April’s market rebound reflects easing pressures, stronger earnings and renewed risk appetite, while Iran and rising energy prices remain key risks.  In this month’s CIO Signal, we review recent market performance and take a closer look at major news stories, assessing whether they are likely to have meaningful implications for capital markets.

Market Overview

Global equities rebounded strongly in April as several of the inflation and geopolitical pressures that previously weighed on markets began to stabilize. The S&P 500 gained 10.5%, while global equities, as measured by ACWI IMI, rose 10.1%. Performance was broadly positive across regions and styles, with U.S. small caps advancing 12.2%, developed international equities (EAFE) up 7.5%, and emerging markets gaining 14.7%.

A key driver was the easing in energy prices from March highs, which helped reduce immediate inflation concerns tied to the Iran conflict.   Oil prices¹, which ended March as high as $118 per barrel dropped below $100 for much of April, before rising again to $114 at the end of the month. At the same time, interest rates were relatively stable during the month, allowing investors to re-enter risk assets after de-risking in March. Importantly, April’s recovery was not limited to a narrow group of mega-cap technology companies, but reflected improved participation across cyclical sectors, small caps, and international markets.

Bonds generally had a strong April as well.  Yields rose across most of the curve in April (Figure 1). Despite the rate move, fixed-income returns were broadly positive as credit spreads tightened enough to offset the increase in yields. The compression in spreads drove outperformance in high yield corporate bonds, which led all major sectors for the month.  Inflation-protected Treasuries (TIPS) also did well, underscoring the role of inflation-protected bonds as an effective hedge when inflation expectations shift unexpectedly.

April marked the final Federal Open Market Committee meeting chaired by Jerome Powell, as new chair Kevin Warsh was confirmed by the US Senate on May 13^th. As expected, the Federal Reserve held the federal fund rate at 3.5% to 3.75%. The decision, however, revealed increased division within the Committee. One member dissented in favor of a rate cut, while three others supported holding rates but opposed including an easing bias in the statement. Following the meeting, market expectations shifted toward no additional rate cuts this year.

Mr. Powell indicated he intends to remain as a Federal Reserve governor while the review of renovations to the Fed’s headquarters continues. In the near term, this affects Board composition, as Mr. Warsh assumes a governorship by filling the spot formerly held by Stephen Miran, whose term has expired. With Mr. Miran the sole dissenter advocating for lower rates in recent meetings, the path to additional easing appears narrower absent from a meaningful decline in inflation or a deterioration in labor-market conditions.

Separately, the Federal Reserve announced a reduction in the pace of its balance sheet support, lowering monthly Treasury bill purchases to approximately $25 billion from $40 billion. These operations supported short-term funding markets and maintained ample liquidity during predictable periods of stress, including tax season. The faster-than-expected moderation suggests policymakers view market functioning as stable. Reserve levels are expected to remain elevated, supporting continued stability in short-term funding conditions.

Figure 1: US Yield Curve

Ongoing Middle East Conflict

The conflict with Iran has, at the moment, transitioned from an active warzone with frequent military strikes to more of an uneasy stalemate between the two sides.  The Strait of Hormuz has largely remained closed, with only a tiny fraction of normal tanker traffic being allowed to proceed.  This means approximately 20% of global trade in oil and natural gas and over 30% of fertilizer has been curtailed. The Trump administration seems eager to find an offramp, with President Trump alternating between claiming a peace deal is near and threatening to attack Iran if the conflict is not resolved soon.  Iran, on the other hand, seems content to try to wait the US out and use their newly asserted control over the Strait to try to gain more concessions in any sort of peace deal.

The impact of the war is beginning to show up clearly in price levels, with CPI (3.8% year over year) and PPI (6% YoY) hitting their highest levels since May 2023 and December 2022, respectively. The longer the conflict continues and global supply chains are impaired, the greater the likelihood prices increase accordingly.  Some of the immediate price impacts have been muted while countries work through strategic reserves of critical commodities like oil and natural gas, but without increased activity through the Strait these reserves will deplete, and energy prices could move materially higher.

Market Outlook

Given the issues with energy markets, ongoing concerns about private credit markets, and fears of a growing bubble in AI infrastructure investments, some investors wonder how the stock market can be at all-time high levels. We’re not in the business of predicting market moves in the near-term, as it has historically been impossible to do accurately and repeatedly, however, we believe the current all-time highs are driven by a combination of fundamental and psychological factors. On the fundamental side, 84% of S&P 500 companies beat earnings estimates in the first quarter.  This surpasses the already absurdly high 75% or so of companies that beat estimates on average². At the same time, valuations, at least those outside of large-cap growth stocks, are in line with long-term averages, meaning there’s room for those areas of the market to have multiple expansion and still not look expensive. There’s also currently no expectation of a recession. When looking at consensus economic forecasts on Bloomberg, there are different views on how much US GDP will grow, but uniform expectations for continued growth.

Regarding investor psychology, there’s a couple of things supporting market highs. First, despite some fears of an AI investment bubble, enthusiasm around AI’s ability to increase productivity and firm profits appears to be outweighing concerns over Iran or energy prices. Second, as the past 16 or so years have shown retail investors, the buy-the-dip approach to market pullbacks continues to work. As we’ve seen several times in the past year, markets are quick to decline when a new fear emerges or worsens, but equally quick to recover at the first sign of good, or even less-bad-than-expected news. Eventually the buy-the-dip strategy will fail and we’ll have another bear market. When that happens is anyone’s guess, and when it does it might reset investors’ approach to dealing with market pullbacks. Until then it seems as long as optimism around AI remains high and fundamentals remain mostly positive, investors could continue to drive the market higher. No matter where the markets go in the near term, we remain committed to maintaining well diversified portfolios and prepared to adjust portfolios when warranted by empirical evidence.

¹ As measured by Brent Crude.
²The subject of companies consistently underestimating earnings in their projections would be an interesting subject for a later article.

*See Disclosures