Round trip Round trip http://www.federatedinvestors.com/texPool/static/images/texpool/texpool-logo-amp.png http://www.federatedinvestors.com/texPool/daf\images\insights\article\race-cars-small.jpg April 17 2026 April 17 2026

Round trip

Recent equity market rally is one for the record books.
Published April 17 2026

Bottom Line

For those investors who decamped for an extended winter vacation on January 28 and just returned this week to file their taxes, welcome back! US stocks are doing just fine, sitting right where you left them in record territory. But for those of us who, over the past eleven weeks, struggled through a shooting war in the Middle East, a surge in financial market volatility and a spike in energy prices, the time spent has been both unnerving and breathtaking.

The S&P 500 corrected 10% from January 28 to March 30, as President Trump was threatening to obliterate Iran for locking down the Strait of Hormuz, through which 20% of the world’s oil and natural gas typically flows freely on tanker ships. While the military superiority of the US and Israel decimated Iran’s naval and air force capabilities, Iran managed to keep the Strait closed. It enacted tolls through a strategic use of naval mines, missiles, drones and small attack boats. 

The equity market, however, is a forward-looking discount mechanism. As investors began to look through the war in April, anticipating a cease fire and the re-opening of the Strait, stocks began to reverse course. Over the past 12 trading days spanning three weeks, the S&P has rebounded 13%, the fastest recovery since 1950 to a new record high after at least an 8% decline.

It is a similar story with small caps and technology stocks. Over this same period, the Russell 2000 small-cap index fell 12% and rebounded 16%, while the tech-heavy Nasdaq Composite fell nearly 13% and recovered 17%.

Follow the money Over the past three months, a tight correlation has developed among stocks, oil, gold and the US dollar. Crude oil prices (West Texas Intermediate, or WTI) spiked more than 80%, from $65 per barrel on February 27 to a four-year high of $118 on April 7. Then it fell more than 30% over the past 10 days to almost $81 today. The futures market has WTI continuing to decline to $75 by October. Lagging gasoline prices rose 40% from a nearly five-year low of $2.98 per gallon at the end of February to a four-year high of $4.17 on April 8 before easing to $4.08 today. We expect gas at the pumps to decline to about $3.55 per gallon by Memorial Day. 

While crude oil and gasoline prices were soaring, gold followed stock prices lower, falling 27% from January 29 to March 23. Since then, as energy prices corrected and stocks soared, gold rallied 19%. The dollar was positively aligned with energy, gaining 5% against the euro and the pound. In contrast, gold and equities declined and the dollar sold off nearly 4% over the past fortnight.

Rather than serve as a flight-to-safety haven, benchmark 10-year Treasury yields followed stocks during this turmoil, rising from 3.95% at the end of February to 4.48% at the end of March. But as stocks have rallied over the past three weeks, Treasuries rallied, too, with yields falling to 4.25% today.

Earnings matter As stocks corrected during February and March, corporate revenue and earnings estimates were rising, which primed equities for their powerful valuation snapback. We are about 10% of the way into the S&P’s first-quarter reporting season and results are stronger than expected. Revenues are up 12-13% year-over-year (y/y) so far, compared with FactSet’s estimate for a 9.8% gain. Earnings increased by an outsized 30-35% y/y thus far, compared with consensus estimates for a 12.6% gain. We expect that when the dust settles, earnings will have risen by a solid, but more pedestrian, 15-20% y/y, and management guidance will likely be cautious. 

Confidence takes a hit, but the consumer keeps on ticking Business and consumer confidence have declined sharply during this chaos. The University of Michigan’s Consumer Sentiment Index plunged to a record low (dating back to 1978) of 47.6 in April, down sharply from 53.3 in March. The NFIB’s Small Business Optimism Index fell to an 11-month low of 95.8 in March, down from 98.8 in February. Despite this loss in confidence, consumers keep spending. Nominal retail sales in February rose a stronger-than-expected 0.6% month-over-month (m/m), and March is expected to rise 1.2% m/m. Auto sales rose by a solid 3.7% m/m in March.

Nominal inflation has soared but core well behaved Due to the spike in energy prices, nominal inflation has risen, although core inflation has not gotten out of hand. The nominal Consumer Price Index (CPI) soared 3.3% y/y in March, up from 2.4% in February. But Core CPI, which strips out volatile energy and food costs, has ticked up from a five-year low of 2.5% y/y in February to 2.6% in March.

Labor market rebounded After an aberrant February, nonfarm payrolls leapt by a 15-month high of 178,000 nonfarm jobs in March; the unemployment rate (U-3) declined to an eight-month low of 4.3%; and average hourly earnings slipped to a five-year low of 3.5% y/y in March. 

Fed likely on hold into the back half of 2026 With the strong labor market rebound in March, the Federal Reserve has no immediate need to cut rates. But with the rise in nominal inflation due to the jump in energy prices, the Fed would be wise to execute patience until the Middle East conflict settles down. Given the Fed’s upcoming leadership transition issues, we expect it will hold until its September policy-setting meeting at the earliest.

Fog of war starting to dissipate The fixed income, liquidity and equity investment professionals who comprise Federated Hermes’ macroeconomic policy committee met Wednesday to discuss how the ongoing conflict with Iran is impacting the US economy and financial markets.

Fourth quarter 2025 GDP growth was revised down to a weaker-than-expected final increase of only 0.5% quarter-over-quarter (q/q) versus much stronger third- and second-quarter gains of 4.4% (the strongest quarterly growth in two years) and 3.8%, respectively. Federal government spending plunged nearly 17% due to the record 43-day shutdown in fall, which reduced GDP growth by 1.16 percentage points. Core private final domestic sales rose 1.8%.

  • We expect a rebound in federal government spending in the first quarter of 2026 to offset a small 2.8% Social Security benefit adjustment in January and brutal winter weather in February and March. But the US and Israel invasion of Iran spiked energy prices, which resulted in higher nominal inflation, as well as reduced business and consumer confidence. So, we reduced our forecast for first quarter 2026 GDP growth from 3.1% to 2.5%, while the Blue-Chip consensus raised its estimate from 2.0% to 2.4% (within a range of 1.0% to 3.5%). The Atlanta Fed’s GDPNow tracking estimate declined from 3.2% to 1.3%. 
  • The fiscal stimulus from President Trump’s One Big Beautiful Bill resulted in larger-than-normal tax refunds, and an early Passover and Easter helped to spark stronger consumer spending this spring. But as the Iran conflict bled into April, we reduced our forecast for second quarter 2026 GDP growth from 2.9% to 2.5%, while the Blue-Chip consensus cut its estimate from 1.9% to 1.6% (within a range of 0.4% to 2.5%).
  • We expect the Iran conflict to be in the rearview mirror by midyear, driving improved consumption, manufacturing, construction and employment trends over the summer months. We hiked our forecast for third quarter 2026 growth from 3.0% to 3.2%, while the Blue-Chip consensus reduced its estimate from 2.0% to 1.8% (within a range of 0.8% to 2.6%). 
  • We similarly increased our forecast for fourth quarter 2026 growth from 3.0% to 3.2%, while the Blue-Chip consensus trimmed its estimate from 2.1% to 2.0% (within a range of 1.0% to 2.7%).
  • But because of the first-half Iran-related shortfall, we cut our estimate for full-year 2026 growth from 3.0% to 2.6%, while the Blue Chip consensus reduced its estimate from 2.4% to 2.2% (within a range of 1.5% to 2.6%). 
  • Because of the temporary spike in energy prices and the potential for higher nominal inflation to bleed into elevated levels of core inflation over time, we raised our year-end 2026 estimate for Core CPI inflation from 2.5% to 2.7% (compared with core CPI inflation of 2.6% y/y in March 2026), while the Blue Chip consensus hiked its forecast from 2.7% to 3.2% (within a range of 2.8% to 3.7%). We also raised our year-end 2026 estimate for Core PCE inflation from 2.5% to 2.8% (compared with core PCE inflation of 3.0% y/y in February 2026), while the Blue Chip raised its estimate from 2.7% to 3.3% (within a range of 2.8% to 3.7%).
  • Buoyed by our expectations for a post-Iran rebound in economic activity in the second half of 2026, we raised our full-year 2027 growth estimate from 2.8% to 3.0%, while the Blue-Chip consensus trimmed its estimate from 2.1% to 2.0% (within a range of 1.4% to 2.5%).
  • We left our year-end 2027 estimate for Core CPI unchanged at 2.4%, while the Blue-Chip consensus reduced its estimate from 2.5% to 2.4% (within a range of 2.1% to 3.0%). We raised our year-end 2027 estimate for Core PCE from 2.3% to 2.4%, while the Blue-Chip consensus left its estimate unchanged at 2.4% (within a range of 2.0% to 2.9%).

Read more about our views and positioning at Capital Markets.

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Tags Equity . Markets/Economy . Geopolitics .
DISCLOSURES

Views are as of the date above and are subject to change based on market conditions and other factors. These views should not be construed as a recommendation for any specific security or sector.

Gross Domestic Product (GDP) is a broad measure of the economy that measures the retail value of goods and services produced in a country.

The National Federation of Independent Business (NFIB) conducts surveys monthly to gauge how small businesses feel about the economy, their situation and their plans.

Consumer Price Index (CPI): A measure of inflation at the retail level.

Nasdaq Composite Index: An unmanaged index that measures all Nasdaq domestic and non-U.S.-based common stocks listed on the Nasdaq Stock Market. Indexes are unmanaged and investments cannot be made in an index.

Personal Consumption Expenditures Price Index (PCE): A measure of inflation at the consumer level.

Russell 2000® Index: Measures the performance of the 2,000 smallest companies in the Russell 3000 Index, which represents approximately 8% of the total market capitalization of the Russell 3000 Index. Investments cannot be made directly in an index.

S&P 500 Index: An unmanaged capitalization-weighted index of 500 stocks designated to measure performance of the broad domestic economy through changes in the aggregate market value of 500 stocks representing all major industries. Indexes are unmanaged and investments cannot be made in an index.

The University of Michigan Consumer Sentiment Index is a measure of consumer confidence based on a monthly telephone survey by the University of Michigan that gathers information on consumer expectations regarding the overall economy.

Small company stocks may be less liquid and subject to greater price volatility than large capitalization stocks.

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