Market Volatility and First-Quarter Earnings
Early in the second quarter, escalating conflict involving Iran weighed on investor sentiment and pushed stocks below their 200-day moving average, matching the low reached during the March 2025 tariff-related selloff. A series of intermittent ceasefires followed, contributing to volatility in both oil prices and equity markets.
At the same time, first-quarter earnings growth was stronger than expected, supported in part by artificial intelligence-related momentum. Earnings rose at an annualized rate of approximately 15%—nearly twice the long-term average for the S&P 500 Index—with more than 80% of companies exceeding estimates.
Second-Quarter Earnings and Valuation Risk
Second-quarter earnings results, expected over the next several weeks, will likely reflect higher inflation and energy-related costs stemming from the Iran conflict. These pressures could reduce first-half earnings growth.
A slower pace of earnings growth could disappoint a market that remains vulnerable at elevated valuations. Stocks are currently trading near all-time highs at more than 20.5 times forward earnings, compared with a 30-year average of 17.2 times.
Federal Reserve Policy and Oil Prices
Another important variable is the Federal Reserve, now led by Chairman Kevin Warsh. If the Fed refrains from raising interest rates, the market may continue to demonstrate resilience. That outcome, however, depends heavily on lower inflation and oil prices—both of which are influenced by whether the Strait of Hormuz remains at least partially open.
Artificial Intelligence as a Growth Driver
The most powerful long-term support for continued economic and market growth remains the rapid advancement of artificial intelligence. As AI is integrated across sectors, it has the potential to reduce costs, improve efficiency, and enhance productivity—factors that could contribute to stronger earnings and higher stock prices over time.
Still, several important questions remain:
- How much of current AI-related earnings growth is circular, driven by technology and information companies doing business with one another in anticipation of broader demand from other industries and consumers?
- Will the current surge in AI capital spending—estimated at $800 billion this year—generate attractive returns across multiple sectors of the market? Unlike many dot-com era revenues that disappeared after speculative internet trends faded, today’s AI earnings appear more grounded in real business demand.
- AI hyperscalers—including companies such as OpenAI, Anthropic, Microsoft, Alphabet, Amazon, Meta, and Oracle—are investing billions in infrastructure, but many have not yet generated positive returns on their AI investments. Meanwhile, infrastructure providers such as Nvidia, Broadcom, Micron, and SanDisk are benefiting from significant revenue growth tied to hyperscaler spending.
- If sufficient returns do not materialize, hyperscaler capital spending will likely taper. As marginal returns flatten, equity prices—particularly for companies trading above reasonable valuation measures—could come under pressure.
In this environment, maintaining a balanced, diversified portfolio of high-quality, income-generating, and reasonably valued assets remains especially important. This continues to be a prudent approach for investing “serious money” during periods of heightened volatility.
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