Review the latest Weekly Headings by CIO Larry Adam.

• Equity markets have moved on, but tail risks from US-Iran conflict remain
• Sustained high energy prices would increase downside economic risks
• High bar for US earnings leaves market vulnerable to disappointing news

After a 9.1% drawdown, the S&P 500 surged 11% over the last 12 trading days to a new record high, breaking above the 7,000 level for the first time. To put this move into perspective: it ranks in the 99th percentile of returns since 1980 and marks the fastest recovery to new highs following a 7+% drawdown on record.

With momentum now stretched on a technical basis (e.g., 14-day relative strength index is in overbought territory at 72), investors are understandably asking whether the rally has further room to run or if expectations should be tempered. While we remain constructive longer term, we see five reasons why volatility is likely to pick up and gains may be more modest in the months ahead:

Tail risks from Iran still hang in the balance

While the two‑week ceasefire has eased near‑term tensions, equity markets appear to be pricing in a rapid resolution – and conditions on the ground suggest that may be premature. Transit through the Strait of Hormuz remains well below pre‑conflict levels, with only ~10% of normal traffic currently moving through. Oil prices have pulled back from recent highs, but at ~$80/barrel they remain well above pre‑conflict levels and are still up more than 40% year to date. Notably, the International Energy Agency warns that current prices understate the severity of the disruption given how long full normalization is likely to take. While hostilities have paused, the two sides remain far apart on key issues, including Iran’s uranium enrichment program and the full reopening of the Strait post ceasefire, leaving downside risks firmly in place. Economic damage has been contained so far, but with the conflict now entering its eighth week and US military activity ongoing, delays in reaching a durable peace agreement could trigger another setback.

Resilient but increasingly fragile economy

Thus far, the economy – particularly consumer spending – has remained resilient despite rising energy prices. That resilience has shown up in recent commentary from bank CEOs during earnings calls and is reinforced by continued strength in real‑time activity indicators such as TSA screenings, hotel occupancy and gasoline demand. That said, some early signs of strain are beginning to emerge. The University of Michigan’s preliminary consumer sentiment reading fell to a record low of 47.6 in April, while the Beige Book noted that consumers are increasingly stretched and that businesses are delaying investments amid elevated uncertainty. In addition, energy‑sensitive industries – most notably air travel – are starting to see softer future bookings. While we expect the economy and consumer spending to hold up in the near term, sustained high energy prices would materially increase downside risks.

Fed chair transition faces key hurdles

Kevin Warsh’s confirmation hearing before the Senate Banking Committee is set for April 21, but it’s unlikely he’ll be in place to lead the Fed by May 15, when Chair Jerome Powell’s term ends. Markets currently see only about a 40% chance of that happening. The main holdup is on Capitol Hill, where Senator Thom Tillis, a key swing vote on the Banking Committee, has indicated Warsh’s nomination won’t move forward while the Justice Department’s investigation into Powell remains unresolved. Adding another layer of uncertainty is Powell’s decision to stay at the Fed after his term ends, a departure from past practice that could complicate the leadership transition. From a market standpoint, Warsh would be stepping into a difficult environment, with inflation still elevated, the labor market showing signs of strain and growing political pressure to cut rates. Taken together, that uncertainty – and the market’s tendency of testing new Fed Chairs (sometimes with significant equity pullbacks) – points to higher volatility in the months ahead.

Overly optimistic earnings

Positive earnings revisions have provided important fundamental support for equities year to date. The +3.7% upward revision to 2026 earnings per share (EPS) ranks as the third‑strongest at this point in the year over the past two decades. However, emerging headwinds – including higher energy prices, supply constraints and signs of weakening global demand highlighted by luxury retailers – are likely to pressure forward estimates and contribute to higher volatility in the months ahead. This pattern echoes the early stages of the 2022 Russia–Ukraine war, when estimates initially moved higher before being revised lower as conditions evolved. Notably, first‑quarter results capture only one month of Iran‑related impacts, making forward guidance and management commentary especially important. With expectations elevated, earnings misses are likely to be punished.

Equity performance is typically weaker in mid-term election years

With attention focused on oil prices and geopolitical risks, investors may be overlooking an important backdrop: This is a mid‑term election year. Historically, mid‑term years have seen deeper intra‑year drawdowns – roughly ~20% versus an average of ~16% in a typical year going back to 1928. They have also tended to experience higher volatility, particularly mid‑year, while delivering below‑average – but still positive – returns of ~3% compared with ~7% in a typical year. This backdrop reinforces our view that further upside is likely to be modest.

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All expressions of opinion reflect the judgment of the author(s) and the Investment Strategy Committee and are subject to change. This information should not be construed as a recommendation. The foregoing content is subject to change at any time without notice. Content provided herein is for informational purposes only. There is no guarantee that these statements, opinions or forecasts provided herein will prove to be correct. Past performance is not a guarantee of future results. Indices and peer groups are not available for direct investment. Any investor who attempts to mimic the performance of an index or peer group would incur fees and expenses that would reduce returns. No investment strategy can guarantee success.

Economic and market conditions are subject to change. Investing involves risks including the possible loss of capital.

The information has been obtained from sources considered to be reliable, but we do not guarantee that the foregoing material is accurate or complete. Diversification and asset allocation do not ensure a profit or protect against a loss.

The S&P 500 Total Return Index: The index is widely regarded as the best single gauge of large-cap U.S. equities. There is over USD 7.8 trillion benchmarked to the index, with index assets comprising approximately USD 2.2 trillion of this total. The index includes 500 leading companies and captures approximately 80% coverage of available market capitalization.

Sector investments are companies focused on a specific economic sector and are presented here for illustrative purposes only. Sectors, including technology, are subject to varying levels of competition, economic sensitivity, and political and regulatory risks. Investing in any individual sector involves limited diversification.

Raymond James Senior Investment Strategist Tracey Manzi examines how Kevin Warsh’s appointment could shape Fed policy outlook.

New Federal Reserve (Fed) chairs don’t come along often. Since 1980, only five individuals have led the Fed: Jerome Powell is currently in his second term, Janet Yellen served one term and Alan Greenspan famously held the role for more than 18 years. With such infrequent turnover in the Fed’s top spot, markets naturally pay close attention to a new nominee, especially when the nominee brings different views than the sitting Fed chair.

Kevin Warsh’s nomination comes at a pivotal time. Questions about the Fed’s independence have intensified, the Trump administration is openly pressuring the central bank to lower interest rates and the economy is undergoing meaningful structural shifts, from evolving trade policy to AI’s growing influence on productivity and the labor market.

Against this backdrop, understanding Warsh’s policy leanings and potential impact on the Fed is critically important.

What’s known about Warsh’s views

During his tenure as a Fed governor from 2006 to 2011, Warsh developed a reputation as an inflation hawk, often placing more weight on inflation risks than on employment concerns. Although he supported the Fed’s crisis-era tools during the Great Financial Crisis, including large-scale asset purchases (quantitative easing), he later became increasingly critical of the prolonged balance sheet expansion.

He has also criticized the Fed’s extensive use of forward guidance, its broader communication tools and its slow response to changing economic conditions. More recently, however, Warsh has adopted a more dovish tone. He now believes that the economy may be experiencing an AI-driven productivity boom, allowing for faster growth without triggering inflation. Some observers worry that this shift reflects political alignment with the current administration. However, Warsh has long been a strong defender of Fed independence and understands the importance of maintaining public trust in the institution.

The Fed under Warsh leadership

Although Warsh was a vocal critic at times during his previous Fed tenure, he never dissented, which underscores his willingness to work collaboratively. In theory, Warsh may favor a combination of lower policy rates, a smaller Fed footprint in the financial markets and a higher bar for future intervention. However, none of these changes would occur quickly in practice.

Even if he leans more dovish than some of his colleagues, elevated inflation and a still solid economic backdrop make near-term rate cuts difficult to justify, especially within a committee that is more divided today than at any point in modern history. One of Warsh’s more ambitious goals is reducing the Fed’s balance sheet. But shifting away from the Fed’s current ample-reserves framework would require significant operational adjustments that are unlikely to happen quickly. The area most likely to see quicker movement is the Fed’s communication strategy. Warsh has argued for scaling back forward guidance, including the widely followed dot plot, which he views as unnecessary and occasionally counterproductive in normal economic times.

The bottom line

Warsh’s nomination comes at a consequential moment for monetary policy and the financial markets. While Warsh may desire meaningful regime change at the Fed, structural constraints and a divided committee argue for gradual adjustments rather than abrupt shifts.

All expressions of opinion reflect the judgment of the author(s) and the Investment Strategy Committee and are subject to change. This information should not be construed as a recommendation. The foregoing content is subject to change at any time without notice. Content provided herein is for informational purposes only. There is no guarantee that these statements, opinions or forecasts provided herein will prove to be correct. Past performance is not a guarantee of future results. Indices and peer groups are not available for direct investment. Any investor who attempts to mimic the performance of an index or peer group would incur fees and expenses that would reduce returns. No investment strategy can guarantee success.

Review the latest Weekly Headings by CIO Larry Adam.

Key takeaways

• S&P 500 earnings estimates have continued to move higher
• US energy independence should cushion economic growth
• Despite war, credit spreads have demonstrated notable stability

Recent weeks have been a whirlwind of headlines centered on the Middle East conflict and rising oil and gas prices, particularly as the conflict enters its fourth full week. We’re closely monitoring these developments, not only for their broader military and economic implications, but also to assess whether they warrant any changes to our asset class views. That said, this week we’re taking a step back and widening the lens.

Rather than focusing exclusively on what could go wrong, we’re highlighting 10 things that are going right across the economy and financial markets. These positives can be easy to miss amid a steady drumbeat of war‑related news, but they offer important insight into the underlying resilience shaping the path forward for long‑term investors.

1. US military strength: During uncertain times, it is reassuring to know that the US maintains the most powerful military force in the world. Its strength is rooted not only in scale – the US spends roughly $950 billion a year on defense, far exceeding any other nation – but also in technological superiority, highly trained personnel and unmatched global reach. These capabilities underpin our strategic advantage.
2. US economy is energy independent: Since the shale oil revolution, the US has become a net energy exporter. At the same time, gains in energy efficiency have made the economy far more resilient to energy shocks, especially relative to import‑dependent regions like Europe and Asia. Along with the Strategic Petroleum Reserve and policy flexibility such as gas tax holidays, these factors help explain why recent oil disruptions have not sparked widespread panic or the long gas lines reminiscent of the 1970s.
3. Consumers remain resilient: While gasoline prices are nearing the psychological $4/gallon level, real-time metrics suggest consumer spending has remained resilient up until this point. Year over year, TSA screenings are up 2-3% year over year, restaurant bookings are up 10% and Redbook sales (department store spending) are also up 6.5%. In aggregate, we expect consumer spending growth to remain positive in 2026.
4. Productivity gains: The artificial intelligence (AI) boom is a game changer. Rapid and broad-based adoption across the economy has the potential to meaningfully boost productivity, accelerate economic growth and ease inflationary pressures as workers become more efficient. Over time, this shift should translate into stronger profit margins, improve earnings growth and support corporate profitability.
5. Tax refunds are up this year: With three weeks remaining until Tax Day, refunds are tracking 12% higher year over year and 14% above the historical average at this point in the season. Total refunds in 2026 could increase by as much as $140 billion, providing a meaningful tailwind to consumer spending and helping to offset rising gasoline prices.
6. March’s performance in perspective: March has been a challenging month for asset class performance, with the S&P 500 on track for a 5.7% decline – its worst month since December 2022 – while bonds are down 2.5%. Even so, these near‑term setbacks haven’t derailed the broader trend: over the past year, both asset classes remain firmly positive, with the S&P 500 up 15% and the Bloomberg Agg up 4%.
7. Equity valuations are normalizing: While valuations were a concern coming into the year, they have normalized meaningfully as earnings revisions have moved higher amid the recent market pullback. Although the S&P 500 has declined ~5% over the past three months, its next 12-month P/E has fallen about 11%, nearly twice what the historical relationship would suggest. As a result, the S&P 500’s NTM P/E now sits below its five‑year average for the first time since last year’s tariff‑related drawdown.
8. Earnings estimates moving higher: S&P 500 earnings estimates have surprisingly moved higher since the start of the war. Consensus 2026 earnings are up 2% to $317 per share, implying 17% year-over-year growth, the fastest pace since 2021. Revisions have been broad‑based, with seven of 11 sectors moving higher. Technology continues to lead, with estimates up 6% and earnings growth projected at 40% year over year, the strongest since 2010. With the economy still on solid footing, earnings momentum remains a key tailwind for equities.
9. Cash offers an attractive yield: Amid recent market volatility, cash alternatives have emerged as clear beneficiaries. Beyond providing a conservative allocation option, cash now offers an attractive opportunity – with money market yields near 3.7% – allowing investors to earn a reasonable return while patiently waiting to deploy capital as market dislocations create more compelling entry points.
10. No significant widening in spreads: Despite heightened geopolitical tensions, credit spreads have remained relatively stable. Since the conflict began, investment‑grade and high‑yield spreads are only two and 17 basis points wider, respectively. This stability suggests markets view the energy shock as a temporary disruption rather than a lasting threat to the corporate outlook.

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All expressions of opinion reflect the judgment of the author(s) and the Investment Strategy Committee and are subject to change. This information should not be construed as a recommendation. The foregoing content is subject to change at any time without notice. Content provided herein is for informational purposes only. There is no guarantee that these statements, opinions or forecasts provided herein will prove to be correct. Past performance is not a guarantee of future results. Indices and peer groups are not available for direct investment. Any investor who attempts to mimic the performance of an index or peer group would incur fees and expenses that would reduce returns. No investment strategy can guarantee success.

Economic and market conditions are subject to change. Investing involves risks including the possible loss of capital.

The information has been obtained from sources considered to be reliable, but we do not guarantee that the foregoing material is accurate or complete. Diversification and asset allocation do not ensure a profit or protect against a loss.

The S&P 500 Total Return Index: The index is widely regarded as the best single gauge of large-cap U.S. equities. There is over USD 7.8 trillion benchmarked to the index, with index assets comprising approximately USD 2.2 trillion of this total. The index includes 500 leading companies and captures approximately 80% coverage of available market capitalization.

Sector investments are companies focused on a specific economic sector and are presented here for illustrative purposes only. Sectors, including technology, are subject to varying levels of competition, economic sensitivity, and political and regulatory risks. Investing in any individual sector involves limited diversification.

Doug Drabik discusses fixed income market conditions and offers insight for bond investors.

Total return is the entire amount of income passed to an investor holding a particular security. It annualizes any price change plus any dividends or interest earned over time. By example, an investor paying $100 for a stock, earning $3/yr in annual dividend, and selling the stock for $110 two years later has an annual total return of 8% [($110 – $100) +$3div + $3div) / $100 = 16% / 2 yrs holding period]. For many bond investors who hold to maturity, the total return can be calculated upfront. The acquisition yield determines the annual return, factoring in coupon payments and price movement towards par at maturity. The distinction is important because a bond held to maturity essentially removes market price risk from the equation, making it a less risky asset.

Taking more risk can be both rewarding and costly. Over six of the last seven years, stocks have performed well by providing investors with double-digit returns. The chart shows that, historically, dividend income has underperformed corporate yields. It is rare for dividend income to outperform the average 10-year corporate yields. It is safe to assume that investors seek most of the total return in equities via price appreciation. The robust stock market has enabled many investors to accumulate wealth. Individual bonds may provide investors with a means to lock in a portion of their wealth into less-risky assets at a known return.

Corporate bonds trade at a spread to Treasury bond rates. If the 10-year Treasury is 4.2% and a corporate bond is at a +50-basis-point spread, then the corporate bond yield is 4.7%. The reason a corporate bond trades with a spread has much to do with real and/or perceived credit risk. The U.S. government is considered more likely to pay its debt. The greater the credit risk, typically the greater the spread or offered yield of a security.

In general, spreads have narrowed to historically low levels since the 2020 pandemic. On their own, narrow spreads indicate investor confidence and a modest risk associated with corporations’ ability to pay their debts. U.S. markets have weathered many geopolitical disruptions better than those of most other countries.

Although still historically narrow, spreads have begun to widen out. What is particularly compelling is that spreads are widening while Treasury rates are rising. For spreads to widen, prices fall, giving pause to total return investors seeking positive price action. However, for buy-and-hold investors, this is exciting news. Higher spreads at a time when Treasury yields are rising translate into higher nominal yields for investors. This provides investors with an opportunity to lock in elevated yields for extended periods and can be accomplished in high-quality, investment-grade individual bonds. It is also an opportunity that comes on the heels of the successful accumulation of stock and housing wealth. Spreads and yields are working for investors.

The author of this material is a Trader in the Fixed Income Department of Raymond James & Associates (RJA), and is not an Analyst. Any opinions expressed may differ from opinions expressed by other departments of RJA, including our Equity Research Department, and are subject to change without notice. The data and information contained herein was obtained from sources considered to be reliable, but RJA does not guarantee its accuracy and/or completeness. Neither the information nor any opinions expressed constitute a solicitation for the purchase or sale of any security referred to herein. This material may include analysis of sectors, securities and/or derivatives that RJA may have positions, long or short, held proprietarily. RJA or its affiliates may execute transactions which may not be consistent with the report’s conclusions. RJA may also have performed investment banking services for the issuers of such securities. Investors should discuss the risks inherent in bonds with their Raymond James Financial Advisor. Risks include, but are not limited to, changes in interest rates, liquidity, credit quality, volatility, and duration. Past performance is no assurance of future results.

Investment products are: not deposits, not FDIC/NCUA insured, not insured by any government agency, not bank guaranteed, subject to risk and may lose value.

To learn more about the risks and rewards of investing in fixed income, access the Financial Industry Regulatory Authority’s website at finra.org/investors/learn-to-invest/types-investments/bonds and the Municipal Securities Rulemaking Board’s (MSRB) Electronic Municipal Market Access System (EMMA) at emma.msrb.org.