Weekly Update 5/1/2026: Fed Holds Rates Steady as Earnings Season Rolls On
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- Multiple SGK core holdings release earnings this week – enjoy the reading below!
Domestic Economic News
We are in the thick of earnings season and so far results have been good. This was a big earnings week so this information is reflective of the end of the week prior. The S&P 500 is modestly outperforming preseason expectations, with earnings growth running about 133 basis points above the 12.35% forecast, led by financials. That strength is offset by a sharp reversal in energy, where earnings are now expected to fall 12.3% versus a prior 7.1% growth outlook, reflecting Iran-related uncertainty. Excluding energy, growth is closer to 14.9%. So far, 139 companies, or 26.6% of market cap, have reported. Materials is leading on a limited sample, while health care, energy and communications are on track to contract. So far, 80% of companies posted earnings above estimates vs. the post-pandemic average 78.3% and the 65.8% mean since 1992. Revenue growth is approaching a key threshold, rising to 9.9% in the first quarter from a 9.4% preseason forecast and on track to exceed 10% for the first time since 3Q22. Excluding energy, sales growth is already at 10.5%, modestly above expectations, underscoring steady demand across sectors. Materials and communications have delivered the largest upside surprises, while all sectors are still expected to post positive revenue growth. The main exception is energy, where forecasts have been sharply revised lower to 2.1% from 12.6%, alongside a smaller downgrade to utilities. 67.6% of companies have beaten revenue estimates, above both post-pandemic and longer-term averages. Net income and operating margins are still expanding, but the upside surprise is fading. Net income margin is tracking at 14.1% in the first quarter, just 9 basis points above preseason forecasts, while operating margins are essentially in line at 16.9%. Gains are concentrated in utilities and technology, both of which are exceeding expectations, while energy is seeing margin compression and falling short of forecasts. Both margins remain higher than a year earlier, yet the share of companies that beat margin estimates varied -- 75.3% of 137 reported cleared net margin hurdles thus far vs. the 64.6% four-year average, while 45.6% of 90 companies beat operating margin estimates vs. the 51.9% norm.
US orders for business equipment increased in March by the most since mid-2020, extending a yearlong stretch of solid capital investment fueled by spending on artificial intelligence. The value of core capital goods orders, a proxy for investment in equipment that excludes aircraft and military hardware, jumped 3.3% after an upwardly revised 1.6% advance in February, Commerce Department figures showed Wednesday. Bookings for all durable goods — items meant to last at least three years and including orders for commercial aircraft and military equipment — rose 0.8% in a largely broad advance. Economists expect business investment will remain solid this year as companies keep spending on artificial intelligence and take advantage of more favorable tax provisions. At the same time, it’s unclear how guarded firms will be if the Iran war isn’t resolved soon. The conflict has sharply driven up prices of oil and some other commodities. “The stunning degree of strength during a month when firms would have had valid reason to be cautious attests to the substantial energy in business investment that was bottled up last year due to policy-related uncertainty but is being unleashed over the past several months,” Stephen Stanley, chief US economist at Santander US Capital Markets LLC, said in a note. The durables report showed increased bookings for communications equipment, electrical hardware and motor vehicles and parts. Orders for military aircraft also advanced sharply, while bookings for machinery and metals rose. Non-defense capital goods shipments including aircraft, which feed directly into the equipment investment portion of the gross domestic product report, rose 0.5% in March. Rather than orders that can be canceled, the government uses data on shipments as an input to GDP. The durables report showed core capital goods shipments, a less volatile metric that excludes planes and military hardware, rose 1.2% after an upwardly revised 1.3% advance a month earlier. Economists prefer the core equipment shipments and orders figures because they offer a clearer picture of the trend in underlying business investment and the impact on the economy.
Separate data out Wednesday showed the US merchandise-trade deficit widened in March for a second month. The shortfall in goods trade grew 5.3% from the prior month to $87.9 billion — in line with the Bloomberg survey median. A gain in imports exceeded a rise in exports. Economists will use both the durable goods and trade reports to fine-tune their first-quarter growth projections. Before the durables report, the Atlanta Fed’s GDPNow forecast saw first-quarter growth picking up to 1.2%. In the closing months of 2025, the economy expanded just 0.5%, restrained by the federal government shutdown. Prior to the Wednesday reports, the Atlanta Fed penciled in a 0.77 percentage point contribution to first-quarter growth from business equipment. It also saw net exports subtracting about 0.9 point. In other news, housing starts came in much better than expected as they rose to 1,502,000 annualized vs 1,356,000 in the prior month – the estimate was for 1,380,000, Census Bureau data showed. US economic growth accelerated at the start of the year, fueled by a massive upswing in business investment and solid consumer demand. Inflation-adjusted gross domestic product increased an annualized 2% in the first quarter after the longest-ever federal government shutdown limited growth in the closing months of 2025, according to an initial estimate issued Thursday by the Bureau of Economic Analysis. Consumer spending, which comprises about two-thirds of economic activity, increased at a better-than-expected 1.6% rate, driven by demand for services including healthcare and financial services. Business outlays on equipment and structures advanced 10.4%, the fastest pace in almost three years and supported by rapid investment in artificial intelligence. The report points to an economy that has so far held firm and is better positioned to withstand the fallout from the Middle East conflict, which is pushing oil prices sharply higher and disrupting global supply chains. Still, the geopolitical situation risks tempering growth should inflation-weary consumers become more guarded. While higher tax refunds helped to underpin household spending, the GDP report showed inflationary pressures accelerated sharply in March as the war spurred a surge in gasoline prices.
The Federal Reserve’s preferred measure of inflation — the personal consumption expenditures price index — rose 0.7% last month, the most since 2022. The gauge was up 3.5% from the prior year, according to separate BEA data. Gas prices have since continued to climb and are now at the highest since 2022. While household demand cooled from the prior quarter, some of that may have reflected the severe winter weather in much of the US at the start of the year. Inflation-adjusted spending rose 0.2% in March from a month earlier as consumers doled out for goods like cars and household furnishings. Applications for US unemployment benefits plunged to the lowest level in decades, a sign that job-cut announcements have not yet meaningfully translated into layoffs. Initial claims fell by 26,000 to 189,000 in the week ended April 25. according to Labor Department data released Thursday. The median forecast in a Bloomberg survey of economists called for 212,000 applications. Continuing claims, a proxy for the number of people receiving benefits, dropped to 1.79 million in the previous week, the lowest in two years. Filings have remained subdued despite high-profile companies such as Meta Platforms Inc. and Nike Inc. announcing job cuts, signaling the labor market continues to be in a low-firing environment.
The Federal Reserve left interest rates unchanged Wednesday as we discuss below, and Fed Chair Jerome Powell cited a labor market showing “more and more signs of stability” as a reason why the central bank didn’t have to rush toward further rate cuts. Fed Chair Jerome Powell described the economy as “quite resilient” in his final press conference as chair Wednesday, in part due to “apparently insatiable demand” for data centers across the US. Big tech companies Alphabet Inc., Amazon.com Inc., Meta Platforms Inc. and Microsoft Corp. are expecting to plow hundreds of billions into AI this year. The first-quarter jump in business spending was powered by outsized increases in information processing equipment and software. Meanwhile, government spending rebounded 4.4% in the first quarter after the government shutdown disrupted services and pay during the previous period. Net exports, however, weighed notably on growth, subtracting 1.3 percentage points from the calculation of GDP in the first quarter, the most in a year. That was due to a surge in imports that likely reflected a rush by businesses to get goods into the country after the Supreme Court struck down many of President Donald Trump’s tariffs in February. Because swings in trade and inventories often distort GDP, economists pay close attention to a narrower metric of underlying demand known as final sales to private domestic purchasers. This measure rose at a 2.5% pace in the first quarter, a pickup from the prior quarter.
Interest Rate Insight and the Fed
Federal Reserve officials left interest rates unchanged but revealed a deepening division over the outlook for policy amid increased uncertainty caused by the conflict in the Middle East. Four officials voted against the decision, including three who objected to language in their post-meeting statement that suggested the central bank would eventually resume cutting rates. Cleveland Fed President Beth Hammack, Minneapolis Fed President Neel Kashkari and Dallas Fed President Lorie Logan “supported maintaining the target range for the federal funds rate but did not support inclusion of an easing bias in the statement at this time,” the committee said. Governor Stephen Miran dissented in favor of a quarter-point reduction in rates. The 8-4 vote marked the first time since October 1992 that four officials dissented against a Federal Open Market Committee decision. The committee left their benchmark federal funds rate in a range of 3.5% to 3.75%. The S&P 500 and Treasuries remained lower after the decision. Heading into the meeting, investors and economists widely expected the Fed to leave rates unchanged through the remainder of the year. Officials made a slight change to their statement, saying “developments in the Middle East are contributing to a high level of uncertainty about the economic outlook.” They previously said the implications of the conflict on the economy were uncertain. Officials repeated the phrase referring to “the extent and timing of additional adjustments” to rates. Policymakers lowered rates three times in the closing months of 2025.
Impactful International News
The euro-area economy unexpectedly slowed at the start of 2026, with soaring energy costs triggered by the Iran war threatening stagflation in the months ahead. First-quarter gross domestic product rose 0.1% from the previous three months — below the 0.2% median estimate in a Bloomberg poll. Spain led the way again among the region’s top economies, expanding by 0.6%. Germany grew by 0.3%, while France unexpectedly stagnated. Covering only the first month of fighting in the Middle East, Thursday’s data don’t reflect the full extent of the slowdown facing Europe as the shock from the conflict ripples through the 21-nation bloc. Highlighting the dangers still unfolding just hours before the European Central Bank sets interest rates, a separate release from Eurostat showed consumer prices surged 3% in April — the fastest pace since September 2023. Some European firms have been quick to pass on rising raw materials costs. German chemicals giant BASF SE is hiking prices for plastic-protecting chemicals commonly used in the car and consumer-goods industries for the second time since the war began. Lubricants maker Fuchs SE also plans to lift prices to offset higher input costs.
The European Central Bank kept interest rates unchanged, with officials signaling they need more time to assess the extent of the Iran war’s jolt to the economy. The deposit rate was left at 2%, where it’s been since June 2025 and in line with the predictions of all analysts in a Bloomberg survey. The ECB offered no guidance on future decisions, reiterating it will act one meeting at a time based on information as it arrives. “The upside risks to inflation and the downside risks to growth have intensified,” the Governing Council said on Thursday in a statement. “The Governing Council remains well positioned to navigate the current uncertainty.” While policymakers have stressed since the conflict broke out that they’ll act decisively if inflation shows signs of spiraling, data available so far haven’t convinced them. The ECB isn’t alone in holding fire: The Federal Reserve sat tight on Wednesday and the Bank of England decided against a move earlier on Thursday. “The economic outlook is highly uncertain and will depend on how long the war in the Middle East will last, how strongly it affects energy and other commodity markets, as well as global supply chains,” President Christine Lagarde said. “Incoming information suggests that the conflict is weighing on economic activity, surveys point to slowing growth and consumers and businesses have become less confident about the future,” she told reporters.
The Bank of England is expected to stress test multiple scenarios that reveal how it might react to a prolonged energy price shock this week, as it holds off immediate action on interest rates. The Monetary Policy Committee is widely predicted to leave borrowing costs on hold at 3.75% on Thursday as it awaits further clarity on the Middle Eastern conflict. However, its members may use an innovation in their communications to show how they will respond to extended market turmoil as the Iran war comes close to entering its third month. Officials believe futures signaling a sharp easing of energy-price pressures may be too optimistic, given the damage done to infrastructure in the Middle East. While that pricing will underpin the BOE’s central forecasts, the bank is likely to acknowledge the possibility of a more negative outcome with damaging implications for growth and inflation. “They may have scenarios for energy prices, but will probably also have scenarios for the different extent of second-round effects for a given path of energy prices,” said Michael Saunders, a former BOE rate-setter and senior adviser at Oxford Economics. Scenarios will “play a central role in their decision-making” because of the “wide range of possible outcomes.” A prolonged energy shock would likely deliver a further blow to growth and jobs, but also increase the risk of an inflationary feedback loop as workers demand bigger pay rises to compensate and squeezed firms respond by trying to raise prices. BOE hawks could put more emphasis on the latter than the former, with recent data suggesting activity bounced back this month. So far, however, the evidence of such effects is limited, as neither employees nor companies have real leverage at a time when firms are cutting jobs and demand is fragile. Money markets are pricing in two quarter-point rate increases this year, but many economists think the BOE is more likely to keep policy unchanged.
Germany’s Finance Ministry signaled it’s ready to consider suspending debt restrictions as an emergency step with Europe’s largest economy bracing for the impact of the war in Iran. An option to lift the constitutionally anchored debt brake has been firmly rejected by Chancellor Friedrich Merz and his conservative Christian Democratic-led bloc. But the Finance Ministry, led by Social Democrat Lars Klingbeil, said it won’t rule out a suspension, which could be triggered in response to supply disruptions from the Middle East hitting Germany’s economy. Officials within the ministry are preparing several options as they weigh financing for budget-widening crisis measures, including an exemption of the debt brake based on the emergency clause, according to people familiar with the deliberations. “The federal government will continue to analyze the economic impact of the war in Iran on an ongoing basis and examine necessary measures,” ministry spokeswoman Alma Laiadhi told reporters on Monday in Berlin. “Currently, such a resolution is not in the works,” Laiadhi said. “However, it remains essential to act with foresight and vigilance.” The German government cut its 2026 growth forecast in half last week as the US-led war on Iran triggered a spike in energy prices for industry and households. Economy Minister Katherina Reiche said the energy squeeze “remains highly volatile.” Germany’s constitution permits borrowing that exceeds restrictions in emergency situations, Laiadhi said. Such a resolution could be approved in the lower house, or Bundestag, by a simple majority, she added. The division between Merz’s conservatives and the Social Democrats comes on top of cross-party tensions on a range of issues, stifling the chancellor’s ability to push through reform measures aimed at lifting Germany out of its economic malaise. The cabinet this week is expected to approve an overhaul of Germany’s healthcare system and a budget draft as leaders begin a broader package of changes to the country’s income tax and pension system. They’ll confront a medium-term budget gap of around €140 billion ($164 billion) through 2029. Merz has insisted that Germany can’t afford additional borrowing, a scenario that would put the country’s AAA credit rating under pressure. “We must now pay even closer attention than before to ensuring that public debt does not rise further,” Merz told reporters this month.
Company Events
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