On April 7, crude oil WTI (West Texas Intermediate) briefly traded above $115 a barrel. Six trading days later, the S&P 500 closed at a record high following a near 10% correction.
Since the start of the Iran War in late February, consumers have been squeezed at the pump. Yet the stock market has shrugged off the energy price spike and printed new highs. The Nasdaq posted its longest winning streak since 1992. Corporate margins are near their highest levels in fifteen years.
April was another example of how the economy and the stock market are not the same thing. What does this suggest about markets in 2026?
The Oil Shock That Isn’t
The conventional playbook for an oil spike is well-documented. Energy prices rise, input costs increase, margins compress, central banks hike interest rates, and stocks reprice lower. However, stocks bucked the historical trend in April 2026, rebounding sharply off the March 30 correction low.
Why?
From a macro standpoint, the price pressure was largely confined to spot crude, with longer-dated oil futures holding steady, a sign the market viewed the shock as short-lived. More importantly, we think investors started to recognize that the largest stocks in the market don't buy oil. They buy compute.
The Earnings Season That Proved It
84% of S&P 500 companies have exceeded EPS estimates in 1Q’26, above both the five-year average of 78% and the ten-year average of 76%. In aggregate, companies are reporting earnings 12.3% above estimates compared to a five-year average of 7.3%. Net profit margins are currently estimated at 13.4%, the highest level since 2009 according to Factset data. These are not soft beats against a lowered bar and when companies beat estimates, they are beating them by notable marks.
The AI Trade Continues to Bifurcate
Four of the hyperscalers – Microsoft, Alphabet, Meta, and Amazon – each reported strong Q1 results. Combined 2026 capex commitments across those four companies is forecast to exceed $700 billion, $100 billion more than forecast last quarter.
That spending is doing two things at once. It is building the infrastructure that makes AI possible while disrupting the software layer the last decade of tech investing was focused on.
Traditional enterprise software is facing an existential re-rating. AI agents are automating the workflows that licensed software, professional services, and seat-based revenue models were built on. The business model that defined the last bull market is being challenged by the very technology the market is celebrating.
The beneficiary of $700 billion in capex is not software. It is the hardware that makes AI run.
Every AI accelerator requires High Bandwidth Memory. HBM is the binding constraint in AI inference at scale, the point where bandwidth and capacity determine what large language models can actually do in production. As hyperscaler capex has compounded, so has the demand pull on the memory complex. Pricing power has returned. Margins are recovering. Forward estimates are moving higher.
The market has been slow to price this bifurcation. Software multiples remain elevated despite the disruption risk. Memory and semiconductor valuations sit at a discount to the broader technology complex despite an earnings inflection already underway. AI is simultaneously the best thing that has ever happened to one part of the technology sector and an existential threat to another.
A Fed at a Crossroads
The Federal Reserve held rates at its April meeting. The vote was 8 to 4, with October 1992 being the last time a meeting resulted in 4 dissents! Three dissents came from FOMC voters pushing for an explicit easing bias. One dissent came from a governor ready to cut now. This is a divided Fed, being pulled in multiple directions by a data environment that is sending mixed signals.
The leadership picture adds another layer of ambiguity. Kevin Warsh is expected to take over as Chair, inheriting a divided committee and a market that has so far priced one cut into the second half of 2026. Jay Powell staying on as a governor is an unusual dynamic with no real modern precedent, making for a potentially messy situation even as Powell has indicated he intends to keep a low profile.
What the market is watching is whether Warsh moves toward the dissenters or anchors the committee where Powell left it.
The Midterm Paradox
Midterm election year volatility is the part of the presidential cycle that investors dread. The S&P 500 has averaged a peak-to-trough drawdown of approximately 17.5% in midterm years since 1950. In 2022, the most recent midterm cycle, the index fell 25.4% at its lows. The 2026 drawdown reached approximately 9.1% before the S&P 500 recovered to new all-time highs.
The paradox of the midterm cycle is that the period investors fear most historically sets up the returns they want most. The 12 months following midterm elections have averaged 15.5% for the S&P 500 with a 100% positive return rate since 1950. The strongest window of the four-year presidential cycle, Q4 of the midterm year through Q2 of the following year, opens in approximately six months.
Sector dynamics reinforce the setup. The historical post-midterm rotation moves from defensive and Energy leadership, exactly the sectors that led in the first half of 2026, into Technology, Financials, and Consumer Discretionary.
Where This Leaves Us
Corporate earnings just shrugged off an oil shock. Profit margins are at their highest level in fifteen years. Over $700 billion in AI capex is being deployed with no signs of demand destruction. A divided Fed leaves a lot of open-ended questions. A midterm cycle that historically precedes the strongest return window of the four-year presidential period.
The Iran War is another notch in the belt for analysts that say geopolitical events are transitory. Stocks are at all-time highs. That does not mean the road from here is clean. The contrasts that defined April, old economy versus new, software versus semiconductors, holding versus cutting, are not going away. They are going to generate volatility. The geopolitical situation is not fully resolved. The Fed transition is not fully priced. The midterm election is six months away.
But the trade that is working has the fundamentals, the earnings momentum, and increasingly the rate environment behind it. Markets have a way of following that combination for longer than most expect. The path forward is not a straight line, but there are clear tailwinds for stocks. Earnings, AI investment, and a potential easing bias from the Fed remain the dominant forces pushing stocks higher for now. Until that backdrop changes, the bar for getting defensive stays high.
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