantly changing 🔀

Passive investing is a concept usually associated with buying and holding a fund that tracks an index. And no passive investment strategy has attracted as much attention as buying an S&P 500 index fund. However, the S&P 500 — an index of 500 of the largest U.S. companies — is anything but a static set of 500 stocks.

The key driver of stock prices: Earnings💰

For investors, anything you can ever learn about a company matters only if it also tells you something about earnings. That’s because long-term moves in a stock can ultimately be explained by the underlying company’s earnings, expectations for earnings, and uncertainty about those expectations for earnings. Over time, the relationship between stock prices and earnings has a very tight statistical relationship.

Stomach-churning stock market sell-offs are normal🎢

Investors should always be mentally prepared for some big sell-offs in the stock market. It’s part of the deal when you invest in an asset class that is sensitive to the constant flow of good and bad news. Since 1950, the S&P 500 has seen an average annual max drawdown (i.e., the biggest intra-year sell-off) of 14%.

How the stock market performed around recessions 📉📈

Every recession in history was different. And the range of stock performance around them varied greatly. There are two things worth noting. First, recessions have always been accompanied by a significant drawdown in stock prices. Second, the stock market bottomed and inflected upward long before recessions ended.

In the stock market, time pays ⏳

Since 1928, the S&P 500 has generated a positive total return more than 89% of the time over all five-year periods. Those are pretty good odds. When you extend the timeframe to 20 years, you’ll see that there’s never been a period where the S&P 500 didn’t generate a positive return.

What a strong dollar means for stocks 👑

While a strong dollar may be great news for Americans vacationing abroad and U.S. businesses importing goods from overseas, it’s a headwind for multinational U.S.-based corporations doing business in non-U.S. markets.

Stanley Druckenmiller’s No. 1 piece of advice for novice investors 🧐

…you don’t want to buy them when earnings are great, because what are they doing when their earnings are great? They go out and expand capacity. Three or four years later, there’s overcapacity and they’re losing money. What about when they’re losing money? Well, then they’ve stopped building capacity. So three or four years later, capacity will have shrunk and their profit margins will be way up. So, you always have to sort of imagine the world the way it’s going to be in 18 to 24 months as opposed to now. If you buy it now, you’re buying into every single fad every single moment. Whereas if you envision the future, you’re trying to imagine how that might be reflected differently in security prices.

Peter Lynch made a remarkably prescient market observation in 1994 🎯

Some event will come out of left field, and the market will go down, or the market will go up. Volatility will occur. Markets will continue to have these ups and downs. … Basic corporate profits have grown about 8% a year historically. So, corporate profits double about every nine years. The stock market ought to double about every nine years… The next 500 points, the next 600 points — I don’t know which way they’ll go… They’ll double again in eight or nine years after that. Because profits go up 8% a year, and stocks will follow. That’s all there is to it.

Warren Buffett’s ‘fourth law of motion’ 📉

Long ago, Sir Isaac Newton gave us three laws of motion, which were the work of genius. But Sir Isaac’s talents didn’t extend to investing: He lost a bundle in the South Sea Bubble, explaining later, “I can calculate the movement of the stars, but not the madness of men.” If he had not been traumatized by this loss, Sir Isaac might well have gone on to discover the Fourth Law of Motion: For investors as a whole, returns decrease as motion increases.

Most pros can’t beat the market 🥊

According to S&P Dow Jones Indices (SPDJI), 79% of U.S. large-cap equity fund managers underperformed the S&P 500 in 2025. As you stretch the time horizon, the numbers get even more dismal. Over three years, 67% underperformed. Over 5 years, 89% underperformed. And over 20 years, 93% underperformed. This 2025 performance was the 16th consecutive year in which the majority of fund managers in this category have lagged the index.

Proof that ‘past performance is no guarantee of future results’ 📊

Even if you are a fund manager who generated industry-leading returns in one year, history says it’s an almost insurmountable task to stay on top consistently in subsequent years. According to S&P Dow Jones Indices, of the 334 large-cap equity funds in the top half of performance in 2021, 58.7% remained at the top half in 2022. However, just 6.9% remained on top through 2023. Only 4.5% stayed on top in the five consecutive years through 2025.

It’s much more dismal when you raise the bar. Of the 164 large-cap equity funds in the top quartile in 2021, just 20.1% remained in that category in 2022. That percentage fell to literally 0.0% in 2023.

The odds are stacked against stock pickers 🎲

Picking stocks in an attempt to beat market averages is an incredibly challenging and sometimes money-losing effort. Most professional stock pickers aren’t able to do this consistently. One of the reasons for this is that most stocks don’t deliver above-average returns. According to S&P Dow Jones Indices, only 19% of the stocks in the S&P 500 outperformed the average stock’s return from 2001 to 2025. Over this period, the average return on an S&P 500 stock was 452%, while the median stock rose by just 59%.

The company is currently unprofitable.

But its valuation suggests investors are wagering that it will continue to grow its profitable Starlink service, capitalize on the massive potential opportunity in AI, and eventually achieve at least some of its other almost unbelievably ambitious goals — like establishing “a permanent human colony on Mars with at least 1 million inhabitants.”

Read more

Interestingly, inflation hasn’t really stopped people from spending. Economic data confirm this.

This contradiction helps explain why, despite poor vibes, the economy continues to grow, profit margins continue to expand, and corporate earnings continue to rise.

A recent research note from Goldman Sachs highlights studies reflecting these trends.

First, they cite two studies (this and this) that provide evidence companies have been increasing price markups on the stuff they sell. This evidence is in line with data showing gross profit margins have been expanding.

“After-tax corporate profits as a share of value added have roughly doubled from about 5% in the late 1980s to over 10% recently,” Goldman economists wrote. “Over the same period, U.S. firms have substantially raised markups — the amount by which prices exceed the marginal cost of producing goods and services.”

At least some of this trend toward rising markups over the years can be explained by falling costs. Regardless, the point is that what customers are paying increasingly covers much more than the costs.

But why hasn’t there been more pushback from consumers?

As I’ve been arguing for a while, customers will pay up if they can afford it.

On that, the Goldman economists found studies showing consumers’ sensitivity to price has been on the decline (study), a trend that can be explained by rising incomes (study).

“Higher income raises the opportunity cost of time, leading consumers to search less for lower prices,” Goldman economists wrote.

Of course, this also means wealthier folks are less price sensitive than poorer folks.

“[Economist Kunal Sangani] estimates that increases in average income and in income inequality — which has meant that less price-sensitive households account for a larger share of total consumption — can account for a roughly 8pp rise in the aggregate retail markup from 1980 to 2018,” Goldman economists added.

This speaks to the K-shaped economic narrative, which argues that higher-income cohorts have increasingly driven spending while those on the lower end retrench.

For those familiar with the concept of price elasticity of demand, this discussion isn’t exactly mind-blowing. Nevertheless, it’s a timely one as everyone wrestles with why corporate profit margins remain high despite consumers’ distaste for higher prices.

Take off your sentiment hat🧢 and put on your stock market hat🎩

As a consumer, I don’t like any of this. I’d much rather be a beneficiary of any corporate cost savings. But instead, the opposite appears to be happening.

Admittedly, I’m not helping the problem. Like the people in Sangani’s study, I frequently find myself begrudgingly paying up for stuff when I could be trading down to lower-priced alternatives.

As an investor in the stock market, I suppose I’m willing to tolerate all this as long as it’s driving sustainable earnings growth, which is bullish for the stocks in my portfolio.

This dynamic speaks to the internal conflicts we face living in a world where how you feel and how you’re treated might not align with the overall direction of the economy or the markets.

There are times when you are wearing your sentiment hat. And there might be times you’re motivated to put on your policy hat.

But TKer is a stock market newsletter, which means we’re putting on our stock market hat right now. And the evidence continues to show that publicly traded companies, which are not charities, remain effective at maneuvering in ways that grow earnings and improve shareholder value.

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Related from TKer:

• A bullish contradiction 🛍

• The stock market isn’t as crazy as you might think 🤨

• Higher energy costs, massive labor costs ... and yet record-high profit margins? 🤑

• Globalization has been great for U.S. corporate profit margins 🌎

• Income and costs affect you and your neighbors differently 💵

• 4 sometimes-conflicting ways I’m thinking about the economy 😬😞😎🙃

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Review of the macro crosscurrents 🔀

📈The stock market rallied to all-time highs, with the S&P 500 setting an intraday high of 7,620.90 and a closing high of 7,609.78 on Tuesday. The index closed the week at 7,383.74, up 7.9% year-to-date. For market insights, check out the Stock Market tab at TKer. »

There were several notable data points and macroeconomic developments since our last review:

💼 Jobs were created. According to the BLS’s Employment Situation report released on Friday, U.S. employers added 172,000 jobs in May. The three-month moving average has risen to 188,000, the highest level since early 2024.

Total payroll employment rose to a record 159.0 million jobs in May.

The unemployment rate — that is, the number of workers who identify as unemployed as a percentage of the civilian labor force — stood at 4.3% in May.

The labor market is in decent shape, but clearly isn’t as hot as it was just a few years ago.

For more on the labor market, read: Things are looking up in the labor market👍

💸 Wage growth is cooling. Average hourly earnings rose by 0.3% month-over-month in May. On a year-over-year basis, May’s wages were up 3.4%.

💰 Job switchers get better pay. According to ADP, annual pay in May for people who changed jobs was up 6.5% from a year ago. For those who stayed at their job, pay was up 4.4%, about what it’s been for the past year.

For more on why policymakers are watching wage growth, read: Revisiting the key chart to watch amid the Fed’s war on inflation 📈

💼 Job openings rose. According to the BLS’s Job Openings and Labor Turnover Survey, employers had 7.62 million job openings in April, up from 6.89 million in March.

During the month, there were 7.37 million unemployed people — meaning there were 1.03 job openings per unemployed person. This remains one of the most straightforward indicators of labor demand. However, this metric has returned to prepandemic levels.

For more on job openings, read: Were there really twice as many job openings as unemployed people? 🤨

👍 Layoffs remain depressed, hiring remains firm. Employers laid off 1.69 million people in April. While challenging for the people affected, this figure represents just 1.1% of total employment. This metric remains slightly below prepandemic levels.

For more on layoffs, read: Mathematical context can totally change the story 🧮

Hiring activity remains well above layoff activity. During the month, employers hired 5.12 million people.

That said, the hiring rate — the number of hires as a percentage of the employed workforce — is relatively low, which could be a sign of trouble to come in the labor market.

For more on why this metric matters, read: The hiring situation 🧩

🤔 People are quitting less. In April, 2.98 million workers quit their jobs. This represents 1.9% of the workforce. The rate continues to trend below prepandemic levels.

A low quits rate could mean a number of things: more people are satisfied with their job, workers have fewer outside job opportunities, wage growth is cooling, or productivity will improve as fewer people are entering new, unfamiliar roles.

For more on this dynamic, read: The crummy labor market is yielding a ‘tenure dividend’ for corporations 💰

💼 New unemployment insurance claims, total ongoing claims remain low. Initial claims for unemployment benefits rose to 225,000 during the week ending May 30, up from 212,000 the week prior. This metric remains at levels historically associated with economic growth.

Insured unemployment, which captures those who continue to claim unemployment benefits, ticked down to 1.777 million during the week ending May 23.

For more on the labor market, read: Why mass tech layoffs have little effect on total employment 💾

💪 Labor productivity increases. From the BLS: “Nonfarm business sector labor productivity increased 0.3% in the first quarter of 2026 … as output increased 1.0% and hours worked increased 0.7%. (All quarterly percent changes in this release are seasonally adjusted annualized rates.) From the same quarter a year ago, nonfarm business sector labor productivity increased 2.8% in the first quarter of 2026, reflecting an increase in output of 3.2% and increase in hours worked of 0.4%.”

For more, read: Promising signs for productivity ⚙️ and The crummy labor market is yielding a ‘tenure dividend’ for corporations 💰

💳 Card spending data is holding up. From BofA: “Total card spending per HH was up 5.2% y/y in the week ending May 30, according to BAC aggregated credit & debit card data. Ex-gas spending rose by 4.1% y/y. Dept stores, general merch and restaurants saw the biggest pickup in y/y spending growth. The largest declines in y/y spending growth were in furniture, transit, home improvement, clothing, electronics & groceries.“

Consumer spending data has looked a lot better than consumer sentiment readings. For more on this contradiction, read: We’re taking that vacation whether we like it or not 🛫 and Household finances are both ‘worse’ and ‘good’ 🌦️

⛽️ Gas and diesel prices fall but remain elevated. From AAA: “The national average for a gallon of regular gasoline is down 12 cents from last week at $4.42. Crude oil prices have been going down this week amid reports of peace talks with Iran. But the fragile situation could cause oil prices to spike again if a ceasefire deal isn’t reached. The chart below shows how the national average has fluctuated in recent weeks. Gas prices remain the highest they’ve been in four years and will likely remain elevated as the busy summer driving season gets underway.“

Here’s a longer-term look at the trajectory of gas and diesel prices, as tracked by the EIA.

For more on energy prices, read: Our love-hate relationship with rising oil prices in charts 💔🛢️📊

🏠 Mortgage rates tick lower. According to Freddie Mac, the average 30-year fixed-rate mortgage declined to 6.48%, down from 6.53% last week. From Freddie Mac: “With mortgage rates in the mid-6% range and income growth outpacing home price growth, housing affordability is marginally improving.“

As of Q1, there were 147.6 million housing units in the U.S., of which 86.0 million were owner-occupied and about 40% were mortgage-free. Of those carrying mortgage debt, almost all have fixed-rate mortgages, and most of those mortgages have rates that were locked in before rates surged from 2021 lows. All of this is to say: Most homeowners are not particularly sensitive to the small weekly movements in home prices or mortgage rates.

For more on mortgages and home prices, read: Why home prices and rents are creating all sorts of confusion about inflation 😖

🔨 Construction spending ticked higher. Construction spending increased 0.4% to an annual rate of $2.17 trillion in April.

📋 Manufacturing activity surveys signal growth, but also problems. From S&P Global’s May U.S. Manufacturing PMI: “At first glance, the manufacturing sector seems to be firing on all cylinders but lift the hood and the picture is not so clear. The headline PMI has hit a four-year high, with strong factory production growth for a second successive month in response to a further marked upturn in order books, but since the outbreak of war in the Middle East we have seen production and demand buoyed by stock building as companies worry over rising prices and supply difficulties. This stockpiling was again widely evident in May and makes it hard to take an accurate reading on the underlying health of the manufacturing economy, as growth will cool once this stock build has run its course. The incidence of supply chain delays is the highest since August 2022, with the buying of safety stocks not only adding to the supply squeeze from the closure of the Strait of Hormuz but also pushing prices higher for a wide variety of inputs. The resulting steep jump in producer costs sends a worrying signal that broader economy inflation has further to rise in the coming months.”

Similarly, the ISM May Manufacturing PMI signaled growth.

The ISM report also signaled inflation was heating up.

📋 Services activity surveys were mixed. From S&P Global’s May U.S. Services PMI: “Demand for services has been largely stalled over the past three months, losing the strength seen earlier in the year. The sluggish services economy is acting as drag on overall economic growth, which the PMI data signal to be running at a modest annualized pace of just above 1% so far in the second quarter. … Rising costs and cooling demand are meanwhile causing service companies to cut staff at the fastest rate seen since the early months of the pandemic.”

While S&P’s survey signaled cooling growth, ISM’s Services PMI signaled an acceleration in growth.

The ISM report also signaled inflation was heating up.

Keep in mind that during times of perceived stress, soft survey data tends to be more exaggerated than actual hard data.

For more on this, read: What businesses do > what businesses say 🙊 and 4 sometimes-conflicting ways I’m thinking about the economy 😬😞😎🙃

🏭 Business investment activity ticks lower. Orders for nondefense capital goods excluding aircraft — a.k.a. core capex or business investment — declined 1.0% to $82.5 billion in April.

Core capex orders are a leading indicator, meaning they foretell economic activity down the road.

📈 Near-term GDP growth estimates are tracking positively. The Atlanta Fed’s GDPNow model sees real GDP growth rising at a 3.0% rate in Q2.

For more on GDP and the economy, read: It’s too ambiguous to just say ‘the economy’ 🤦🏻‍♂️ and Economic data can often be both ‘worse’ and ‘good’ 🌦️

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Putting it all together 📋

Earnings look bullish: The long-term outlook for the stock market remains favorable, bolstered by expectations for years of earnings growth. And earnings are the most important driver of stock prices.

Demand is positive: Demand for goods and services remains positive, supported by healthy consumer and business balance sheets. Personal spending activity remains at record levels. Core capex orders, which are a leading indicator of business spending, have been trending higher.

Growth rates have cooled: While the economy remains healthy, growth has normalized from much hotter levels earlier in the cycle. The economy is less “coiled” these days as major tailwinds like job openings and excess savings have faded. Job creation, while positive, is not as hot as it used to be. It has become harder to argue that growth is destiny.

Actions speak louder than words: We are in an odd period, given that the hard economic data decoupled from the soft sentiment-oriented data. Consumer and business sentiment has been relatively poor, even as tangible consumer and business activity continues to grow and trend at record levels. From an investor’s perspective, what matters is that the hard economic data continues to hold up.

Stocks are not the economy: There’s a case to be made that the U.S. stock market could outperform the U.S. economy in the near term, thanks largely to positive operating leverage. Since the pandemic, companies have aggressively adjusted their cost structures. This came with strategic layoffs and investment in new equipment, including hardware powered by AI. These moves are resulting in positive operating leverage, which means a modest amount of sales growth — in the cooling economy — is translating to robust earnings growth.

Mind the ever-present risks: Of course, we should not get complacent. There will always be risks to worry about, such as U.S. political uncertainty, geopolitical turmoil, energy price volatility, and cyber attacks. There are also the dreaded unknowns. Any of these risks can flare up and spark short-term volatility in the markets.

Investing is never a smooth ride: There’s also the harsh reality that economic recessions and bear markets are developments that all long-term investors should expect as they build wealth in the markets. Always keep your stock market seat belts fastened.

Think long-term: For now, there’s no reason to believe there’ll be a challenge that the economy and the markets won’t overcome. The long game remains undefeated, and it’s a streak that long-term investors can expect to continue.

For more on how the macro story is evolving, check out the previous review of the macro crosscurrents. »

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Key insights about the stock market 📈

Here’s a roundup of some of TKer’s most talked-about paid and free newsletters about the stock market. All of the headlines are hyperlinked to the archived pieces.

10 truths about the stock market 📈

The stock market can be an intimidating place: It’s real money on the line, there’s an overwhelming amount of information, and people have lost fortunes in it very quickly. But it’s also a place where thoughtful investors have long accumulated a lot of wealth. The primary difference between those two outlooks is related to misconceptions about the stock market that can lead people to make poor investment decisions.

The makeup of the S&P 500 is constantly changing 🔀

Passive investing is a concept usually associated with buying and holding a fund that tracks an index. And no passive investment strategy has attracted as much attention as buying an S&P 500 index fund. However, the S&P 500 — an index of 500 of the largest U.S. companies — is anything but a static set of 500 stocks.

The key driver of stock prices: Earnings💰

For investors, anything you can ever learn about a company matters only if it also tells you something about earnings. That’s because long-term moves in a stock can ultimately be explained by the underlying company’s earnings, expectations for earnings, and uncertainty about those expectations for earnings. Over time, the relationship between stock prices and earnings has a very tight statistical relationship.

Stomach-churning stock market sell-offs are normal🎢

Investors should always be mentally prepared for some big sell-offs in the stock market. It’s part of the deal when you invest in an asset class that is sensitive to the constant flow of good and bad news. Since 1950, the S&P 500 has seen an average annual max drawdown (i.e., the biggest intra-year sell-off) of 14%.

How the stock market performed around recessions 📉📈

Every recession in history was different. And the range of stock performance around them varied greatly. There are two things worth noting. First, recessions have always been accompanied by a significant drawdown in stock prices. Second, the stock market bottomed and inflected upward long before recessions ended.

In the stock market, time pays ⏳

Since 1928, the S&P 500 has generated a positive total return more than 89% of the time over all five-year periods. Those are pretty good odds. When you extend the timeframe to 20 years, you’ll see that there’s never been a period where the S&P 500 didn’t generate a positive return.

What a strong dollar means for stocks 👑

While a strong dollar may be great news for Americans vacationing abroad and U.S. businesses importing goods from overseas, it’s a headwind for multinational U.S.-based corporations doing business in non-U.S. markets.

Stanley Druckenmiller’s No. 1 piece of advice for novice investors 🧐

…you don’t want to buy them when earnings are great, because what are they doing when their earnings are great? They go out and expand capacity. Three or four years later, there’s overcapacity and they’re losing money. What about when they’re losing money? Well, then they’ve stopped building capacity. So three or four years later, capacity will have shrunk and their profit margins will be way up. So, you always have to sort of imagine the world the way it’s going to be in 18 to 24 months as opposed to now. If you buy it now, you’re buying into every single fad every single moment. Whereas if you envision the future, you’re trying to imagine how that might be reflected differently in security prices.

Peter Lynch made a remarkably prescient market observation in 1994 🎯

Some event will come out of left field, and the market will go down, or the market will go up. Volatility will occur. Markets will continue to have these ups and downs. … Basic corporate profits have grown about 8% a year historically. So, corporate profits double about every nine years. The stock market ought to double about every nine years… The next 500 points, the next 600 points — I don’t know which way they’ll go… They’ll double again in eight or nine years after that. Because profits go up 8% a year, and stocks will follow. That’s all there is to it.

Warren Buffett’s ‘fourth law of motion’ 📉

Long ago, Sir Isaac Newton gave us three laws of motion, which were the work of genius. But Sir Isaac’s talents didn’t extend to investing: He lost a bundle in the South Sea Bubble, explaining later, “I can calculate the movement of the stars, but not the madness of men.” If he had not been traumatized by this loss, Sir Isaac might well have gone on to discover the Fourth Law of Motion: For investors as a whole, returns decrease as motion increases.

Most pros can’t beat the market 🥊

According to S&P Dow Jones Indices (SPDJI), 79% of U.S. large-cap equity fund managers underperformed the S&P 500 in 2025. As you stretch the time horizon, the numbers get even more dismal. Over three years, 67% underperformed. Over 5 years, 89% underperformed. And over 20 years, 93% underperformed. This 2025 performance was the 16th consecutive year in which the majority of fund managers in this category have lagged the index.

Proof that ‘past performance is no guarantee of future results’ 📊

Even if you are a fund manager who generated industry-leading returns in one year, history says it’s an almost insurmountable task to stay on top consistently in subsequent years. According to S&P Dow Jones Indices, of the 334 large-cap equity funds in the top half of performance in 2021, 58.7% remained at the top half in 2022. However, just 6.9% remained on top through 2023. Only 4.5% stayed on top in the five consecutive years through 2025.

It’s much more dismal when you raise the bar. Of the 164 large-cap equity funds in the top quartile in 2021, just 20.1% remained in that category in 2022. That percentage fell to literally 0.0% in 2023.

The odds are stacked against stock pickers 🎲

Picking stocks in an attempt to beat market averages is an incredibly challenging and sometimes money-losing effort. Most professional stock pickers aren’t able to do this consistently. One of the reasons for this is that most stocks don’t deliver above-average returns. According to S&P Dow Jones Indices, only 19% of the stocks in the S&P 500 outperformed the average stock’s return from 2001 to 2025. Over this period, the average return on an S&P 500 stock was 452%, while the median stock rose by just 59%.

Importantly, the multi-month trends suggest we’re on an upswing, which is welcome news following a couple of months of net job losses earlier this year and late last year.

Read more

The pandemic market crash followed an all-time high in February 2020. An all-time high in October 2007 preceded the global financial crisis. The dotcom bubble burst after the market set an all-time high in March 2000. And so on.

But listen very carefully: Just because major market drawdowns are often preceded by record highs doesn’t mean all-time highs are often followed by major market drawdowns.

Read more

Maybe the market eventually moves as they predicted. Sometimes that happens.

But markets are complicated, and they’ll often move in counterintuitive ways.

Consider the recent rally in long-term interest rates. That’s gotta be bad news for the stock market, right? Not necessarily.

In his note to clients on Wednesday, Nick Colas, co-founder of DataTrek Research, challenged the idea that rising rates automatically mean lower stock market valuations. From his note: “You have probably heard this sequence of statements many times: Long-term interest rates are increasing. This means that the present value of future cash flows is declining. Therefore, equity valuations should drop as well.“

TKer subscribers aren’t strangers to this theory.

Colas dismantled this oversimplification, flagging two big problems with the shoddy argument he just summarized.

“The first is that it doesn’t work in real life,” he wrote.

He pointed at 2015 to 2019, when the 10-year U.S. Treasury note yielded an average 2.27%. During that period, the S&P 500’s forward price-to-earnings (P/E) ratio was between 15x and 18x earnings.

He then noted that as of Wednesday, the 10-year yield is now much higher at 4.49%, and yet the forward P/E is also much higher at 21x earnings.

In short, the market didn’t do what some skeptics might’ve assumed.

But does this mean the stock market is irrational? No.

“The second reason that yields and equity valuations move independently of each other comes down to discounted cash flow math,” Colas wrote.

Instead of quoting too much of his work here, I’ll recommend you sign up for his and his colleague Jessica Rabe’s work at DataTrekResearch.com.

But the takeaway from his analysis is that an increase in interest rates is theoretically bad for valuations if you don’t consider earnings growth.

“If interest rates go up 2 percentage points (as they have since 2020) but earnings growth expectations increase by 3 percent, then equity valuations actually increase,” he wrote.

It’s such a refreshingly simple observation that speaks to a massive mistake some short-sighted market prognosticators keep making. And that mistake is adjusting one variable in a complex formula while holding all other variables constant.

In the real world, all other variables are never constant. With the passage of time, a lot of things change. This includes earnings, which we’ve seen trend higher for decades.

Zooming out 🔭

Whether it’s rising interest rates, a stronger dollar, higher tax rates, elevated energy prices, falling rate cut odds, above-average valuations, or a shrinking equity risk premium, investors should be wary of jumping to conclusions after seeing a single metric move unfavorably.

To Colas’ point, you’ll often find historical examples of the market doing the opposite of what you might’ve intuited.

Furthermore, the closer you look, the more likely it is that you’ll find other variables moving in ways that provide a theoretically sound justification for why stocks do what they do.

This is not to say that investors and traders are always rational and never wrong. Rather, it’s all just a reminder that markets are complicated and deserving of analysis that involves more than an assumption based on the move of one variable.

-

Related from TKer:

• A few charts to remember before you jump to conclusions 📊

• 3 stock market charts to consider as interest rates rise 📊📉📈

• There’s more to the story than ‘high interest rates are bad for stocks’ 🤨

• The stock market isn’t as crazy as you might think 🤨

• The most important Latin phrase in investing 📜

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Review of the macro crosscurrents 🔀

📈The stock market rallied to all-time highs, with the S&P 500 setting an intraday high of 7,599.38 and a closing high of 7,580.06 on Friday. The index is up 10.7% year-to-date. For market insights, check out the Stock Market tab at TKer. »

There were several notable data points and macroeconomic developments since our last review:

🎈 Fed’s preferred inflation measure jumped on higher energy prices. The personal consumption expenditures (PCE) price index in April was up 3.8% from a year ago, fueled by higher energy prices. The core PCE price index — the Federal Reserve’s preferred measure of inflation — was up 3.3% during the month, up from March’s 3.2% rate.

On a month-over-month basis, the core PCE price index was up 0.24%. If you annualize the three-month trend in the monthly figures — a reflection of the short-term trend in prices — core PCE climbed 3.8%.

While inflation rates remain above the Federal Reserve’s 2% target, they are down considerably from peak levels just a few years ago. Nevertheless, the recent move higher bears watching.

For more on the Fed’s impact on markets, read: ‘When will the Fed cut rates?’ is not the right question for investors right now ✂️

⛽️ Gas and diesel prices decline but remain elevated. From AAA: “The national average for a gallon of regular gasoline is down 12 cents from last week at $4.42. Crude oil prices have been going down this week amid reports of peace talks with Iran. But the fragile situation could cause oil prices to spike again if a ceasefire deal isn’t reached. The chart below shows how the national average has fluctuated in recent weeks. Gas prices remain the highest they’ve been in four years and will likely remain elevated as the busy summer driving season gets underway.“

Here’s a longer-term look at the trajectory of gas and diesel prices, as tracked by the EIA.

For more on energy prices, read: Our love-hate relationship with rising oil prices in charts 💔🛢️📊

🛍️ Consumer spending ticks higher. According to BEA data, personal consumption expenditures increased 0.5% month-over-month in April to an annual rate of $21.98 trillion, an all-time high.

Adjusted for inflation, real personal consumption expenditures increased 0.1% from the prior month to another all-time high.

Here’s a breakdown of spending growth by category.

💳 Card spending data is holding up. From BofA: “Total card spending per HH was up 5.7% y/y in the week ending May 23, according to BAC aggregated credit & debit card data. Ex-gas spending rose by 4.5% y/y. Memorial Day timing impact is minimal as both ‘25 & ‘26 include the Fri before the holiday. Consumers continue to spend at a healthy pace even as the tailwind from the OBBBA related stimulus is behind them.“

Consumer spending data has looked a lot better than consumer sentiment readings. For more on this contradiction, read: We’re taking that vacation whether we like it or not 🛫 and Household finances are both ‘worse’ and ‘good’ 🌦️

👎 Consumer vibes remain in the dumps. The Conference Board’s Consumer Confidence Index declined 0.7 points in May. From the report: “Consumer confidence edged downward in May as the inflationary impacts of the war in the Middle East intensified. Consumer appraisals of current business conditions and the current labor market were moderately less positive compared to last month. This was somewhat offset by modest improvements in consumers’ expectations for business conditions and the labor market six months from now. Meanwhile, income expectations eased in May, as those anticipating less income rose.”

More from the report: “Among age groups, confidence ticked up for consumers aged 35-54, but trended downward for older and younger consumers, both month-over-month and on a six-month moving average basis. By income, confidence among higher income groups trended upward on a six-month moving average basis. By generation, confidence improved for the Silent Generation (the oldest group) but was little changed or lower among other generations. By political affiliation, Republicans remained the most optimistic, while Independents were the only group that saw confidence tick up on a month-over-month basis.”

For more on consumer sentiment, read: What consumers do > what consumers say 🙊 and The economy may not be working for everyone right now, but it’s at least working for stock market investors 🎭

👎 Consumers don’t feel good about the labor market. From The Conference Board: “On net, consumers’ views of the labor market worsened slightly in May. 25.5% of consumers said jobs were ‘plentiful,’ down from 26.9% in April. Conversely, 18.6% of consumers said jobs were ‘hard to get,’ down from 19.4%.”

Many economists monitor the spread between these two percentages (a.k.a., the labor market differential). While the metric improved recently, the direction of the spread reflects a cooling labor market.

More from The Conference Board: “Consumers were also more positive about the labor market outlook in May. 17.5% of consumers expected more jobs to be available, up from 16.7% in April. 26.0% anticipated fewer jobs, down from 26.8%.”

For more on the labor market, read: The labor market is cooling 💼

💼 New unemployment insurance claims, total ongoing claims remain low. Initial claims for unemployment benefits rose to 215,000 during the week ending May 23, up from 210,000 the week prior. This metric remains at levels historically associated with economic growth.

Insured unemployment, which captures those who continue to claim unemployment benefits, ticked up to 1.786 million during the week ending May 16.

For more on the labor market, read: Why mass tech layoffs have little effect on total employment 💾

🤔 Recent private job growth is stable. According to payroll processor ADP, private U.S. employers added 35,750 jobs in the four weeks ending May 9.

For more on the labor market, read: The next couple of years for the job market could be tough 🫤

👎 CEO confidence tumbles. From The Conference Board’s Dana Peterson: “CEOs reported that the economy is materially worse now than it was six months ago and expected economic conditions to weaken further over the next six months. Regarding their own industries, CEO assessments about current conditions and expectations in six months deteriorated since last quarter.”

From the firm’s Roger Ferguson: “Among top business risks impacting their industries, CEOs became more worried about cyber risks, with nearly two thirds ranking it a top risk in Q2. Geopolitical and AI & new technology risks also remained top concerns. Risks associated with supply chains and energy rose in importance and intensity in Q2.“

For more on cyber risks, read: Bizarre moment at Berkshire’s annual meeting spotlights cyber risk🤖

🏭 Business investment activity ticks lower. Orders for nondefense capital goods excluding aircraft — a.k.a. core capex or business investment — declined 1.1% to $82.4 billion in April.

Core capex orders are a leading indicator, meaning they foretell economic activity down the road.

🏠 Mortgage rates rise. According to Freddie Mac, the average 30-year fixed-rate mortgage rose to 6.53%, up from 6.51% last week. From Freddie Mac: “Pending home sales have increased three months in a row, indicating there’s latent demand and homebuyers are ready to jump back into the market if mortgage rates decline.“

As of Q1, there were 147.6 million housing units in the U.S., of which 86.0 million were owner-occupied and about 40% were mortgage-free. Of those carrying mortgage debt, almost all have fixed-rate mortgages, and most of those mortgages have rates that were locked in before rates surged from 2021 lows. All of this is to say: Most homeowners are not particularly sensitive to the small weekly movements in home prices or mortgage rates.

For more on mortgages and home prices, read: Why home prices and rents are creating all sorts of confusion about inflation 😖

🏘️ New home sales fell. Sales of newly built homes declined 6.2% in April to an annualized rate of 622,000 units.

New home sales figures come with a large margin of error. For more on this, read: Mathematical context can totally change the story 🧮

🏠 Home prices cool. According to the S&P CoreLogic Case-Shiller index, home prices were up 0.7% year-over-year in March but declined 0.2% month-over-month. From S&P Dow Jones Indices’ Nicholas Godec: “More than half of the 20 major U.S. housing markets recorded year-over-year price declines in March, reflecting a broadening and deepening housing slowdown. … With consumer inflation accelerating to roughly 3.3% in March, U.S. home values have now fallen in real terms for the 10th consecutive month, underscoring an ongoing erosion of inflation-adjusted housing wealth.”

For more on how home prices may be affecting saving, read: A contrarian note about the falling personal saving rate...💸

📈 Near-term GDP growth estimates are tracking positively. The Atlanta Fed’s GDPNow model sees real GDP growth rising at a 3.8% rate in Q2.

For more on GDP and the economy, read: It’s too ambiguous to just say ‘the economy’ 🤦🏻‍♂️ and Economic data can often be both ‘worse’ and ‘good’ 🌦️

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Putting it all together 📋

Earnings look bullish: The long-term outlook for the stock market remains favorable, bolstered by expectations for years of earnings growth. And earnings are the most important driver of stock prices.

Demand is positive: Demand for goods and services remains positive, supported by healthy consumer and business balance sheets. Personal spending activity remains at record levels. Core capex orders, which are a leading indicator of business spending, have been on the rise.

Growth rates have cooled: While the economy remains healthy, growth has normalized from much hotter levels earlier in the cycle. The economy is less “coiled” these days as major tailwinds like job openings and excess savings have faded. Job creation is hovering at near-zero. It has become harder to argue that growth is destiny.

Actions speak louder than words: We are in an odd period, given that the hard economic data decoupled from the soft sentiment-oriented data. Consumer and business sentiment has been relatively poor, even as tangible consumer and business activity continues to grow and trend at record levels. From an investor’s perspective, what matters is that the hard economic data continues to hold up.

Stocks are not the economy: There’s a case to be made that the U.S. stock market could outperform the U.S. economy in the near term, thanks largely to positive operating leverage. Since the pandemic, companies have aggressively adjusted their cost structures. This came with strategic layoffs and investment in new equipment, including hardware powered by AI. These moves are resulting in positive operating leverage, which means a modest amount of sales growth — in the cooling economy — is translating to robust earnings growth.

Mind the ever-present risks: Of course, we should not get complacent. There will always be risks to worry about, such as U.S. political uncertainty, geopolitical turmoil, energy price volatility, and cyber attacks. There are also the dreaded unknowns. Any of these risks can flare up and spark short-term volatility in the markets.

Investing is never a smooth ride: There’s also the harsh reality that economic recessions and bear markets are developments that all long-term investors should expect as they build wealth in the markets. Always keep your stock market seat belts fastened.

Think long-term: For now, there’s no reason to believe there’ll be a challenge that the economy and the markets won’t overcome. The long game remains undefeated, and it’s a streak that long-term investors can expect to continue.

For more on how the macro story is evolving, check out the previous review of the macro crosscurrents. »

Subscribe now

Key insights about the stock market 📈

Here’s a roundup of some of TKer’s most talked-about paid and free newsletters about the stock market. All of the headlines are hyperlinked to the archived pieces.

10 truths about the stock market 📈

The stock market can be an intimidating place: It’s real money on the line, there’s an overwhelming amount of information, and people have lost fortunes in it very quickly. But it’s also a place where thoughtful investors have long accumulated a lot of wealth. The primary difference between those two outlooks is related to misconceptions about the stock market that can lead people to make poor investment decisions.

The makeup of the S&P 500 is constantly changing 🔀

Passive investing is a concept usually associated with buying and holding a fund that tracks an index. And no passive investment strategy has attracted as much attention as buying an S&P 500 index fund. However, the S&P 500 — an index of 500 of the largest U.S. companies — is anything but a static set of 500 stocks.

The key driver of stock prices: Earnings💰

For investors, anything you can ever learn about a company matters only if it also tells you something about earnings. That’s because long-term moves in a stock can ultimately be explained by the underlying company’s earnings, expectations for earnings, and uncertainty about those expectations for earnings. Over time, the relationship between stock prices and earnings has a very tight statistical relationship.

Stomach-churning stock market sell-offs are normal🎢

Investors should always be mentally prepared for some big sell-offs in the stock market. It’s part of the deal when you invest in an asset class that is sensitive to the constant flow of good and bad news. Since 1950, the S&P 500 has seen an average annual max drawdown (i.e., the biggest intra-year sell-off) of 14%.

How the stock market performed around recessions 📉📈

Every recession in history was different. And the range of stock performance around them varied greatly. There are two things worth noting. First, recessions have always been accompanied by a significant drawdown in stock prices. Second, the stock market bottomed and inflected upward long before recessions ended.

In the stock market, time pays ⏳

Since 1928, the S&P 500 has generated a positive total return more than 89% of the time over all five-year periods. Those are pretty good odds. When you extend the timeframe to 20 years, you’ll see that there’s never been a period where the S&P 500 didn’t generate a positive return.

What a strong dollar means for stocks 👑

While a strong dollar may be great news for Americans vacationing abroad and U.S. businesses importing goods from overseas, it’s a headwind for multinational U.S.-based corporations doing business in non-U.S. markets.

Stanley Druckenmiller’s No. 1 piece of advice for novice investors 🧐

…you don’t want to buy them when earnings are great, because what are they doing when their earnings are great? They go out and expand capacity. Three or four years later, there’s overcapacity and they’re losing money. What about when they’re losing money? Well, then they’ve stopped building capacity. So three or four years later, capacity will have shrunk and their profit margins will be way up. So, you always have to sort of imagine the world the way it’s going to be in 18 to 24 months as opposed to now. If you buy it now, you’re buying into every single fad every single moment. Whereas if you envision the future, you’re trying to imagine how that might be reflected differently in security prices.

Peter Lynch made a remarkably prescient market observation in 1994 🎯

Some event will come out of left field, and the market will go down, or the market will go up. Volatility will occur. Markets will continue to have these ups and downs. … Basic corporate profits have grown about 8% a year historically. So, corporate profits double about every nine years. The stock market ought to double about every nine years… The next 500 points, the next 600 points — I don’t know which way they’ll go… They’ll double again in eight or nine years after that. Because profits go up 8% a year, and stocks will follow. That’s all there is to it.

Warren Buffett’s ‘fourth law of motion’ 📉

Long ago, Sir Isaac Newton gave us three laws of motion, which were the work of genius. But Sir Isaac’s talents didn’t extend to investing: He lost a bundle in the South Sea Bubble, explaining later, “I can calculate the movement of the stars, but not the madness of men.” If he had not been traumatized by this loss, Sir Isaac might well have gone on to discover the Fourth Law of Motion: For investors as a whole, returns decrease as motion increases.

Most pros can’t beat the market 🥊

According to S&P Dow Jones Indices (SPDJI), 79% of U.S. large-cap equity fund managers underperformed the S&P 500 in 2025. As you stretch the time horizon, the numbers get even more dismal. Over three years, 67% underperformed. Over 5 years, 89% underperformed. And over 20 years, 93% underperformed. This 2025 performance was the 16th consecutive year in which the majority of fund managers in this category have lagged the index.

Proof that ‘past performance is no guarantee of future results’ 📊

Even if you are a fund manager who generated industry-leading returns in one year, history says it’s an almost insurmountable task to stay on top consistently in subsequent years. According to S&P Dow Jones Indices, of the 334 large-cap equity funds in the top half of performance in 2021, 58.7% remained at the top half in 2022. However, just 6.9% remained on top through 2023. Only 4.5% stayed on top in the five consecutive years through 2025.

It’s much more dismal when you raise the bar. Of the 164 large-cap equity funds in the top quartile in 2021, just 20.1% remained in that category in 2022. That percentage fell to literally 0.0% in 2023.

The odds are stacked against stock pickers 🎲

Picking stocks in an attempt to beat market averages is an incredibly challenging and sometimes money-losing effort. Most professional stock pickers aren’t able to do this consistently. One of the reasons for this is that most stocks don’t deliver above-average returns. According to S&P Dow Jones Indices, only 19% of the stocks in the S&P 500 outperformed the average stock’s return from 2001 to 2025. Over this period, the average return on an S&P 500 stock was 452%, while the median stock rose by just 59%.

According to BEA data released Thursday, personal consumption expenditures increased 0.5% month over month in April to an annual rate of $21.98 trillion, an all-time high. Adjusted for inflation, real personal consumption expenditures increased 0.1% from the prior month to another all-time high.

What’s striking is that disposable personal income declined by 0.1% during the period.

Taken together, the personal saving rate fell to 2.6%, the lowest level since June 2022.

All else equal, this is not great. The implication is that more people are drawing from their savings to support their spending amid inflationary pressures.

However, all else is never equal. And incomes and savings rates give an incomplete picture of household finances.

Read more

In his mid-year outlook note published earlier this month, Morgan Stanley’s Mike Wilson offered a glimpse of what he’s expecting in 2028.

“We see 2026 EPS of $339 (23% growth), 2027 EPS of $380 (12% growth), and 2028 EPS of $429 (13% growth),” Wilson wrote (emphasis added).

This is encouraging for investors because earnings are the most important long-term driver of stock prices.

Wilson’s 2028 estimate isn’t too far from the consensus, which calls for earnings to grow 12% year over year to $427 per share.

“Positive operating leverage, AI adoption/’run it lean,’ improving pricing power, and an AI capex cycle that continues to show momentum are key drivers of our constructive view on earnings,” Wilson said.

Admittedly, no one can be expected to nail what’ll happen two to three years from now.

But it’s worth giving it a shot, especially since so much of a stock’s value comes from what the underlying company is expected to earn in the years ahead.

To his credit, Wilson has long been right about the positive operating leverage theme. Three years ago, he predicted that operating leverage — or the degree to which costs move with sales — would help drive profit margin expansion in the years to come. Indeed, profit margins have continued to trend higher through the years.

The AI adoption story is relatively new, but it’s gaining traction.

Companies continue to prove they have pricing power as they have been making their customers help pay for inflation over the years.

And then there’s the AI capex story. The megacap tech hyperscalers continue to commit massive amounts of cash toward building out the AI hardware infrastructure. Barclays analysts expect hyperscaler capex to peak at $1 trillion in 2028 before leveling off.

There’s no guarantee that these will be the leading earnings narratives two years from now. Nevertheless, it’s positive that we have tangible narratives that could realistically be the driving forces of earnings growth.

Decelerating somewhat 🐢

While earnings may continue to grow, the pace of growth isn’t expected to remain as hot.

“S&P 500 net income is expected by consensus to peak in 2026, then decelerate in 2027 and 2028,” RBC’s Lori Calvasina wrote earlier this month. “The Mag 7 appears to have peaked in 2024, with deceleration expected through 2027 and some reacceleration anticipated in 2028. Meanwhile, a broader AI basket is anticipated to see far superior growth in 2026 to both the broader index and Mag 7, followed by deceleration in 2027 and 2028.”

For those who’ve been nervous about growth being a little hot, these forecasts for decelerating growth might come as a relief.

But don’t confuse decelerating growth with slow growth.

Ed Yardeni, founder of Yardeni Research, considered how the current five-year earnings growth estimate compares to historical levels.

“The analysts may be starting to get ‘Buzzed,’ as their expected long-term earnings growth (LTEG) for the S&P 500 rose to 20.2% during the week of May 5,” Yardeni observed. “It rose even higher during the pandemic, when fiscal and monetary policymakers both were slamming on the accelerator. But LTEG now exceeds the 18.6% peak of the 2000 tech bubble.”

So even assuming deceleration in growth, the expected earnings growth rate remains very strong.

The big picture 🖼️

A lot of things could go wrong between now and 2028. And if we’ve learned anything over the past few years, unexpected things happen.

While we don’t know for sure what the next couple of years will look like, we can at least be certain that the publicly traded companies in the stock market will do whatever they can to generate earnings growth.

Time and time again, Corporate America has proven it can adapt and evolve when challenged in its relentless pursuit of profits.

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Related from TKer:

• Stanley Druckenmiller’s No. 1 piece of advice for novice investors 🧐

• Higher energy costs, massive labor costs ... and yet record-high profit margins? 🤑

• We’re learning more about who’s winning and losing in the AI revolution 🤖

• It remains ‘dangerous’ to underestimate Corporate America ⚠️

• The wrong question — and the right one — to ask about earnings headwinds 💬

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Review of the macro crosscurrents 🔀

📈The stock market climbed last week, with the S&P 500 gaining 0.9% to end at 7,473.47. The index is now down 0.4% from its May 14 closing high of 7,501.24 and up 9.2% year-to-date. For market insights, check out the Stock Market tab at TKer. »

There were several notable data points and macroeconomic developments since our last review:

👎 Consumer vibes are in the dumps. From the University of Michigan’s May Surveys of Consumers: “Consumer sentiment fell for the third straight month as supply disruptions in the Strait of Hormuz continue to boost gasoline prices. Sentiment is now just below the previous historical trough seen in June 2022. The cost of living continues to be a first-order concern, with 57% of consumers spontaneously mentioning that high prices were eroding their personal finances, up from 50% last month. Lower-income consumers and those without college degrees posted particularly strong sentiment declines; these groups are more sensitive to increases in the cost of gas and other essentials. Independents and Republicans saw decreases in sentiment, with both groups reaching their lowest readings of the current presidential administration. Meanwhile, sentiment of Democrats was little changed from last month. Critically, consumers appear worried that inflation will increase and proliferate beyond fuel prices, even in the long run.”

More on inflation: “Year-ahead inflation expectations inched up from 4.7% last month to 4.8% this month. The current reading substantially exceeds the 3.4% reading seen in February 2026 prior to the start of the Iran conflict, along with all 2024 readings. Long-run inflation expectations climbed from 3.5% in April to 3.9% in May, notably higher than the 2.8% to 3.2% range seen in 2024. This month’s increase in long-run expectations reflects sizable jumps among independents and Republicans. For the latter group, long-run inflation expectations are currently more than double their February 2025 reading on a monthly basis.“

For more on consumer sentiment, read: What consumers do > what consumers say 🙊

⛽️ Gas and diesel prices remain elevated. From AAA: “As holiday travelers start hitting the road today in record numbers, Memorial Day weekend gas prices are the highest they’ve been in four years. The national average for a gallon of regular is at $4.56, up 3 cents over last week and $1.38 higher than this time last year. Current prices are close to what drivers were paying 4 years ago, when the national average on Memorial Day was $4.61. With gasoline demand on the rise and the prolonged closure of the Strait of Hormuz, pump prices are likely to remain elevated as the summer travel season gets underway.“

Here’s a longer-term look at the trajectory of gas and diesel prices, as tracked by the EIA.

For more on energy prices, read: Our love-hate relationship with rising oil prices in charts 💔🛢️📊

💼 New unemployment insurance claims, total ongoing claims remain low. Initial claims for unemployment benefits declined to 209,000 during the week ending May 16, down from 212,000 the week prior. This metric remains at levels historically associated with economic growth.

Insured unemployment, which captures those who continue to claim unemployment benefits, ticked up to 1.782 million during the week ending May 9.

For more on the labor market, read: The next couple of years for the job market could be tough 🫤

🤔 Recent private job growth improved. According to payroll processor ADP, private U.S. employers added 42,500 jobs in the four weeks ending May 2.

For more on the labor market, read: Why mass tech layoffs have little effect on total employment 💾

💳 Card spending data is holding up. From BofA: “Total card spending per HH was up 4.8% y/y in the week ending May 16, according to BAC aggregated credit & debit card data. Ex-gas spending rose by 3.5% y/y. The shift in Mother’s Day likely weighed on spending growth in the week ending May 16. Smoothing through the daily data volatility, the bottom line is that spending remains resilient to the gas price shock.“

Consumer spending data has looked a lot better than consumer sentiment readings. For more on this contradiction, read: We’re taking that vacation whether we like it or not 🛫 and Household finances are both ‘worse’ and ‘good’ 🌦️

🏠 Mortgage rates jump. According to Freddie Mac, the average 30-year fixed-rate mortgage rose to 6.51%, up from 6.36% last week.

As of Q4, there were 148.7 million housing units in the U.S., of which 87.8 million were owner-occupied and about 40% were mortgage-free. Of those carrying mortgage debt, almost all have fixed-rate mortgages, and most of those mortgages have rates that were locked in before rates surged from 2021 lows. All of this is to say: Most homeowners are not particularly sensitive to the small weekly movements in home prices or mortgage rates.

For more on mortgages and home prices, read: Why home prices and rents are creating all sorts of confusion about inflation 😖

🏡 Home affordability got worse. From the Atlanta Fed: “Home ownership affordability declined from February to March, down by 3.1%. This was the sharpest one-month decline since June of 2023.“

More from the Atlanta Fed: “In March, the median-income household in the US, making $85,828 per year, needed to spend 42% of its income to own the median-priced home ($399,333). … The total monthly cost to own the median-priced home was $3,004 in March, up 3.4% from February. Costs were up by 1.1% from a year ago when mortgage rates were as high as 6.7%. The total monthly payments remained below the previous peak reached in June of last year.“

🏠 Homebuilder sentiment ticks up from low levels. From the NAHB: “Recent increases for long-term interest rates will continue to hold back home buyer demand. Although some regional markets, including parts of the Midwest, are showing relative strength, the housing market continues to face significant affordability challenges.”

🔨 New home construction starts fell. Housing starts declined 2.8% in April to an annualized rate of 1.47 million units, according to the Census Bureau. Building permits rose 5.8% to an annualized rate of 1.44 million units.

😬 This is the stuff pros are worried about. From BofA’s May Global Fund Manager Survey: “Asked what the biggest tail risk is…40% of FMS investors said ‘2nd wave inflation,’ up sharply from 26% last month.20% said ‘geopolitical conflict,’ down from 44% in April (was the #1 tail risk last month).”

Here’s how the biggest “tail risk” has evolved over the years.

For more on risks, read: Three observations about uncertainty in the markets 😟 and Two times when uncertainty seemed low and confidence was high 🌈

🤔 Economic activity survey signals subdued growth. From S&P Global’s May U.S. Flash PMI: “The damaging economic impact from the war in the Middle East is becoming increasingly evident in the business surveys. The ‘flash’ PMI data for May recorded only modest growth of business activity as demand was again squeezed by a further spike in prices and jobs were cut as firms worried over rising costs and the economic outlook.”

Keep in mind that during times of perceived stress, soft survey data tends to be more exaggerated than actual hard data.

For more on this, read: What businesses do > what businesses say 🙊 and 4 sometimes-conflicting ways I’m thinking about the economy 😬😞😎🙃

📈 Near-term GDP growth estimates are tracking positively. The Atlanta Fed’s GDPNow model sees real GDP growth rising at a 4.3% rate in Q2.

For more on GDP and the economy, read: It’s too ambiguous to just say ‘the economy’ 🤦🏻‍♂️ and Economic data can often be both ‘worse’ and ‘good’ 🌦️

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Putting it all together 📋

Earnings look bullish: The long-term outlook for the stock market remains favorable, bolstered by expectations for years of earnings growth. And earnings are the most important driver of stock prices.

Demand is positive: Demand for goods and services remains positive, supported by healthy consumer and business balance sheets. Personal spending activity remains at record levels. Core capex orders, which are a leading indicator of business spending, have been on the rise.

Growth rates have cooled: While the economy remains healthy, growth has normalized from much hotter levels earlier in the cycle. The economy is less “coiled” these days as major tailwinds like job openings and excess savings have faded. Job creation is hovering at near-zero. It has become harder to argue that growth is destiny.

Actions speak louder than words: We are in an odd period, given that the hard economic data decoupled from the soft sentiment-oriented data. Consumer and business sentiment has been relatively poor, even as tangible consumer and business activity continues to grow and trend at record levels. From an investor’s perspective, what matters is that the hard economic data continues to hold up.

Stocks are not the economy: There’s a case to be made that the U.S. stock market could outperform the U.S. economy in the near term, thanks largely to positive operating leverage. Since the pandemic, companies have aggressively adjusted their cost structures. This came with strategic layoffs and investment in new equipment, including hardware powered by AI. These moves are resulting in positive operating leverage, which means a modest amount of sales growth — in the cooling economy — is translating to robust earnings growth.

Mind the ever-present risks: Of course, we should not get complacent. There will always be risks to worry about, such as U.S. political uncertainty, geopolitical turmoil, energy price volatility, and cyber attacks. There are also the dreaded unknowns. Any of these risks can flare up and spark short-term volatility in the markets.

Investing is never a smooth ride: There’s also the harsh reality that economic recessions and bear markets are developments that all long-term investors should expect as they build wealth in the markets. Always keep your stock market seat belts fastened.

Think long-term: For now, there’s no reason to believe there’ll be a challenge that the economy and the markets won’t overcome. The long game remains undefeated, and it’s a streak that long-term investors can expect to continue.

For more on how the macro story is evolving, check out the previous review of the macro crosscurrents. »

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Key insights about the stock market 📈

Here’s a roundup of some of TKer’s most talked-about paid and free newsletters about the stock market. All of the headlines are hyperlinked to the archived pieces.

10 truths about the stock market 📈

The stock market can be an intimidating place: It’s real money on the line, there’s an overwhelming amount of information, and people have lost fortunes in it very quickly. But it’s also a place where thoughtful investors have long accumulated a lot of wealth. The primary difference between those two outlooks is related to misconceptions about the stock market that can lead people to make poor investment decisions.

The makeup of the S&P 500 is constantly changing 🔀

Passive investing is a concept usually associated with buying and holding a fund that tracks an index. And no passive investment strategy has attracted as much attention as buying an S&P 500 index fund. However, the S&P 500 — an index of 500 of the largest U.S. companies — is anything but a static set of 500 stocks.

The key driver of stock prices: Earnings💰

For investors, anything you can ever learn about a company matters only if it also tells you something about earnings. That’s because long-term moves in a stock can ultimately be explained by the underlying company’s earnings, expectations for earnings, and uncertainty about those expectations for earnings. Over time, the relationship between stock prices and earnings has a very tight statistical relationship.

Stomach-churning stock market sell-offs are normal🎢

Investors should always be mentally prepared for some big sell-offs in the stock market. It’s part of the deal when you invest in an asset class that is sensitive to the constant flow of good and bad news. Since 1950, the S&P 500 has seen an average annual max drawdown (i.e., the biggest intra-year sell-off) of 14%.

How the stock market performed around recessions 📉📈

Every recession in history was different. And the range of stock performance around them varied greatly. There are two things worth noting. First, recessions have always been accompanied by a significant drawdown in stock prices. Second, the stock market bottomed and inflected upward long before recessions ended.

In the stock market, time pays ⏳

Since 1928, the S&P 500 has generated a positive total return more than 89% of the time over all five-year periods. Those are pretty good odds. When you extend the timeframe to 20 years, you’ll see that there’s never been a period where the S&P 500 didn’t generate a positive return.

What a strong dollar means for stocks 👑

While a strong dollar may be great news for Americans vacationing abroad and U.S. businesses importing goods from overseas, it’s a headwind for multinational U.S.-based corporations doing business in non-U.S. markets.

Stanley Druckenmiller’s No. 1 piece of advice for novice investors 🧐

…you don’t want to buy them when earnings are great, because what are they doing when their earnings are great? They go out and expand capacity. Three or four years later, there’s overcapacity and they’re losing money. What about when they’re losing money? Well, then they’ve stopped building capacity. So three or four years later, capacity will have shrunk and their profit margins will be way up. So, you always have to sort of imagine the world the way it’s going to be in 18 to 24 months as opposed to now. If you buy it now, you’re buying into every single fad every single moment. Whereas if you envision the future, you’re trying to imagine how that might be reflected differently in security prices.

Peter Lynch made a remarkably prescient market observation in 1994 🎯

Some event will come out of left field, and the market will go down, or the market will go up. Volatility will occur. Markets will continue to have these ups and downs. … Basic corporate profits have grown about 8% a year historically. So, corporate profits double about every nine years. The stock market ought to double about every nine years… The next 500 points, the next 600 points — I don’t know which way they’ll go… They’ll double again in eight or nine years after that. Because profits go up 8% a year, and stocks will follow. That’s all there is to it.

Warren Buffett’s ‘fourth law of motion’ 📉

Long ago, Sir Isaac Newton gave us three laws of motion, which were the work of genius. But Sir Isaac’s talents didn’t extend to investing: He lost a bundle in the South Sea Bubble, explaining later, “I can calculate the movement of the stars, but not the madness of men.” If he had not been traumatized by this loss, Sir Isaac might well have gone on to discover the Fourth Law of Motion: For investors as a whole, returns decrease as motion increases.

Most pros can’t beat the market 🥊

According to S&P Dow Jones Indices (SPDJI), 79% of U.S. large-cap equity fund managers underperformed the S&P 500 in 2025. As you stretch the time horizon, the numbers get even more dismal. Over three years, 67% underperformed. Over 5 years, 89% underperformed. And over 20 years, 93% underperformed. This 2025 performance was the 16th consecutive year in which the majority of fund managers in this category have lagged the index.

Proof that ‘past performance is no guarantee of future results’ 📊

Even if you are a fund manager who generated industry-leading returns in one year, history says it’s an almost insurmountable task to stay on top consistently in subsequent years. According to S&P Dow Jones Indices, of the 334 large-cap equity funds in the top half of performance in 2021, 58.7% remained at the top half in 2022. However, just 6.9% remained on top through 2023. Only 4.5% stayed on top in the five consecutive years through 2025.

It’s much more dismal when you raise the bar. Of the 164 large-cap equity funds in the top quartile in 2021, just 20.1% remained in that category in 2022. That percentage fell to literally 0.0% in 2023.

The odds are stacked against stock pickers 🎲

Picking stocks in an attempt to beat market averages is an incredibly challenging and sometimes money-losing effort. Most professional stock pickers aren’t able to do this consistently. One of the reasons for this is that most stocks don’t deliver above-average returns. According to S&P Dow Jones Indices, only 19% of the stocks in the S&P 500 outperformed the average stock’s return from 2001 to 2025. Over this period, the average return on an S&P 500 stock was 452%, while the median stock rose by just 59%.

Kevin Warsh was just sworn in as chair of the Federal Reserve.

The former Fed governor takes the helm as inflation rates remain stubbornly above the central bank’s 2% target and long-term interest rates have climbed to multi-year highs.

President Trump nominated Warsh after repeatedly blasting his predecessor, Jay Powell, for not aggressively lowering interest rates, calling the former chair a “numbskull” and “STUPID” for holding the rates steady. The Justice Department even launched a criminal investigation into Powell.

However, markets don’t expect rates to immediately go down under Warsh. In fact, markets expect the Fed’s next move to be an interest rate hike. It’s quite the conundrum.

Will the stock market test Warsh?

Read more

Generally speaking, rising interest rates are worse for borrowers than falling interest rates. That’s not news to anyone.

For those sitting on a lot of cash, rising interest rates can be welcome news, as they mean more interest income.

Even if you are a net borrower, falling rates might be a bad thing, because they may be a symptom of bigger problems in the economy.

All that’s to say there’s more to the story than “high interest rates are bad for stocks.”

Consider the following three charts.

Read more

“The market waits for no one,” Morgan Stanley’s Mike Wilson wrote in his research note last month.

“Equity markets trade in the future where information is imperfect and uncertain,” he added. “Just like they discounted much of the uncertainty we are now seeing in the headlines, they are now looking ahead to the resolution of that uncertainty and better visibility on the rolling recovery that began a year ago.”

Many of the folks struggling to make sense of this year’s market action continue to make the mistake of assuming that stocks are supposed to reflect what’s happening today, when in reality they represent expectations for the future and the premium investors are willing to pay for that future.

To be fair, while stock prices may not appear to reflect heightened uncertainty, stock valuations certainly do.

Stocks are cheaper, but their prices are higher 🤨

As the S&P 500 fell 9% peak-to-trough earlier this year, the forward price-to-earnings (P/E) ratio dropped 18%.

And while prices have more than recovered those losses, the P/E ratios remain off their highs, suggesting investors are paying a lower premium for future earnings.

“That’s not complacency, in our view, but a market that did a substantial amount of work to price in the numerous risks that appeared over the past 6 months — Iran war/oil spike, AI disruption and private credit concerns being the most significant,” Wilson wrote on Wednesday.

But how can stocks be higher in price but also cheaper in valuation?

It’s simple: Earnings are looking up!

While we were all distracted by the recent bout of market volatility, reported earnings have been better than expected and estimates for future earnings have been going up.

When the E in P/E is rising faster than the P, it’s possible to get an outcome where the P is up while the P/E is down. That’s just math.

The chart below from Wilson illustrates this dynamic nicely. The blue line (earnings) has outpaced the yellow line (price), causing the grey line (valuation) to trend lower.

To Wilson’s point about the market waiting for no one, this has been very true about expectations for future earnings.

Something I’ve grown to appreciate with age is that time doesn’t stop. And earnings tend to go up with time — at least, that’s been the trend for S&P 500 earnings for at least 90 years, according to this long-term log chart from Deutsche Bank.

That means if you’re waiting for cheaper valuations to buy stocks, time is your enemy. Because as time passes, earnings tend to go up. That creates the condition where you’re at risk of paying up when you finally get what you think is an attractive valuation.

The big picture 🖼️

You could sit on the sidelines, fretting over how valuations appear unattractive. Maybe they do eventually meet your definition of a reasonable valuation.

But remember: Publicly traded companies will never stop pursuing earnings growth. It’s something that’s been going on since the beginning of capitalism. (Read more about that here and here.)

So, the longer you wait for that attractive valuation to come, the greater the risk that earnings are much higher and you find that attractive valuation comes with a much higher price.

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Related from TKer:

• The stock market isn’t as crazy as you might think 🤨

• It’s like we fell down an escalator that’s going up ↙️

• If you only have time for one metric, make it this one 💰

• Let’s talk about stock prices and earnings estimates diverging 🔀

• What getting older has taught me about P/E ratios 🎂

• Stocks can get cheaper while rising 🤔

• Falling valuations ≠ falling stock prices 🤔

• 10 truths about the stock market 📈

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Review of the macro crosscurrents 🔀

📈The stock market rallied to all-time highs, with the S&P 500 setting an intraday high of 7,517.12 and a closing high of 7,501.24 on Thursday. The index closed the week at 7,408.50, up 8.2% year-to-date. For market insights, check out the Stock Market tab at TKer. »

There were several notable data points and macroeconomic developments since our last review:

🎈Consumer price inflation rises. The Consumer Price Index (CPI) jumped 3.8% year-over-year in April, up from 3.3% the month prior, as energy prices surged. Adjusted for food and energy prices, core CPI was up 2.8%.

On a month-over-month basis, CPI jumped 0.6%, driven by a 3.8% increase in energy prices. Core CPI rose 0.4%. If you annualize the three-month and six-month figures — a reflection of the short-term trend in prices — core CPI climbed 3.2% and 2.9%, respectively.

While inflation rates have cooled over the years, they remain above the Fed’s 2% target rate.

For more discussion on inflation and monetary policy, read: The other side of the Fed’s inflation ‘mistake’ 🧐 and ‘When will the Fed cut rates?’ is not the right question for investors right now ✂️

⛽️ Gas and diesel prices remain elevated. From AAA: “After five straight days of declines earlier this week, the national average is once again on its way back up. Today’s national average is a couple cents lower than last week, but with crude oil prices hovering in the $100/barrel range, pump prices remain elevated. …Travelers are preparing to hit the road in record numbers next week, and drivers will be facing the highest Memorial Day gas prices in four years.“

Here’s a longer-term look at the trajectory of gas and diesel prices, as tracked by the EIA.

For more on energy prices, read: Our love-hate relationship with rising oil prices in charts 💔🛢️📊

🛍️ Retail shopping activity rose. Retail sales in April increased 0.5% to a record $757.1 billion, led by higher gasoline prices.

Excluding autos and gas, which tend to be volatile over the short-term, retail sales climbed 0.5%.

Here’s a breakdown of retail sales by category.

💳 Card spending data is holding up. From BofA: “Total card spending per HH was up 7.1% y/y in the week ending May 9, according to BAC aggregated credit & debit card data. Ex-gas spending rose by 5.8% y/y. Some of this was likely due to the impact of Mother’s Day (5/10/26 vs 5/11/25). Ex‑gas spending in the week ending May 7 was up a solid 4.2% y/y. This would largely exclude the impact of Mother’s Day.“

Consumer spending data has looked a lot better than consumer sentiment readings. For more on this contradiction, read: We’re taking that vacation whether we like it or not 🛫 and Household finances are both ‘worse’ and ‘good’ 🌦️

💼 New unemployment insurance claims, total ongoing claims remain low. Initial claims for unemployment benefits rose to 211,000 during the week ending May 9, up from 199,000 the week prior. This metric remains at levels historically associated with economic growth.

Insured unemployment, which captures those who continue to claim unemployment benefits, ticked up to 1.782 million during the week ending May 2.

For more on the labor market, read: The next couple of years for the job market could be tough 🫤

🤔 Recent private job growth improved. According to payroll processor ADP, private U.S. employers added 33,000 jobs in the four weeks ending April 25.

For more on the labor market, read: About that ugly jobs report 📉

💰Household finances are stable and mostly normalizing. Household finances strengthened considerably during the COVID-19 pandemic, helped by a combination of limited spending options and government financial support. Over the past three years, finances have deteriorated but are mostly normalizing to pre-pandemic levels.

The New York Fed’s Household Debt & Credit report suggests finances are stabilizing at those normal levels. From the Q1 report: “Aggregate delinquency rates were flat in the first quarter of 2026. As of the end of March, 4.8% of outstanding debt was in some stage of delinquency, roughly the same as the share from 2025Q4.“

“Transition into early delinquency held steady for auto loans, but ticked down for credit cards, from 8.7% annually to 8.6%, and for mortgages from 3.9% to 3.8%.”

“Transition rates into serious delinquency were mostly unchanged for auto loans and credit cards, but increased slightly for mortgages from 1.4% annually to 1.5%.”

And while credit card debt balances often steal headlines, it’s a mistake to suggest consumers are maxing out their credit cards. The $1.25 trillion in credit card balances as of Q1 represents just a tiny fraction of credit card limits.

One popular way to look at debt relative to income is household debt service payments as a percent of disposable income. This is a metric that has been deteriorating for years. But relative to history, it remains pretty strong.

For more on household finances, read: Economic data can often be both ‘worse’ and ‘good’ 🌦️

🛠️ Industrial activity increased. Industrial production activity in April rose 0.7% from prior month levels. Manufacturing output rose 0.6% compared to the prior month.

🏚 Home sales rose. Sales of previously owned homes increased 0.2% in April to an annualized rate of 4.02 million units. From NAR chief economist Lawrence Yun: “Despite mixed macroeconomic signals—including a record-high stock market and historically low consumer confidence—home sales were modestly boosted by the continued improvement in housing affordability. Mortgage rates are lower from a year ago, and average income growth is outpacing home price gains.”

Prices for previously owned homes rose from last month and year-ago levels. From the NAR: “The median existing-home sales price for all housing types in April was $417,700, up 0.9% from one year ago ($414,000) – the 34th consecutive month of year-over-year price increases.”

More from Yun: “Inventory still remains tight. Multiple offers, though not as intense as a few years ago, are still occurring. At the same time, days on market are lengthening on average, implying that consumers are taking their time before making decisions. The increase in second-home purchases reflects stronger finances among higher-income households, as well as the post-COVID rise in remote work and hybrid job schedules.”

🏠 Mortgage rates tick lower. According to Freddie Mac, the average 30-year fixed-rate mortgage declined to 6.36%, down from 6.37% last week. “While purchase demand is softening, it remains above this time last year. Recent data also shows existing-home sales modestly edging up.“

As of Q4, there were 148.7 million housing units in the U.S., of which 87.8 million were owner-occupied and about 40% were mortgage-free. Of those carrying mortgage debt, almost all have fixed-rate mortgages, and most of those mortgages have rates that were locked in before rates surged from 2021 lows. All of this is to say: Most homeowners are not particularly sensitive to the small weekly movements in home prices or mortgage rates.

For more on mortgages and home prices, read: Why home prices and rents are creating all sorts of confusion about inflation 😖

👎 Small business optimism ticks higher, remains cool. The NFIB’s Small Business Optimism Index rose to 95.9 in April from 95.8 in March. From the NFIB: “Inflationary pressures continue to be a challenge for Main Street. While small business optimism is currently fragile, the benefits of the Working Families Tax Cut Act should start to feed into the private sector over the next few months.”

Keep in mind that during times of perceived stress, soft survey data tends to be more exaggerated than actual hard data.

For more on this, read: What businesses do > what businesses say 🙊 and 4 sometimes-conflicting ways I’m thinking about the economy 😬😞😎🙃

🏢 Offices remain relatively empty. From Kastle Systems: “The Kastle Barometer national weekly average occupancy was 54.6% this week, a second consecutive weekly drop, falling from the prior week’s 55.0%. Seven of the ten cities in the Barometer saw their weekly average drop, but all just slightly lower from the prior week. Austin, Dallas, and San Francico were the three gainers. Dallas was the biggest mover in a positive direction, gaining 1.1% to 63.5% weekly occupancy. San Jose reported the largest drop, falling 1.3% to 44.8% average weekly occupancy. Looking at the graph of the last 12 weeks of Barometer data, the lines are very stable for the last six weeks, smoothing out the March waves.”

For more on office occupancy, read: This stat about offices reminds us things are far from normal 🏢

📈 Near-term GDP growth estimates are tracking positively. The Atlanta Fed’s GDPNow model sees real GDP growth rising at a 4.0% rate in Q2.

For more on GDP and the economy, read: It’s too ambiguous to just say ‘the economy’ 🤦🏻‍♂️ and Economic data can often be both ‘worse’ and ‘good’ 🌦️

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Putting it all together 📋

Earnings look bullish: The long-term outlook for the stock market remains favorable, bolstered by expectations for years of earnings growth. And earnings are the most important driver of stock prices.

Demand is positive: Demand for goods and services remains positive, supported by healthy consumer and business balance sheets. Personal spending activity remains at record levels. Core capex orders, which are a leading indicator of business spending, have been on the rise.

Growth rates have cooled: While the economy remains healthy, growth has normalized from much hotter levels earlier in the cycle. The economy is less “coiled” these days as major tailwinds like job openings and excess savings have faded. Job creation is hovering at near-zero. It has become harder to argue that growth is destiny.

Actions speak louder than words: We are in an odd period, given that the hard economic data decoupled from the soft sentiment-oriented data. Consumer and business sentiment has been relatively poor, even as tangible consumer and business activity continues to grow and trend at record levels. From an investor’s perspective, what matters is that the hard economic data continues to hold up.

Stocks are not the economy: There’s a case to be made that the U.S. stock market could outperform the U.S. economy in the near term, thanks largely to positive operating leverage. Since the pandemic, companies have aggressively adjusted their cost structures. This came with strategic layoffs and investment in new equipment, including hardware powered by AI. These moves are resulting in positive operating leverage, which means a modest amount of sales growth — in the cooling economy — is translating to robust earnings growth.

Mind the ever-present risks: Of course, we should not get complacent. There will always be risks to worry about, such as U.S. political uncertainty, geopolitical turmoil, energy price volatility, and cyber attacks. There are also the dreaded unknowns. Any of these risks can flare up and spark short-term volatility in the markets.

Investing is never a smooth ride: There’s also the harsh reality that economic recessions and bear markets are developments that all long-term investors should expect as they build wealth in the markets. Always keep your stock market seat belts fastened.

Think long-term: For now, there’s no reason to believe there’ll be a challenge that the economy and the markets won’t overcome. The long game remains undefeated, and it’s a streak that long-term investors can expect to continue.

For more on how the macro story is evolving, check out the previous review of the macro crosscurrents. »

Subscribe now

Key insights about the stock market 📈

Here’s a roundup of some of TKer’s most talked-about paid and free newsletters about the stock market. All of the headlines are hyperlinked to the archived pieces.

10 truths about the stock market 📈

The stock market can be an intimidating place: It’s real money on the line, there’s an overwhelming amount of information, and people have lost fortunes in it very quickly. But it’s also a place where thoughtful investors have long accumulated a lot of wealth. The primary difference between those two outlooks is related to misconceptions about the stock market that can lead people to make poor investment decisions.

The makeup of the S&P 500 is constantly changing 🔀

Passive investing is a concept usually associated with buying and holding a fund that tracks an index. And no passive investment strategy has attracted as much attention as buying an S&P 500 index fund. However, the S&P 500 — an index of 500 of the largest U.S. companies — is anything but a static set of 500 stocks.

The key driver of stock prices: Earnings💰

For investors, anything you can ever learn about a company matters only if it also tells you something about earnings. That’s because long-term moves in a stock can ultimately be explained by the underlying company’s earnings, expectations for earnings, and uncertainty about those expectations for earnings. Over time, the relationship between stock prices and earnings has a very tight statistical relationship.

Stomach-churning stock market sell-offs are normal🎢

Investors should always be mentally prepared for some big sell-offs in the stock market. It’s part of the deal when you invest in an asset class that is sensitive to the constant flow of good and bad news. Since 1950, the S&P 500 has seen an average annual max drawdown (i.e., the biggest intra-year sell-off) of 14%.

How the stock market performed around recessions 📉📈

Every recession in history was different. And the range of stock performance around them varied greatly. There are two things worth noting. First, recessions have always been accompanied by a significant drawdown in stock prices. Second, the stock market bottomed and inflected upward long before recessions ended.

In the stock market, time pays ⏳

Since 1928, the S&P 500 has generated a positive total return more than 89% of the time over all five-year periods. Those are pretty good odds. When you extend the timeframe to 20 years, you’ll see that there’s never been a period where the S&P 500 didn’t generate a positive return.

What a strong dollar means for stocks 👑

While a strong dollar may be great news for Americans vacationing abroad and U.S. businesses importing goods from overseas, it’s a headwind for multinational U.S.-based corporations doing business in non-U.S. markets.

Stanley Druckenmiller’s No. 1 piece of advice for novice investors 🧐

…you don’t want to buy them when earnings are great, because what are they doing when their earnings are great? They go out and expand capacity. Three or four years later, there’s overcapacity and they’re losing money. What about when they’re losing money? Well, then they’ve stopped building capacity. So three or four years later, capacity will have shrunk and their profit margins will be way up. So, you always have to sort of imagine the world the way it’s going to be in 18 to 24 months as opposed to now. If you buy it now, you’re buying into every single fad every single moment. Whereas if you envision the future, you’re trying to imagine how that might be reflected differently in security prices.

Peter Lynch made a remarkably prescient market observation in 1994 🎯

Some event will come out of left field, and the market will go down, or the market will go up. Volatility will occur. Markets will continue to have these ups and downs. … Basic corporate profits have grown about 8% a year historically. So, corporate profits double about every nine years. The stock market ought to double about every nine years… The next 500 points, the next 600 points — I don’t know which way they’ll go… They’ll double again in eight or nine years after that. Because profits go up 8% a year, and stocks will follow. That’s all there is to it.

Warren Buffett’s ‘fourth law of motion’ 📉

Long ago, Sir Isaac Newton gave us three laws of motion, which were the work of genius. But Sir Isaac’s talents didn’t extend to investing: He lost a bundle in the South Sea Bubble, explaining later, “I can calculate the movement of the stars, but not the madness of men.” If he had not been traumatized by this loss, Sir Isaac might well have gone on to discover the Fourth Law of Motion: For investors as a whole, returns decrease as motion increases.

Most pros can’t beat the market 🥊

According to S&P Dow Jones Indices (SPDJI), 79% of U.S. large-cap equity fund managers underperformed the S&P 500 in 2025. As you stretch the time horizon, the numbers get even more dismal. Over three years, 67% underperformed. Over 5 years, 89% underperformed. And over 20 years, 93% underperformed. This 2025 performance was the 16th consecutive year in which the majority of fund managers in this category have lagged the index.

Proof that ‘past performance is no guarantee of future results’ 📊

Even if you are a fund manager who generated industry-leading returns in one year, history says it’s an almost insurmountable task to stay on top consistently in subsequent years. According to S&P Dow Jones Indices, of the 334 large-cap equity funds in the top half of performance in 2021, 58.7% remained at the top half in 2022. However, just 6.9% remained on top through 2023. Only 4.5% stayed on top in the five consecutive years through 2025.

It’s much more dismal when you raise the bar. Of the 164 large-cap equity funds in the top quartile in 2021, just 20.1% remained in that category in 2022. That percentage fell to literally 0.0% in 2023.

The odds are stacked against stock pickers 🎲

Picking stocks in an attempt to beat market averages is an incredibly challenging and sometimes money-losing effort. Most professional stock pickers aren’t able to do this consistently. One of the reasons for this is that most stocks don’t deliver above-average returns. According to S&P Dow Jones Indices, only 19% of the stocks in the S&P 500 outperformed the average stock’s return from 2001 to 2025. Over this period, the average return on an S&P 500 stock was 452%, while the median stock rose by just 59%.

In the throes of the global financial crisis, the early months of the COVID-19 pandemic, and the height of the recent inflation crisis, every move by the Fed and every statement from a Fed official mattered big time.

But when markets are relatively calm, and the economy is growing, like they are now, I’d argue the Fed — while still very important — doesn’t matter quite as much.

Sure, an interest rate cut here might nudge unemployment lower, and a rate hike there could cool inflation. But any action right now would be more about getting ahead of a potential problem than stemming a crisis.

As such, the Fed isn’t really moving the economy much right now. On the contrary, economic developments are shifting expectations for what the Fed will do next.

Expectations for rate cuts fall, and yet the stock market continues to rally? 🤨

Just last Friday, we got a jobs report that confirmed the labor market was surprisingly healthy, with payrolls growing and unemployment remaining low. In reaction to the strong report, economists at Goldman Sachs and BofA pushed back their forecasts for the Fed’s next rate cut.

But wait a second? Rate cuts are generally considered stimulative and therefore favorable for markets. Wouldn’t that mean delaying rate cuts is bad for markets?

Not necessarily!

Read more

Carlson, of Ritholtz Wealth Management, has a gift for being both entertaining and informative. His accessible writing makes for a casual read, and yet with each page you turn, you get a little smarter about investing.

His book is loaded with helpful charts and graphics. Chapter 14 has one of my favorite visualizations of stock market performance: It’s a plot of the S&P 500’s annual returns since 1928. It’s pretty chaotic.

Some investors may find this scatterplot surprising, especially after hearing the near-constant refrain that the stock market typically returns 8% to 10%. And those figures are true if you average the years out. But almost none of the yearly returns line up in that range.

“Investing in the stock market would be far easier if you could simply bank on 10% each and every year,” Carlson wrote. “Unfortunately, it doesn’t work that way. … You could have periods of multiple down years in a row (like 1929 to 1932) or a cluster of positive years in a row (like 1995 to 1999). There are more gains than losses but no rhyme or reason when it comes to annual stock market returns.”

As someone who’s anxious and finds the investing process to be generally unpleasant, I’m constantly managing expectations. Sometimes, this means deprogramming flawed beliefs born out of faulty assumptions.

One of the bigger flawed assumptions I had to correct was that an average return is something that happens frequently.

In fact, the opposite is true.

“One of the strangest aspects of stock market returns in any given year is how seldom they finish around the long-term average,” Carlson added.

He reviews the history going back to 1928. Instead of quoting too much of his book in this newsletter, I’ll encourage you to pick up a copy and check out his work.

In the meantime, I’ll point you to this visualization shared by Carlson’s colleague Michael Batnick. It shows annual returns in the S&P 500 since 1950, sorted from highest to lowest. In red, you can see instances where the S&P returned 7% to 10%. There are just five.

The lesson: An investor’s long-term returns may reflect the averages we talk about. But that’s only because they’ve experienced a combination of many very strong years, some lackluster years, some negative years, and a very small handful of average years.

Average years are so rare that you might as well treat them like a mirage. Just because you can see them in the math doesn’t mean that they’re likely to be ahead of you in the coming year. Manage your expectations.

That said, as years pass, I think it’s a good exercise to see long-term performance in terms of annualized averages. You may be in the middle of a very strong year or an unusually negative one. But in the context of the past several years, you’re likely to see something that’s a little more average.

-

Related from TKer:

• Expecting average returns doesn’t mean you should expect average years 🤔

• 8 chaotic scatterplots — and the bullish quality they all share 🐞

• TKer’s 3rd birthday comes with an extraordinarily average stock market stat 📈🎂

• Good years in the stock market tend to be great years 🚀

• 10 truths about the stock market 📈

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Review of the macro crosscurrents 🔀

📈The stock market rallied to all-time highs, with the S&P 500 setting an intraday high of 7,401.50 and a closing high of 7,398.93 on Friday. The index is now up 8.1% year-to-date. For market insights, check out the Stock Market tab at TKer. »

There were several notable data points and macroeconomic developments since our last review:

💼 Jobs were created. According to the BLS’s Employment Situation report released on Friday, U.S. employers added 115,000 jobs in April. This metric has been noisy in recent months, going negative in five of the last 11 months.

Total payroll employment rose to a record 158.7 million jobs in April.

The unemployment rate — that is, the number of workers who identify as unemployed as a percentage of the civilian labor force — stood at 4.3% in April.

The labor market is in decent shape, but clearly isn’t as hot as it was just a few years ago.

For more on the labor market, read: About that ugly Feb. jobs report 📉 and We’re at an economic tipping point ⚖️

💸 Wage growth is cooling. Average hourly earnings rose by 0.2% month-over-month in April. On a year-over-year basis, April’s wages were up 3.6%.

💰 Job switchers still get better pay. According to ADP, annual pay in April for people who changed jobs was up 6.6% from a year ago. That better-pay gap has been cooling a bit in recent months. For those who stayed at their job, pay was up 4.4%, about what it’s been for the past year.

For more on why policymakers are watching wage growth, read: Revisiting the key chart to watch amid the Fed’s war on inflation 📈

💼 Job openings fall. According to the BLS’s Job Openings and Labor Turnover Survey, employers had 6.87 million job openings in March, down from 6.92 million in February.

During the month, there were 7.24 million unemployed people — meaning there were 0.95 job openings per unemployed person. This remains one of the most straightforward indicators of labor demand. However, this metric has returned to prepandemic levels.

For more on job openings, read: Were there really twice as many job openings as unemployed people? 🤨 and Revisiting the key chart to watch amid the Fed’s war on inflation 📈

👍 Layoffs remain depressed, hiring remains firm. Employers laid off 1.87 million people in March. While challenging for the people affected, this figure represents just 1.2% of total employment. This metric remains slightly below prepandemic levels.

For more on layoffs, read: Mathematical context can totally change the story 🧮

Hiring activity remains well above layoff activity. During the month, employers hired 5.55 million people.

That said, the hiring rate — the number of hires as a percentage of the employed workforce — is relatively low, which could be a sign of trouble to come in the labor market.

For more on why this metric matters, read: The hiring situation 🧩

🤔 People are quitting less. In March, 3.17 million workers quit their jobs. This represents 2.0% of the workforce. The rate continues to trend below prepandemic levels.

A low quits rate could mean a number of things: more people are satisfied with their job, workers have fewer outside job opportunities, wage growth is cooling, or productivity will improve as fewer people are entering new, unfamiliar roles.

For more on this dynamic, read: The crummy labor market is yielding a ‘tenure dividend’ for corporations 💰

💪 Labor productivity increases. From the BLS: “Nonfarm business sector labor productivity increased 0.8% in the first quarter of 2026 … as output increased 1.5% and hours worked increased 0.7%. (All quarterly percent changes in this release are seasonally adjusted annualized rates.) From the same quarter a year ago, nonfarm business sector labor productivity increased 2.9% in the first quarter of 2026.”

For more, read: Promising signs for productivity ⚙️ and The crummy labor market is yielding a ‘tenure dividend’ for corporations 💰

💼 New unemployment insurance claims, total ongoing claims remain low. Initial claims for unemployment benefits rose to 200,000 during the week ending May 2, up from 190,000 the week prior. This metric remains at levels historically associated with economic growth.

Insured unemployment, which captures those who continue to claim unemployment benefits, ticked up to 1.766 million during the week ending Apr. 25.

For more on the labor market, read: The next couple of years for the job market could be tough 🫤

⛽️ Gas and diesel prices remain elevated. From AAA: “Drivers are seeing another sharp increase at the pump, with the national average for a gallon of regular gasoline rising 25 cents for the second consecutive week to $4.55. Pump prices are now $1.40 higher than they were a year ago and have reached their highest level since 2022, when the national average peaked at $5.01 per gallon. While crude oil prices dipped below $100 per barrel amid ongoing negotiations to reopen the Strait of Hormuz, gasoline prices continue to face upward pressure from global supply concerns.“

Here’s a longer-term look at the trajectory of gas and diesel prices, as tracked by the EIA.

For more on energy prices, read: Our love-hate relationship with rising oil prices in charts 💔🛢️📊

🎈 Inflation expectations were mixed as gas price expectations improved. From the New York Fed’s April Survey of Consumer Expectations: “Gas price growth expectations retreated appreciably from a spike in March … Median inflation expectations increased by 0.2 percentage point to 3.6% at the one-year-ahead horizon. They were unchanged at 3.1% for the three-year-ahead horizon and at 3.0% for the five-year-ahead horizon in April.”

👎 Consumer vibes are in the dumps. From the University of Michigan’s May Surveys of Consumers: “Consumer sentiment was essentially unchanged this month, coming in a scant 1.6 index points below April’s reading and comparable to the trough reached in June 2022. While the expectations index inched up, current conditions fell back about 9%, owing to a surge in concerns about high prices both for personal finances as well as buying conditions for major purchases. Real income expectations continued a decline that began in March. About one-third of consumers spontaneously mentioned gasoline prices and about 30% mentioned tariffs. Taken together, consumers continue to feel buffeted by cost pressures, led by soaring prices at the pump. Middle East developments are unlikely to meaningfully boost sentiment until supply disruptions have been fully resolved and energy prices fall.”

For more on consumer sentiment, read: What consumers do > what consumers say 🙊

💳 Card spending data is holding up. From BofA: “Total card spending per HH was up 2.7% y/y in the week ending May 2, according to BAC aggregated credit & debit card data. Ex-gas spending rose by 1.8% y/y. The broad slowdown in the week ending May 2 might be due to volatility around month-end. But with the tax refund tailwind fading, higher gas prices might also finally be taking their toll.“

Consumer spending data has looked a lot better than consumer sentiment readings. For more on this contradiction, read: We’re taking that vacation whether we like it or not 🛫 and Household finances are both ‘worse’ and ‘good’ 🌦️

🏭 Business investment activity jumps. Orders for nondefense capital goods excluding aircraft — a.k.a. core capex or business investment — jumped 3.4% to a record $82.96 billion in March.

Core capex orders are a leading indicator, meaning they foretell economic activity down the road.

🔨 Construction spending ticked higher. Construction spending increased 0.6% to an annual rate of $2.186 trillion in March.

🏘️ New home sales rise. Sales of newly built homes increased 7.4%in March to an annualized rate of 682,000 units.

New home sales figures come with a large margin of error. For more on this, read: Mathematical context can totally change the story 🧮

🏠 Mortgage rates tick higher. According to Freddie Mac, the average 30-year fixed-rate mortgage rose to 6.37%, up from 6.30% last week. “Recent data points to slightly better conditions for buyers with a boost in new-home sales, median new-home prices being down to their lowest level since July 2021, and higher inventory than in recent years. Together, these trends could modestly ease affordability pressures through the spring homebuying season.“

As of Q4, there were 148.7 million housing units in the U.S., of which 87.8 million were owner-occupied and about 40% were mortgage-free. Of those carrying mortgage debt, almost all have fixed-rate mortgages, and most of those mortgages have rates that were locked in before rates surged from 2021 lows. All of this is to say: Most homeowners are not particularly sensitive to the small weekly movements in home prices or mortgage rates.

For more on mortgages and home prices, read: Why home prices and rents are creating all sorts of confusion about inflation 😖

🤷🏻‍♂️ Services activity surveys were okay, could be better. From S&P Global’s April U.S. Services PMI: “Although business activity returned to growth after a small decline in March, it’s clear the pace of growth has kicked down a couple of gears since the start of the year. The survey data are indicative of GDP growing at a modest 1% annualized rate. Growth may weaken further, as service providers are reporting lower inflows of new business for the first time in two years, reflecting an intensifying hit to demand from the war in the Middle East. The direct impact of the war has been most evident in consumer-facing services, as high prices have led to a pull-back in discretionary spending on activities such as holidays and recreation, though transport has also been curbed by high fuel prices and travel disruptions.”

The April ISM Services PMI signaled cooling growth.

Keep in mind that during times of perceived stress, soft survey data tends to be more exaggerated than actual hard data.

For more on this, read: What businesses do > what businesses say 🙊

⛓️ Supply chain pressures are building. The New York Fed’s Global Supply Chain Pressure Index — a composite of various supply chain indicators — jumped in April. While it’s way down from its December 2021 supply chain crisis high, it has returned to its highest level since January 2023.

For more on the supply chain, read: We can stop calling it a supply chain crisis ⛓

📈 Near-term GDP growth estimates are tracking positively. The Atlanta Fed’s GDPNow model sees real GDP growth rising at a 3.7% rate in Q2.

For more on GDP and the economy, read: It’s too ambiguous to just say ‘the economy’ 🤦🏻‍♂️ and Economic data can often be both ‘worse’ and ‘good’ 🌦️

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Putting it all together 📋

Earnings look bullish: The long-term outlook for the stock market remains favorable, bolstered by expectations for years of earnings growth. And earnings are the most important driver of stock prices.

Demand is positive: Demand for goods and services remains positive, supported by healthy consumer and business balance sheets. Personal spending activity remains at record levels. Core capex orders, which are a leading indicator of business spending, have been on the rise.

Growth rates have cooled: While the economy remains healthy, growth has normalized from much hotter levels earlier in the cycle. The economy is less “coiled” these days as major tailwinds like job openings and excess savings have faded. Job creation is hovering at near-zero. It has become harder to argue that growth is destiny.

Actions speak louder than words: We are in an odd period, given that the hard economic data decoupled from the soft sentiment-oriented data. Consumer and business sentiment has been relatively poor, even as tangible consumer and business activity continues to grow and trend at record levels. From an investor’s perspective, what matters is that the hard economic data continues to hold up.

Stocks are not the economy: There’s a case to be made that the U.S. stock market could outperform the U.S. economy in the near term, thanks largely to positive operating leverage. Since the pandemic, companies have aggressively adjusted their cost structures. This came with strategic layoffs and investment in new equipment, including hardware powered by AI. These moves are resulting in positive operating leverage, which means a modest amount of sales growth — in the cooling economy — is translating to robust earnings growth.

Mind the ever-present risks: Of course, we should not get complacent. There will always be risks to worry about, such as U.S. political uncertainty, geopolitical turmoil, energy price volatility, and cyber attacks. There are also the dreaded unknowns. Any of these risks can flare up and spark short-term volatility in the markets.

Investing is never a smooth ride: There’s also the harsh reality that economic recessions and bear markets are developments that all long-term investors should expect as they build wealth in the markets. Always keep your stock market seat belts fastened.

Think long-term: For now, there’s no reason to believe there’ll be a challenge that the economy and the markets won’t overcome. The long game remains undefeated, and it’s a streak that long-term investors can expect to continue.

For more on how the macro story is evolving, check out the previous review of the macro crosscurrents. »

Subscribe now

Key insights about the stock market 📈

Here’s a roundup of some of TKer’s most talked-about paid and free newsletters about the stock market. All of the headlines are hyperlinked to the archived pieces.

10 truths about the stock market 📈

The stock market can be an intimidating place: It’s real money on the line, there’s an overwhelming amount of information, and people have lost fortunes in it very quickly. But it’s also a place where thoughtful investors have long accumulated a lot of wealth. The primary difference between those two outlooks is related to misconceptions about the stock market that can lead people to make poor investment decisions.

The makeup of the S&P 500 is constantly changing 🔀

Passive investing is a concept usually associated with buying and holding a fund that tracks an index. And no passive investment strategy has attracted as much attention as buying an S&P 500 index fund. However, the S&P 500 — an index of 500 of the largest U.S. companies — is anything but a static set of 500 stocks.

The key driver of stock prices: Earnings💰

For investors, anything you can ever learn about a company matters only if it also tells you something about earnings. That’s because long-term moves in a stock can ultimately be explained by the underlying company’s earnings, expectations for earnings, and uncertainty about those expectations for earnings. Over time, the relationship between stock prices and earnings has a very tight statistical relationship.

Stomach-churning stock market sell-offs are normal🎢

Investors should always be mentally prepared for some big sell-offs in the stock market. It’s part of the deal when you invest in an asset class that is sensitive to the constant flow of good and bad news. Since 1950, the S&P 500 has seen an average annual max drawdown (i.e., the biggest intra-year sell-off) of 14%.

How the stock market performed around recessions 📉📈

Every recession in history was different. And the range of stock performance around them varied greatly. There are two things worth noting. First, recessions have always been accompanied by a significant drawdown in stock prices. Second, the stock market bottomed and inflected upward long before recessions ended.

In the stock market, time pays ⏳

Since 1928, the S&P 500 has generated a positive total return more than 89% of the time over all five-year periods. Those are pretty good odds. When you extend the timeframe to 20 years, you’ll see that there’s never been a period where the S&P 500 didn’t generate a positive return.

What a strong dollar means for stocks 👑

While a strong dollar may be great news for Americans vacationing abroad and U.S. businesses importing goods from overseas, it’s a headwind for multinational U.S.-based corporations doing business in non-U.S. markets.

Stanley Druckenmiller's No. 1 piece of advice for novice investors 🧐

…you don't want to buy them when earnings are great, because what are they doing when their earnings are great? They go out and expand capacity. Three or four years later, there's overcapacity and they're losing money. What about when they're losing money? Well, then they’ve stopped building capacity. So three or four years later, capacity will have shrunk and their profit margins will be way up. So, you always have to sort of imagine the world the way it's going to be in 18 to 24 months as opposed to now. If you buy it now, you're buying into every single fad every single moment. Whereas if you envision the future, you're trying to imagine how that might be reflected differently in security prices.

Peter Lynch made a remarkably prescient market observation in 1994 🎯

Some event will come out of left field, and the market will go down, or the market will go up. Volatility will occur. Markets will continue to have these ups and downs. … Basic corporate profits have grown about 8% a year historically. So, corporate profits double about every nine years. The stock market ought to double about every nine years… The next 500 points, the next 600 points — I don’t know which way they’ll go… They’ll double again in eight or nine years after that. Because profits go up 8% a year, and stocks will follow. That's all there is to it.

Warren Buffett's 'fourth law of motion' 📉

Long ago, Sir Isaac Newton gave us three laws of motion, which were the work of genius. But Sir Isaac’s talents didn’t extend to investing: He lost a bundle in the South Sea Bubble, explaining later, “I can calculate the movement of the stars, but not the madness of men.” If he had not been traumatized by this loss, Sir Isaac might well have gone on to discover the Fourth Law of Motion: For investors as a whole, returns decrease as motion increases.

Most pros can’t beat the market 🥊

According to S&P Dow Jones Indices (SPDJI), 79% of U.S. large-cap equity fund managers underperformed the S&P 500 in 2025. As you stretch the time horizon, the numbers get even more dismal. Over three years, 67% underperformed. Over 5 years, 89% underperformed. And over 20 years, 93% underperformed. This 2025 performance was the 16th consecutive year in which the majority of fund managers in this category have lagged the index.

Proof that 'past performance is no guarantee of future results' 📊

Even if you are a fund manager who generated industry-leading returns in one year, history says it’s an almost insurmountable task to stay on top consistently in subsequent years. According to S&P Dow Jones Indices, of the 334 large-cap equity funds in the top half of performance in 2021, 58.7% remained at the top half in 2022. However, just 6.9% remained on top through 2023. Only 4.5% stayed on top in the five consecutive years through 2025.

It’s much more dismal when you raise the bar. Of the 164 large-cap equity funds in the top quartile in 2021, just 20.1% remained in that category in 2022. That percentage fell to literally 0.0% in 2023.

The odds are stacked against stock pickers 🎲

Picking stocks in an attempt to beat market averages is an incredibly challenging and sometimes money-losing effort. Most professional stock pickers aren’t able to do this consistently. One of the reasons for this is that most stocks don’t deliver above-average returns. According to S&P Dow Jones Indices, only 19% of the stocks in the S&P 500 outperformed the average stock’s return from 2001 to 2025. Over this period, the average return on an S&P 500 stock was 452%, while the median stock rose by just 59%.

It’s hard enough to construct and manage a stock portfolio in a way that beats the competition.

Even if you are a fund manager who generated industry-leading returns in one year, history says it’s unlikely you’ll stay on top consistently in subsequent years.

S&P Dow Jones Indices (SPDJI) just published its latest Persistence Scorecard, which tracks the performance of actively managed funds over the five years ending 2025.

Of the 334 large-cap equity funds in the top half of performance in 2021, 58.7% remained at the top half in 2022. However, just 6.9% remained on top through 2023. Only 4.5% stayed on top in the five consecutive years through 2025. (See the chart above.)

It’s much more dismal when you raise the bar. Of the 164 large-cap equity funds in the top quartile in 2021, just 20.1% remained in that category in 2022. That percentage fell to literally 0.0% in 2023.

“Active management is challenging,” SPDJI analysts wrote. “But identifying outstanding managers can be equally, if not more, challenging. The Persistence Scorecard shows that consistent outperformance is typically fleeting.“

The results were a little better in recent years 🔎

The past three years were a bit better than the five-year results we reviewed above.

For example, 338 large-cap equity funds were in the top half of performance in 2023. Of those funds, 82.0% came in the top half again in 2024. And a respectable 49.4% extended that streak through 2025.

Even with the bar set higher, of the 173 large-cap equity funds in the top quartile in 2023, 75.7% remained on top in 2024, and 28.9% remained there through 2025.

But anyway you slice it, the data suggest the odds are against you that you’ll pick the fund manager that delivers top-performing returns over periods greater than two years.

As fund-management companies always caution in their disclaimers, past performance is no guarantee of future results.

This data is the latest reminder of how hard it is to pick winning stocks that’ll help you outperform. It's in line with data showing how difficult it is to beat benchmarks like the S&P 500, which itself sees lots of turnover in its constituents. For most investors, the smartest move has been to just park in an index fund where “consistent average returns turn into above-average returns over time.”

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Related from TKer:

• Most stock-picking pros underperformed in 2025’s market rollercoaster 🫤

• Picking a market-beating stock is far from a coin flip 🪙

• The S&P 500 experiences a ton of turnover 🔀

• Warren Buffett reminds us how picking winning stocks is hard 🤓

• The best investing wisdom shares a common theme 🧐

• 10 truths about the stock market 📈

Every publicly traded company is required to report quarterly financial performance in accordance with generally accepted accounting principles (GAAP), which is set by the Financial Accounting Standards Board.

But the rigid standard forces companies to incorporate items that are arguably non-recurring (e.g., restructuring costs, legal settlements, and gains or losses on asset sales) or have values that can be volatile over short periods (e.g., unrealized gains and losses on investments).

This has led many companies to report a second set of numbers adjusted for items that management argues don’t reflect the underlying, ongoing performance of the business. This process gets you to what are often referred to as operating earnings, adjusted earnings, pro-forma earnings, or non-GAAP earnings.

But the decision to report adjusted earnings is at the discretion of management, which means analysts and investors often have to make their own judgments about what should and shouldn’t be considered when analyzing financial performance.

It’s all very complicated, and it’s usually something you don’t have to worry about.

But Q1 had some high-profile companies reporting big swings in earnings driven by items that arguably should be adjusted.

Trillion-dollar companies reported multibillion-dollar investment gains and losses 💸

In addition to selling goods and services, some companies carry large portfolios of investments, including shares of public and private companies.

Berkshire Hathaway famously has a massive stock portfolio, which has helped drive the company’s long-term returns. However, Berkshire’s executives aren’t fans of how they have to account for those holdings. It’s why the company’s brief two-page earnings announcement released Saturday had one paragraph that was in both bold and italic font:

The amount of investment gains (losses) in any given quarter is usually meaningless and delivers figures for net earnings per share that can be extremely misleading to investors who have little or no knowledge of accounting rules.

The now-retired Warren Buffett and departed Charlie Munger had long decried this line item in their income statement. (More here, here, and here.)

Unfortunately, they have to report it. As explained in the release: “Generally Accepted Accounting Principles (‘GAAP’) require that we include the changes in unrealized gains (losses) of our equity security investments as a component of investment gains (losses) in our earnings statements.”

In short, they’ve argued: 1) Equity prices can be volatile over short periods, especially over three-month periods covered in quarterly earnings reports. As such, it adds the appearance of volatility to quarterly financial performance. And 2) These are unrealized losses, which means they reflect changes in value for securities that weren’t sold (which they might not intend to sell for years).

Berkshire reported Q1 operating earnings of $11.3 billion. But because of the stock market pullback during the period, the company had to report $1.2 billion in unrealized investment losses, which pared net earnings to $10.1 billion.

Meanwhile, a few megacap tech companies experienced the opposite during the period, reporting huge gains on private investments.

• From Amazon.com: “First quarter 2026 net income includes pre-tax gains of $16.8 billion included in non-operating income from our investments in Anthropic.“

• From Alphabet, which has big stakes in Anthropic and SpaceX: “Other income reflected a net gain of $37.7 billion, primarily the result of net unrealized gains on our nonmarketable equity securities.“

It’s great that we have this transparency, so the more sophisticated investors can separate these figures as we analyze the performance of these companies’ core businesses.

But it appears that these 11-figure unrealized windfalls were included in the numbers measured against analysts’ forecasts. As Deutsche Bank’s Binky Chadha wrote on Monday, “Indeed, popular reporting platforms like Bloomberg, which have not made these adjustments, are showing significantly stronger beats and growth numbers.”

And so we got stories about how Amazon.com and Alphabet reported earnings “nearing double Wall Street’s” estimates.

FactSet’s John Butters found this peculiar. From his note on Monday (emphasis added):

It is important to note that EPS reported on a GAAP basis by Alphabet, Amazon.com, and Meta Platforms was used for both the earnings surprise and the earnings growth rate calculations, as the majority of analysts contributing EPS estimates to FactSet for these three companies are providing EPS estimates on a GAAP basis. Alphabet, Amazon.com, and Meta Platforms historically have only reported EPS numbers on a GAAP basis.

It is interesting to note that all three companies highlighted items in their Q1 earnings releases that had a positive impact on GAAP earnings for the quarter. The (GAAP) EPS actual for Alphabet for Q1 2026 included a net gain of $37.7 billion primarily due to net unrealized gains on non-marketable equity securities. The (GAAP) EPS actual for Amazon.com for Q1 2026 included pre-tax gains of $16.8 billion included in non-operating income from investments in Anthropic. The (GAAP) EPS actual for Meta Platforms for Q1 2026 included an $8.03 billion income tax benefit. Meta Platforms also stated that EPS excluding the tax benefit for the first quarter would have been $3.13 lower.

To be fair, it’s not new for these megacap companies to hold investments with fluctuating values. But the scale of the gains in Q1 was unusual.

Goldman Sachs’ Ben Snider examined the history of the income statement line item capturing this phenomenon. From his note (emphasis added):

Read more

Berkshire Hathaway’s annual shareholder meeting was destined to be interesting as the first without its now-retired CEO, Warren Buffett, MC’ing the event.

But Buffett, who remains chairman of Berkshire’s board, made a few cameos. One of them was pretty eerie.

Kicking off the Q&A on Saturday morning, the spotlight went to a video where “Warren from Omaha” asked the first question:

Hi. My name is Warren from Omaha. I’ve recently undergone, let’s call it, a significant change in role. And I have, well, let’s just say, a not insignificant portion of my net worth tied up in Berkshire stock. Now, Greg, I’ve been watching this company for a while, a long time, a very long time. And I’ve been telling people that I have no intentions of selling a single share, not one. So my question is a simple one. I’m 95 years old. I’ve got nothing but time and Cherry Coke. And I want to know, just so I have something to tell my fellow shareholders: Why should they hold their Berkshire shares for the long term?

The fun moment quickly turned serious when CEO Greg Abel informed the audience that it wasn’t Warren Buffett.

“As you've all picked up, that was a deepfake,” Abel said. “But here's the interesting thing. That was done with zero input from Warren. Voice, photo... we were able to obtain that with information that's out there, and replicate those actions and that voice.”

It’s notable that they leaned into the deepfake because it’s a problem that Buffett has been wrestling with for years. Just a few months ago, Berkshire put out a rare press release about deepfakes titled: “It’s Not Me.”

“Scamming has always been part of the American scene,” Buffett said of deepfakes at the 2024 meeting. “If I was interested in investing in scamming — it’s gonna be the growth industry of all time.”

While Buffett has had to warn specifically of deepfakes of his likeness being used by scammers, Berkshire and its management team have long flagged cyber broadly as a major risk. In fact, it’s the second item identified in “Risk Factors” section of the company’s annual report:

Cybersecurity risks could result in economic losses to our businesses and reputational damage.

We rely on technology in virtually all aspects of our business. Like those of many large businesses, certain of our information systems have been subject to cyber threats, including computer viruses, malicious codes, unauthorized access, phishing efforts, denial-of-service attacks and other cyber-attacks. We expect continued exposure to such attacks in the future and attacks have become more sophisticated and frequent. A significant disruption or failure of our technology systems could result in service interruptions, safety failures, security events, regulatory compliance failures, an inability to protect information and assets against unauthorized users and other operational difficulties. Cyber-attacks perpetrated against our systems could result in loss of assets and critical information and expose us to remediation costs and reputation damage.

So of course, it’s not surprising that it was the very first topic they addressed during the meeting’s Q&A session.

“That’s what we’re dealing with when we think of Berkshire and how we have to protect it every day,” Abel said on Saturday. “It can go to deepfakes, and they’re using it to try to penetrate our business. It can be cyber attacks. It’s a great reminder for our team, because that is a significant risk across Berkshire that we’re managing every day. Cyber risk. And it’s one that we take extremely seriously.”

Are markets complacent about cyber risks?

While it’s unsettling to think about the risks posed by cyber attacks, it’s encouraging to hear executives, not just at Berkshire, confirm that it’s top of mind.

The fact that we haven’t experienced a market-destabilizing event tied to cyber perhaps speaks to how effective companies and regulators have been at keeping bad actors at bay.

Hopefully it stays that way.

Because, for now, market participants are arguably complacent about cyber risks. It rarely comes up in surveys about risk. For example, in BofA’s latest Global Fund Manager Survey, cyber didn’t crack the list of top “tail risks” identified by market pros.

This might be a problem. Because according to TKer Truth No. 8: “The most destabilizing risks are the ones people aren’t talking about.“

Investors and traders not talking about a risk suggests that the risk isn’t priced into markets. That means when the risk materializes, volatility is more likely to spike with prices potentially overshooting to the downside.

Especially with the rise of AI and increasingly scary stories about related risks, it’s never been more important to be vigilant.

For now, we put faith in our business leaders and policymakers and hope that they continue to be in front of this.

On Saturday, CNBC’s Becky Quick asked Buffett about the morning’s deepfake and the risk AI poses to the world.

“It’s scary,” Buffett said. “It’s particularly scary when you have nine countries or so with nuclear weapons and people working on it. We haven’t dealt with it. We don’t know what’s going to happen.“

Investing is risky. Bad things often happen. And sometimes, very bad things happen.

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Related from TKer:

• Warren Buffett’s warning about AI 🧐

• Taking stock of Corporate America’s ‘Risk Factors’⚠️

• 10 truths about the stock market 📈

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Review of the macro crosscurrents 🔀

📈The stock market rallied to all-time highs, with the S&P 500 setting an intraday high of 7,272.52 and a closing high of 7,230.12 on Friday. The index is now up 5.6% year-to-date. For market insights, check out the Stock Market tab at TKer. »

There were several notable data points and macroeconomic developments since our last review:

🏛️ Fed holds rates. On Wednesday, the Federal Reserve kept its benchmark interest rate target range at 3.5% to 3.75%.

From the Fed’s policy statement: “Recent indicators suggest that economic activity has been expanding at a solid pace. Job gains have remained low, on average, and the unemployment rate has been little changed in recent months. Inflation is elevated, in part reflecting the recent increase in global energy prices. The Committee seeks to achieve maximum employment and inflation at the rate of 2 percent over the longer run. Developments in the Middle East are contributing to a high level of uncertainty about the economic outlook. The Committee is attentive to the risks to both sides of its dual mandate.”

From Fed Chair Powell’s press conference: “After my term as Chair ends on May 15, I will continue to serve as a governor for a period of time, to be determined. I plan to keep a low profile as a governor. There is only ever one Chair of the Federal Reserve Board. When Kevin Warsh is confirmed and sworn, he will be that Chair. Once sworn in as Board Chair, his new colleagues will elect him to chair the FOMC as well.”

For more on what Fed policy could mean for markets, read: About Fed rate cuts and stocks ⚖️

⛽️ Gas and diesel prices remain elevated. From AAA: “After ticking down for nearly two weeks, gas prices are going back up again with the national average seeing a 27-cent hike in one week. The national average is $1.12 higher than it was this time last year, as oil prices surge above $100/barrel with no indication of when the Strait of Hormuz will reopen. Gas prices are the highest they’ve been in four years, since late July 2022.“

Here’s a longer-term look at the trajectory of gas and diesel prices, as tracked by the EIA.

For more on energy prices, read: Our love-hate relationship with rising oil prices in charts 💔🛢️📊

🎈 Fed’s preferred inflation measure jumped on higher energy prices. The personal consumption expenditures (PCE) price index in March was up 3.5% from a year ago, fueled by higher energy prices. The core PCE price index — the Federal Reserve’s preferred measure of inflation — was up 3.2% during the month, up from February’s 3.0% rate.

On a month-over-month basis, the core PCE price index was up 0.29%.

While inflation rates remain above the Federal Reserve’s 2% target, they are down considerably from peak levels just a few years ago.

For more on the Fed’s impact on markets, read: There’s a more important force than the Fed driving the stock market 💪

🛍️ Consumer spending ticks higher. According to BEA data, personal consumption expenditures increased 0.9% month-over-month in March to an annual rate of $21.86 trillion, an all-time high.

Adjusted for inflation, real personal consumption expenditures increased 0.2% from the prior month to another all-time high.

Here’s a breakdown of real spending growth by category.

💳 Card spending data is holding up. From BofA: “Total card spending per HH was up 7.2% y/y in the week ending Apr 25, according to BAC aggregated credit & debit card data. Ex gas spending was up 6.4% y/y, in part due to favorable base effects from Easter Sunday (low spending day) timing change. Spending remains healthy. K-shaped spending dynamics persist, with the ‘K’ even wider at the top 5% & top 1% income cohorts.“

Consumer spending data has looked a lot better than consumer sentiment readings. For more on this contradiction, read: We’re taking that vacation whether we like it or not 🛫 and Household finances are both ‘worse’ and ‘good’ 🌦️

🏭 Business investment activity jumps. Orders for nondefense capital goods excluding aircraft — a.k.a. core capex or business investment — increased 3.3% to a record $82.9 billion in March.

Core capex orders are a leading indicator, meaning they foretell economic activity down the road.

📋 Manufacturing activity surveys signal growth, but also problems. From S&P Global’s April U.S. Manufacturing PMI: “The surge in manufacturing activity in April is not the cause for cheer that at first glance it suggests. A key driving force behind the upturn is the need for companies to get ahead of further feared price rises and supply shortages, providing a short-term boost that could fade in the coming months as headwinds to the economy continue to build.”

Similarly, the ISM April Manufacturing PMI signaled growth.

But the ISM report also signaled inflation was heating up.

Keep in mind that during times of perceived stress, soft survey data tends to be more exaggerated than actual hard data.

For more on this, read: What businesses do > what businesses say 🙊 and 4 sometimes-conflicting ways I’m thinking about the economy 😬😞😎🙃

👎 Consumer vibes improve slightly, but remain in the dumps. The Conference Board’s Consumer Confidence Index climbed 0.6 points in April. From the report: “Consumer confidence edged up in April but was overall little changed, despite material concern about rising gasoline prices as the war in the Middle East prompted a surge in Brent crude oil prices. Consumer appraisals of current and expected business conditions declined moderately compared to last month. This was offset by modest improvements in consumers’ perceptions of the labor market, both current and expected, as well as income expectations, which were slightly more optimistic in April.”

More from the report: “Among demographic groups, confidence continued to trend downward on a six-month moving average basis for consumers aged 35 and up while younger consumers were a tad more confident in April. Respondents under 35 remained the most optimistic and those 55 and over the least. On a six-month moving average basis, confidence improved among Millennials and Gen Z but declined among older generations. By income, confidence on a six-month moving average basis varied, but most income groups expressed less optimism. By political affiliation, Republicans remained the most optimistic, while confidence fell for Independents and improved slightly for Democrats.”

For more on consumer sentiment, read: What consumers do > what consumers say 🙊 and The economy may not be working for everyone right now, but it’s at least working for stock market investors 🎭

💼 New unemployment insurance claims, total ongoing claims remain low. Initial claims for unemployment benefits fell to 189,000 during the week ending Apr. 25, down from 215,000 the week prior. This metric remains at levels historically associated with economic growth.

Insured unemployment, which captures those who continue to claim unemployment benefits, ticked up to 1.785million during the week ending Apr. 18.

For more on the labor market, read: The next couple of years for the job market could be tough 🫤

👎 Consumers don’t feel good about the labor market. From The Conference Board: “On net, consumers’ views of the labor market improved moderately in April. 27.3% of consumers said jobs were ‘plentiful,’ virtually unchanged from 27.4% in March. 19.8% of consumers said jobs were ‘hard to get,’ down from 21.3%.”

Many economists monitor the spread between these two percentages (a.k.a., the labor market differential). While the metric improved recently, the direction of the spread reflects a cooling labor market.

More from The Conference Board: “However, consumers were less negative about the labor market outlook in April. 16.1% of consumers expected more jobs to be available, up from 15.4% in March. 26.9% anticipated fewer jobs, down from 27.8%.“

For more on the labor market, read: The labor market is cooling 💼

🤔 Recent private job growth cooled. According to payroll processor ADP, private U.S. employers added 39,250 jobs in the four weeks ending April 11.

For more on the labor market, read: About that ugly jobs report 📉

💵 Key labor costs metric picked up. The employment cost index in Q1 was up 0.9% from the prior quarter.

For more on why policymakers are watching wage growth, read: Revisiting the key chart to watch amid the Fed's war on inflation 📈

🏠 Mortgage rates tick higher. According to Freddie Mac, the average 30-year fixed-rate mortgage rose to 6.30%, up from 6.23% last week. “As rates had modestly declined the last few weeks, purchase demand has accelerated with purchase applications rising to over 20 percent above a year ago. It is clear that purchase demand continues to hold up as prospective buyers react to both modestly lower rates and more inventory to choose from than the last few years.“

As of Q4, there were 148.7 million housing units in the U.S., of which 87.8 million were owner-occupied and about 40% were mortgage-free. Of those carrying mortgage debt, almost all have fixed-rate mortgages, and most of those mortgages have rates that were locked in before rates surged from 2021 lows. All of this is to say: Most homeowners are not particularly sensitive to the small weekly movements in home prices or mortgage rates.

For more on mortgages and home prices, read: Why home prices and rents are creating all sorts of confusion about inflation 😖

🔨 New home construction starts rise. Housing starts 10.8% in March to an annualized rate of 1.50 million units, according to the Census Bureau. Building permits declined 10.8% to an annualized rate of 1.37 million units.

🏠 Home prices cool. According to the S&P CoreLogic Case-Shiller index, home prices were up 0.7% year-over-year in February, but declined 0.8% month-over-month. From S&P Dow Jones Indices’ Nicholas Godec: “More than half of major U.S. metropolitan markets posted year-over-year price declines in February, signaling that the housing slowdown has broadened well beyond its Sun Belt origins. …Mountain West (Denver -2.2%) and Pacific Northwest (Seattle -2.0%) markets now sit alongside Sun Belt decliners Tampa (-2.1%), Phoenix (-1.8%), and Dallas (-1.7%). Los Angeles (-0.8%) and Washington (-0.1%) joined the list of decliners, while Tampa’s decline narrowed for a fourth consecutive month and Denver displaced it as the weakest market in the index.”

🐇 GDP growth picked up in Q1. U.S. GDP grew at a 2.0% rate in Q1, up from 0.5% in Q4. Investment and personal consumption led growth, more than offsetting the drag from net exports.

Because the GDP calculation has several quirks, economists often point to “real final sales to private domestic purchasers” to better understand the economy's underlying health. Sometimes referred to as “core” GDP, this metric excludes net exports, inventory adjustments, and government spending. That metric grew at a 2.5% rate in Q1.

For more on how GDP relates to the economy, read: It’s too ambiguous to just say ‘the economy’ 🤦🏻‍♂️

📈 Near-term GDP growth estimates are tracking positively. The Atlanta Fed’s GDPNow model sees real GDP growth rising at a 3.5% rate in Q2.

For more on GDP and the economy, read: It’s too ambiguous to just say ‘the economy’ 🤦🏻‍♂️ and Economic data can often be both ‘worse’ and ‘good’ 🌦️

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Putting it all together 📋

Earnings look bullish: The long-term outlook for the stock market remains favorable, bolstered by expectations for years of earnings growth. And earnings are the most important driver of stock prices.

Demand is positive: Demand for goods and services remains positive, supported by healthy consumer and business balance sheets. Personal spending activity remains at record levels. Core capex orders, which are a leading indicator of business spending, have been on the rise.

Growth is cooling: While the economy remains healthy, growth has normalized from much hotter levels earlier in the cycle. The economy is less “coiled” these days as major tailwinds like job openings and excess savings have faded. Job creation is hovering at near-zero. It has become harder to argue that growth is destiny.

Actions speak louder than words: We are in an odd period, given that the hard economic data decoupled from the soft sentiment-oriented data. Consumer and business sentiment has been relatively poor, even as tangible consumer and business activity continues to grow and trend at record levels. From an investor’s perspective, what matters is that the hard economic data continues to hold up.

Stocks are not the economy: There’s a case to be made that the U.S. stock market could outperform the U.S. economy in the near term, thanks largely to positive operating leverage. Since the pandemic, companies have aggressively adjusted their cost structures. This came with strategic layoffs and investment in new equipment, including hardware powered by AI. These moves are resulting in positive operating leverage, which means a modest amount of sales growth — in the cooling economy — is translating to robust earnings growth.

Mind the ever-present risks: Of course, we should not get complacent. There will always be risks to worry about, such as U.S. political uncertainty, geopolitical turmoil, energy price volatility, and cyber attacks. There are also the dreaded unknowns. Any of these risks can flare up and spark short-term volatility in the markets.

Investing is never a smooth ride: There’s also the harsh reality that economic recessions and bear markets are developments that all long-term investors should expect as they build wealth in the markets. Always keep your stock market seat belts fastened.

Think long-term: For now, there’s no reason to believe there’ll be a challenge that the economy and the markets won’t overcome. The long game remains undefeated, and it’s a streak that long-term investors can expect to continue.

For more on how the macro story is evolving, check out the previous review of the macro crosscurrents. »

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Key insights about the stock market 📈

Here’s a roundup of some of TKer’s most talked-about paid and free newsletters about the stock market. All of the headlines are hyperlinked to the archived pieces.

10 truths about the stock market 📈

The stock market can be an intimidating place: It’s real money on the line, there’s an overwhelming amount of information, and people have lost fortunes in it very quickly. But it’s also a place where thoughtful investors have long accumulated a lot of wealth. The primary difference between those two outlooks is related to misconceptions about the stock market that can lead people to make poor investment decisions.

The makeup of the S&P 500 is constantly changing 🔀

Passive investing is a concept usually associated with buying and holding a fund that tracks an index. And no passive investment strategy has attracted as much attention as buying an S&P 500 index fund. However, the S&P 500 — an index of 500 of the largest U.S. companies — is anything but a static set of 500 stocks.

The key driver of stock prices: Earnings💰

For investors, anything you can ever learn about a company matters only if it also tells you something about earnings. That’s because long-term moves in a stock can ultimately be explained by the underlying company’s earnings, expectations for earnings, and uncertainty about those expectations for earnings. Over time, the relationship between stock prices and earnings has a very tight statistical relationship.

Stomach-churning stock market sell-offs are normal🎢

Investors should always be mentally prepared for some big sell-offs in the stock market. It’s part of the deal when you invest in an asset class that is sensitive to the constant flow of good and bad news. Since 1950, the S&P 500 has seen an average annual max drawdown (i.e., the biggest intra-year sell-off) of 14%.

How the stock market performed around recessions 📉📈

Every recession in history was different. And the range of stock performance around them varied greatly. There are two things worth noting. First, recessions have always been accompanied by a significant drawdown in stock prices. Second, the stock market bottomed and inflected upward long before recessions ended.

In the stock market, time pays ⏳

Since 1928, the S&P 500 has generated a positive total return more than 89% of the time over all five-year periods. Those are pretty good odds. When you extend the timeframe to 20 years, you’ll see that there’s never been a period where the S&P 500 didn’t generate a positive return.

What a strong dollar means for stocks 👑

While a strong dollar may be great news for Americans vacationing abroad and U.S. businesses importing goods from overseas, it’s a headwind for multinational U.S.-based corporations doing business in non-U.S. markets.

Stanley Druckenmiller's No. 1 piece of advice for novice investors 🧐

…you don't want to buy them when earnings are great, because what are they doing when their earnings are great? They go out and expand capacity. Three or four years later, there's overcapacity and they're losing money. What about when they're losing money? Well, then they’ve stopped building capacity. So three or four years later, capacity will have shrunk and their profit margins will be way up. So, you always have to sort of imagine the world the way it's going to be in 18 to 24 months as opposed to now. If you buy it now, you're buying into every single fad every single moment. Whereas if you envision the future, you're trying to imagine how that might be reflected differently in security prices.

Peter Lynch made a remarkably prescient market observation in 1994 🎯

Some event will come out of left field, and the market will go down, or the market will go up. Volatility will occur. Markets will continue to have these ups and downs. … Basic corporate profits have grown about 8% a year historically. So, corporate profits double about every nine years. The stock market ought to double about every nine years… The next 500 points, the next 600 points — I don’t know which way they’ll go… They’ll double again in eight or nine years after that. Because profits go up 8% a year, and stocks will follow. That's all there is to it.

Warren Buffett's 'fourth law of motion' 📉

Long ago, Sir Isaac Newton gave us three laws of motion, which were the work of genius. But Sir Isaac’s talents didn’t extend to investing: He lost a bundle in the South Sea Bubble, explaining later, “I can calculate the movement of the stars, but not the madness of men.” If he had not been traumatized by this loss, Sir Isaac might well have gone on to discover the Fourth Law of Motion: For investors as a whole, returns decrease as motion increases.

Most pros can’t beat the market 🥊

According to S&P Dow Jones Indices (SPDJI), 79% of U.S. large-cap equity fund managers underperformed the S&P 500 in 2025. As you stretch the time horizon, the numbers get even more dismal. Over three years, 67% underperformed. Over 5 years, 89% underperformed. And over 20 years, 93% underperformed. This 2025 performance was the 16th consecutive year in which the majority of fund managers in this category have lagged the index.

Proof that 'past performance is no guarantee of future results' 📊

Even if you are a fund manager who generated industry-leading returns in one year, history says it’s an almost insurmountable task to stay on top consistently in subsequent years. According to S&P Dow Jones Indices, just 4.21% of all U.S. equity funds in the top half of performance during the first year were able to remain in the top during the four subsequent years. Only 2.42% of U.S. large-cap funds remained in the top half

SPDJI’s report also considered fund performance relative to their benchmarks over the past three years. Of 738 U.S. large-cap equity funds tracked by SPDJI, 50.68% beat the S&P 500 in 2022. Just 5.08% beat the S&P in the two years ending 2023. And only 2.14% of the funds beat the index over the three years ending in 2024.

The odds are stacked against stock pickers 🎲

Picking stocks in an attempt to beat market averages is an incredibly challenging and sometimes money-losing effort. Most professional stock pickers aren’t able to do this consistently. One of the reasons for this is that most stocks don’t deliver above-average returns. According to S&P Dow Jones Indices, only 19% of the stocks in the S&P 500 outperformed the average stock’s return from 2001 to 2025. Over this period, the average return on an S&P 500 stock was 452%, while the median stock rose by just 59%.

This dynamic is concerning for investors for two big reasons: 1) it raises the costs of producing goods and services, and 2) it pressures demand from customers who have less money to spend due to their own rising costs.

But we’re currently about a third of the way through Q1 earnings season, and most companies haven’t exactly been sounding the alarm on higher energy costs.

On the contrary, most companies are reporting strong earnings growth, analysts have been revising up their estimates for future earnings, and the stock market is trading near all-time highs.

What gives?

To begin to make sense of it all, we have to remember that energy represents just one of many costs for companies. And while some industries have a lot of exposure to energy prices, most have relatively low exposure.

Let’s take a closer look.

Most industries have much bigger costs than energy 🛢️

Read more

This is especially true in the business world: Entrepreneurs and executives come and go, and industries and companies rise and fall.

These dynamics are very much at the core of TKer Stock Market Truth No. 9: There’s a lot of turnover in the stock market. Specifically, this observation concerns how stocks are regularly added to and removed from the market and the major indices.

But philosophically, Truth No. 9 also speaks to the many changes that long-lasting businesses experience during their time as going concerns.

People come and go 👋

Last Monday, Apple announced that Tim Cook, its CEO for 15 years, would step down from the top job in September.

This is a big deal as Cook oversaw many of the company’s wins, creating trillions of dollars of shareholder value. From the announcement:

He became CEO in 2011 and has overseen the introduction of numerous products and services, including new categories like Apple Watch, AirPods, and Apple Vision Pro, and services ranging from iCloud and Apple Pay to Apple TV and Apple Music. He was also instrumental in expanding existing product lines. Under Cook’s leadership Apple has grown from a market capitalization of approximately $350 billion to $4 trillion, representing a more than 1,000% increase, and yearly revenue has nearly quadrupled, from $108 billion in fiscal year 2011 to more than $416 billion in fiscal year 2025.

His departure surely has some investors concerned. Indeed, Apple shares fell 2.5% on the first trading day following the announcement, underperforming the market.

While leadership changes don’t always go as hoped, history also shows they can work out well. In fact, Apple is arguably the epitome of what shareholders hope for.

Cook had incredibly big shoes to fill in 2011 when he stepped in for visionary leader Steve Jobs. And he delivered.

“The fact of the matter is nobody is irreplaceable,” Berkshire Hathaway’s Ajit Jain said at his company’s 2024 shareholder meeting. “We have Tim Cook here in the audience who has proved that.”

Jain, who oversees Berkshire’s massive insurance operations, made his haunting observation after his boss Warren Buffett quipped, “We won’t find another Ajit.“

Buffett himself made his comment after the then-recent passing of Berkshire executive Charlie Munger, who had been at the company for over 40 years. Buffett, 95, handed the Berkshire CEO reins to a successor earlier this year.

No one leads a business forever.

Business models change 👟

Earlier this month, the once-popular, now-flailing shoe brand Allbirds announced a major pivot to its business model.

From the announcement:

In connection with this pivot, the Company anticipates changing its name to “NewBird AI.” … NewBird AI’s long-term vision is to become a fully integrated GPU-as-a-Service (GPUaaS) and AI-native cloud solutions provider. Over time, the Company intends to grow its neocloud platform by expanding its compute and service offerings, deepening partnerships with operators and customers, and evaluating strategic M&A opportunities.

People were quick to remember when the alcoholic beverage maker Long Island Iced Tea Corp pivoted to blockchain and changed its name to Long Blockchain Corp. Some noted the time AMC Theatres bought a stake in a gold and silver miner.

All this is to say, people — including me — have their doubts. It’s one thing to pivot to an adjacent business. It’s another thing to dive headfirst into an unrelated business that just happens to be hot right now.

That said, it’s not crazy for companies to make big changes to how they make money. Sometimes it happens gradually — think of Netflix becoming a streaming platform after starting as a DVD rental-by-mail business. Sometimes it happens through acquisitions — think of Berkshire Hathaway, which started as a textile company but bought its way into the insurance business.

There are a lot of prominent companies today in businesses that their founders probably couldn’t have imagined.

• Nokia, the Finnish telecommunications company, got its start in 1865 as a paper pulp factory.

• Nintendo, the ubiquitous Japanese video game company, originally sold playing cards in 1889.

• Raytheon, the American defense company, was in the refrigeration business in 1922 long before it sold Tomahawk cruise missiles and Patriot missile defense systems.

• Samsung was exporting dried fish and produce in 1938 before getting into the electronics it’s known for today.

  

• DuPont, the 200-year-old chemical giant, had gunpowder as its first product.

• American Express was delivering packages in 1850 before it got into credit cards.

• Bayer, the German pharmaceutical giant, was originally in the production of dyes in 1881 before it started selling Aspirin. (If you dig a little deeper, you’ll find bottles of Heroin with the Bayer logo on it.)

• William Wrigley Jr. didn’t originally sell gum in 1891. He gave it away for free to customers who bought his soap.

To be clear, companies don’t have to exit their early businesses to survive and grow shareholder value. Alphabet (formerly Google) still offers search; Apple still sells personal computers; Microsoft still sells operating systems; Amazon still sells books online; and Meta (formerly Facebook) still operates its original social network. But all these companies got into many other massive businesses before they became trillion-dollar corporate behemoths.

At the end of the day, publicly traded companies aren’t out here to sell a product. They’re out here to allocate capital, make money, and increase shareholder value. Sometimes, this means shifting focus away from the original product the company was known for.

Zooming out 🔭

Leadership transitions and business pivots don’t always work out.

But the companies that pull it off sometimes go on to become the largest and most successful enterprises in the world.

And it’s often the case that turnover in the stock market and the major market indices can be explained by whether or not a company was able to execute these transitions successfully.

All of this makes investing in the stock market complicated and interesting. Who knows what businesses and which business leaders will be responsible for driving the market higher in the years to come?

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Related from TKer:

• Ajit Jain’s haunting observation about impermanence in business 🤔

• Sometimes, the best business decision is to change businesses 💔

• Berkshire’s new CEO makes clear what this business is really about 🎯

• Trillion dollar exposure 💰

• 10 truths about the stock market 📈

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Review of the macro crosscurrents 🔀

📈The stock market rallied to all-time highs, with the S&P 500 setting an intraday high of 7,168.59 and a closing high of 7,165.08 on Friday. The index is now up 4.7% year-to-date. For market insights, check out the Stock Market tab at TKer. »

There were several notable data points and macroeconomic developments since our last review:

👎 Consumer vibes are in the dumps. From the University of Michigan’s April Surveys of Consumers: “Consumer sentiment ticked down 3.5 index points this month, now comparable to the trough seen in June 2022. Decreases in sentiment were seen across political party, income, age, and education. Expected business conditions declined for both short and long time horizons, nearly matching year-ago readings when the reciprocal tariff regime was implemented. After the two-week cease-fire was announced and gas prices softened a touch, sentiment recovered a modest portion of its early-month losses. The Iran conflict appears to influence consumer views primarily through shocks to gasoline and potentially other prices. In contrast, military and diplomatic developments that do not lift supply constraints or lower energy prices are unlikely to buoy consumers.”

For more on consumer sentiment, read: What consumers do > what consumers say 🙊

💼 New unemployment insurance claims, total ongoing claims remain low. Initial claims for unemployment benefits rose to 214,000 during the week ending Apr. 18, up from 208,000 the week prior. This metric remains at levels historically associated with economic growth.

Insured unemployment, which captures those who continue to claim unemployment benefits, ticked up to 1.821 million during the week ending Apr. 11.

For more on the labor market, read: The next couple of years for the job market could be tough 🫤

🤔 Recent private job growth has picked up. According to payroll processor ADP, private U.S. employers added 54,750 jobs in the four weeks ending April 4.

For more on the labor market, read: About that ugly jobs report 📉

⛽️ Gas and diesel prices remain elevated. From AAA: “Drivers are getting a bit of relief at the pump as the national average went down by 6 cents since last week to $4.03. Crude oil prices have come down below $100/barrel, helping drive down the cost of gasoline for consumers. But how long the downward trend will last is uncertain with continued instability along the Strait of Hormuz. Currently, pump prices are the highest they’ve been during this time of year since 2022, when the national average on April 23 was $4.11.“

Here’s a look at the trajectory of gas and diesel prices, as tracked by the EIA.