Chris

Today marks an exciting evolution for the Market Observatory. What began as an audio-first experience is now moving to video, giving us new ways to bring our market insights to life and connecting more directly with you. So, let's jump right in.

Chris

So here we are, Sam. The negotiations to end the war in the Middle East continue. The supply of oil to the global economy is still limited. Oil prices are high, and gas prices keep going up. Seems to be a lot to worry about, and a lot of risks for the narrative. Yet the stock market’s at an all-time high, and yields on the 10-year bond have basically been range bound through this whole thing. Clearly, investors have expectations about the future, and they seem to be pretty upbeat. So from your perspective, what are bond investors looking at currently?

Sam

Yeah, Chris, that's a great question, and I think you kind of started to answer it with the question itself. It's really all about investor expectations, right? I think that's been the major driver of markets over the past month. And, you know, looking back at it, it kind of makes sense, right? We were talking when we last spoke about the idea that the only thing folks can be certain about is more uncertainty, right? And we've certainly seen that from a geopolitical headline perspective. But what's been encouraging for me is, you know, I think a lot of fixed income investors have really been able to look past the short-term noise and focus on the fundamentals. And there, I think, you know, the updates have actually been a little bit more positive than the headlines would have you believe, and that's why returns have been actually pretty positive, too.

Chris

Not surprisingly, it's a similar story on the equity side. But I do think it starts with the fact that the situation in the Middle East has not gotten worse, so equity investors have taken the worst-case scenario for the impact that the war might have on the U.S. economy going forward. And then once they do that, it allows them to focus on the fundamentals. And the fundamentals in this case are corporate earnings, and they have been really strong. We're about 90 percent of the way through first-quarter earnings reporting season, and S&P 500 companies have delivered earnings growth at a rate of 27 percent, which is pretty stunning. But then you consider that on March 31 when the quarter ended, analysts were expecting 13.2 percent growth, so they've come in twice expectations. And the really encouraging sign for equity investors is that second-quarter earnings estimates are going up, and full-year 2026 numbers have gone up over 5 percent since the start of the war. So, despite the headlines, despite the known fact that oil prices are higher, analysts are becoming more optimistic about what corporate America can earn going forward, and that is a good scenario for equity investors. But our job is always to look for something on the horizon that might cause consensus to not come to fruition, which would be disappointing to investors. So, what are you looking at that might cause consensus for bond investors not to come true?

Sam

Well, Chris, I think there's one primary risk that if you surveyed fixed income investors, they would all mention, and that's really inflation, right? Because we've seen already, so far throughout 2026, prices rise given the rise in oil prices, the rise in gas prices, the rise in headline inflation so far this year isn't really a surprise. I'd say what's a surprise is the fact that future-looking inflation expectations, while they are up modestly from the start of the year, have not really surged. You know, I look back at 2022 as kind of a proxy for what's going on because we saw a similar type of thing back then: geopolitical risk, oil prices rise leads to rising inflation and inflation expectations. What we haven't seen this time around is those inflation expectations surge back up, which is really encouraging because, you know, economists and the Fed keep an eye not just on inflation reports like the CPI and PPI reports that look backwards, but also expectations that look forwards, right? Because, as we all know, when consumers and producers have this idea that inflation is here to stay and it's going to be sticky, they can change their behavior. And that's really what we haven't seen, and that's really encouraging from, you know, a Fed or an investor perspective,

Chris

Yeah, and it's a similar story on the equity side, if corporate earnings have been the driver for market returns, then the biggest risk is that something happens such that corporate earnings don't materialize, as expectations currently are indicating they will. And there are three things that could cause that, and that would be a sign that the U.S. economy is getting worse, if not going into a recession; any change from companies on artificial intelligence spending, because that has been a big driver of both the economy and corporate earnings; and finally, the fact that the impact of higher oil prices actually shows up in profit-and-loss statements more than analysts are currently expecting it to. Any one or all three of those I think would cause earnings estimates in the back half of the year to have to come down, and that would unnerve equity investors. But I think as long as those estimates continue to come through, then that's a supportive backdrop for equity investors going forward.

Sam

Well, sounds like investors certainly have plenty to think about throughout the rest of this year, but it's encouraging that the fundamentals, at least, are a tailwind,

Chris

Agreed.

Sam

Thanks, Chris. And thank you for joining us. Join us again next month for another update from the Market Observatory.