So far in 2026, markets have been supported by stronger-than-expected corporate earnings and an economy that has remained more resilient than anticipated. While this has been encouraging, investors are still balancing several important risks, including inflation that remains above the Federal Reserve's target, geopolitical tensions, and continued market leadership from a relatively small group of large technology companies.

We have seen a resurgence in both U.S. and foreign stock markets after the initial downturn following the onset of the conflict in Iran. Corporate profits have been one of the main reasons stocks have held up well. Technology and communication-related companies have led the way, helped by ongoing demand for artificial intelligence and digital infrastructure. Other areas, including materials, financials, and consumer-focused businesses, have also shown strength, while health care and energy have been more mixed.

Source: YCharts as of May 11, 2026

Looking ahead, earnings expectations remain positive, which has helped support confidence in the market. Even so, we expect markets to remain sensitive to new information on inflation, interest rates, and global events.

The only component that has been lagging is fixed income (bonds), which have struggled to keep even with an uptick in interest rates to new highs for the year. This is in large part due to ongoing inflationary concerns spurred by higher energy prices.

Why Artificial Intelligence Still Matters

Artificial intelligence continues to be the dominant force shaping markets. Investors remain focused on the companies building AI infrastructure, including cloud platforms, chips, and data centers. This theme has been a meaningful driver of returns, but it has also increased concentration in the major indexes.

That does not mean these companies should be avoided, but it does reinforce the importance of diversification. When a narrow group of stocks accounts for a large share of market gains, portfolios can become more sensitive to shifts in sentiment, valuations, or regulation.

The Forward P/E ratio is the price divided by 12-month earnings estimates (IBES since 1996, FactSet since 2022). The remaining 490 S&P 500 stocks exclude the top 10's earnings and market cap. Source: FactSet, S&P, J.P. Morgan Guide to the Markets (May 14, 2026)

Geopolitics and Energy Prices

Geopolitical developments remain an important source of uncertainty for investors. Tensions involving Iran, the relationship between the United States and China, and ongoing trade policy questions have weighed on market sentiment, energy prices, supply chains, and inflation expectations.

We continue to watch the Middle East because of the effect on oil supply and shipping routes around the Strait of Hormuz. The see-sawing news reports and daily swings in oil prices, stock markets, and interest rates should not necessarily change long-term plans, but they will continue to contribute to near-term volatility.

The Economy, Inflation & Federal Reserve

The economy has remained reasonably solid in terms of low unemployment and strong growth, but inflation is still above the Federal Reserve's long-term target. That leaves the Fed in a difficult position as it works to lower inflation without putting too much pressure on growth. The transition of leadership at the Fed from Jerome Powell to Kevin Warsh adds another layer for investors to monitor as markets assess how policy and communication may evolve.

Inflation has  fallen from its highs post-COVID, but it has not fully returned to normal. Regardless of which measure of inflation we use, the overall message is the same: price pressures remain elevated enough to keep the Fed cautious about cutting interest rates too quickly or possibly at all.

The labor market is also a bit of an enigma depending upon the data. The headline unemployment and jobless claims are within bounds of a healthy economy. Hiring rates and participation are lower and could lead to slower economic growth. Taken together, these conditions suggest interest rates may remain higher for longer than many investors once expected.

What This Means for Investors

• Strong earnings have supported stocks, but inflation, interest rates, and global events can still create volatility.
• Diversification remains important, especially when market leadership is concentrated in a small number of companies. This is probably the biggest challenge we have as investors to find the balance in seeking diversification outside just a handful of companies, while still staying invested in those same companies as they continue to drive growth.
• While bonds are at or near their lows for the year, it could be a good opportunity to rebalance into this higher interest rate environment.

Remember when we get overwhelmed by headlines and short-term market swings, focusing on our long-term goals can guide us through the noise.