Macro
The global macro backdrop remains defined by a widening divergence between resilient headline activity and a rapidly deteriorating underlying structure, as the energy shock from the Iran conflict continues to propagate through inflation, trade, and policy channels. U.S. growth remains superficially robust, with Q1 GDP at 2.0% annualised, but this strength is increasingly concentrated in AI-related investment. Estimates suggest ~1.5% of that growth came directly from AI capex, with roughly ~30% of overall activity now tied to IT/AI spending, reinforcing how narrow the expansion has become. Excluding IT, growth slows materially to ~0.3%, while non-residential investment is contracting (~-5% YoY), highlighting a fragile “two-speed” economy. At the same time, inflation is re-accelerating: headline PCE rose to 3.5% YoY (core 3.2%), with energy pass-through reinforcing this, while labour cost measures (ECI ~3.8% annualised) suggest emerging second-round risks. The labour market remains stable but no longer disinflationary, with claims data pointing to tight conditions rather than deterioration. However, this stability is increasingly “steady-state” rather than expansionary, with payroll growth expectations drifting toward ~50–80K and participation dynamics masking underlying softness.
Central banks are responding with increasing caution. The FED held rates at 3.5–3.75%, but internal dynamics have shifted meaningfully more hawkish, with dissent against the easing bias and explicit signalling that hikes remain possible if inflation persists. The transition from Jerome Powell to Kevin Warsh adds another layer of uncertainty, particularly given political pressure to ease versus a macro backdrop that does not justify it. Importantly, the bar for cuts remains high, with policy increasingly constrained by the risk that energy-driven inflation feeds into core and expectations before growth meaningfully deteriorates. Across developed markets, policy is broadly on hold but with a tightening bias: the ECB is preparing markets for a potential June hike despite weakening growth, while the BoE and BoJ face similar trade-offs between inflation persistence and fragile activity.
Europe presents the clearest case of stagflationary pressure. Inflation has re-accelerated across the euro area (headline CPI ~3.0%), while growth momentum continues to weaken sharply, with Q1 GDP at just 0.1% QoQ and sentiment indicators deteriorating across consumers, industry, and services. The ECB’s reluctance to ease reflects concern that energy-driven inflation is becoming embedded, even as financial conditions tighten and lending slows. This creates a policy asymmetry: unlike the U.S., Europe lacks a strong growth buffer, increasing the probability of a policy mistake if inflation proves persistent. The contrast with the U.S. remains stark, with Europe lacking both the AI-driven capex impulse and the relative energy insulation that continue to support U.S. outperformance.
The dominant macro shock remains the disruption to global trade flows through the Strait of Hormuz. Pre-conflict, the region accounted for ~34% of global seaborne crude, ~29% of LPG, and ~19% of LNG flows; the effective closure has triggered a sharp repricing across commodities, with crude rising from ~$70 pre-conflict to peaks near ~$140 before stabilising closer to ~$120. The transmission extends well beyond oil: jet fuel prices have doubled, urea is up ~85%, and LNG ~46%, reinforcing a broad-based cost shock across transportation, agriculture, and industry. Even with a reopening, supply chains are expected to normalise only gradually, implying a persistent inflation impulse into H2. Critically, this shock is already shifting from a pure price story to a growth headwind, as higher energy costs erode real incomes and compress consumption capacity.
China and Asia are showing early signs of this external shock. China’s activity remains marginally expansionary, with manufacturing PMI holding around ~50.3, but services slipping into contraction (49.4), signalling a flattening growth profile. Industrial profits (+15.8% YoY) confirm earlier momentum, but forward indicators are weakening, suggesting the external demand shock is beginning to dominate. Japan presents a mixed picture, with resilient consumption but weakening production and sentiment, while inflation remains below target, complicating the path to normalisation.
Geopolitics continues to shape macro outcomes more directly than at any point since the pandemic. The Iran conflict has effectively become a structural supply shock, while broader shifts, including China’s expanding trade influence (e.g., tariff removals on African imports) and the fragmentation of global trade norms, point toward a more multipolar, less efficient global system. Discussions around a potential “Minsky moment” are gaining traction, reflecting concerns that years of stability have masked accumulated financial risks now being exposed by higher rates and supply shocks.
Overall, the macro regime is shifting toward a more fragile equilibrium: growth remains intact but increasingly narrow, inflation is re-accelerating due to supply-side shocks, and policy flexibility is constrained. Consumer resilience is increasingly dependent on temporary buffers (wealth effects, fiscal transfers, prior savings drawdown), with the savings rate falling toward ~3.6%, signalling reduced capacity to absorb further shocks. The combination of energy disruption, geopolitical fragmentation, and concentration of growth in a single sector (AI) leaves the global economy more vulnerable than headline data currently suggests.
Rates
Treasury markets stabilised at elevated levels, reflecting a decisive shift away from the easing narrative. UST 10Y traded around 4.40% and 2Y near 3.9%, with Treasuries modestly weaker on the week and the curve flattening, consistent with continued front-end repricing. Price action remained orderly rather than disorderly, with the move driven by a repricing of inflation risk and policy expectations rather than funding stress. Markets have moved from pricing more than two cuts in 2026 pre-Iran shock to ~5% probability of a cut this year and ~50% probability of a 25 bp hike by mid-2027, signalling a transition toward a higher-for-longer regime.
The Fed held rates unchanged in what was effectively a hawkish hold. The internal debate has clearly shifted from timing cuts to defining conditions for potential hikes. Multiple dissents pushed for the removal of the easing bias, signalling a move toward a neutral stance and, eventually, a possible hiking bias. The committee is transitioning through that framework as inflation risks rise and growth remains resilient. Importantly, this is not a Fed preparing to tighten imminently, but rather one increasingly unwilling to signal easing amid persistent uncertainty.
The constraint is increasingly driven by energy. WTI crude rose ~8% on the week, extending the prior ~14% surge, reinforcing the inflation impulse and complicating the policy outlook. Elevated oil prices are feeding directly into headline inflation, but, more importantly, risk transmitting into broader price dynamics and expectations. With inflation rising while nominal policy remains unchanged, real rates are effectively falling, creating an unintended easing impulse. The longer the energy shock persists, the less sustainable the current stance becomes, raising the probability that policy may need to tighten not to slow growth, but to prevent inflation from re-accelerating.
Macro data continue to argue against near-term easing. Q1 GDP showed resilience, supported by AI-driven capex and solid investment, while consumption remains moderate but stable. Labour market conditions are still consistent with a steady-state expansion. Consensus expectations for the upcoming payrolls report centre on unemployment at around 4.3%, payroll growth of ~80K, and firm wage dynamics. This mix remains incompatible with a near-term Fed easing cycle, reinforcing the shift in policy expectations.
Inflation measurement has emerged as an additional layer of policy risk. Discussions around greater reliance on trimmed-mean measures may help frame inflation as less acute, but markets are unlikely to accept any perceived softening of the Fed’s inflation framework. The experience of 2021, where such measures lagged realised inflation, remains a key credibility constraint. As a result, the Fed is likely to rely on a broader set of indicators, with particular focus on whether inflation pressures are broadening beyond energy.
The curve dynamic is increasingly asymmetric. The front end has largely repriced away from cuts and reflects a Fed at or near neutral, with limited conviction in further tightening. In contrast, pressure is building at the long end, where inflation uncertainty, elevated issuance, and the term premium are beginning to reprice more meaningfully. The dollar softened modestly (~-0.3%) even as yields remained elevated, while yen strength on intervention headlines highlighted growing global policy divergence. The upcoming Treasury refunding announcement carries greater-than-usual importance, with markets described as jittery and sensitive to any signal of increased duration supply. Longer-dated yields are becoming the primary channel through which tighter financial conditions are transmitted.
This raises the probability that tightening occurs without explicit Fed action. A further rise in long-end yields can tighten financial conditions independently, reducing the need for policy rate hikes while still constraining growth. This dynamic places greater emphasis on the term premium and the supply-demand balance, particularly as future coordination between the Fed and the Treasury on issuance strategy becomes a potential source of uncertainty under incoming Chair Kevin Warsh. In parallel, gold declined ~2.0%, while Bitcoin futures rose ~1.0%, suggesting limited demand for traditional duration hedges, with pockets of risk appetite remaining intact.
The key macro variable is inflation expectations. While long-term expectations remain broadly anchored, they are now the central hinge for policy. If expectations remain contained and the energy shock fades, a path toward easing later in the year remains plausible. However, any sustained drift higher would materially tighten the Fed’s reaction function and increase the likelihood of a hawkish policy response.
Credit
Credit markets remained resilient at the index level, but the underlying structure continues to diverge sharply. Public credit spreads stayed tight, issuance remained strong, and investors continued to reach for yield, even as a second, more fragile layer of risk built underneath across private credit, leveraged technology, and idiosyncratic distress. That tension between stable surface conditions and deteriorating underlying credit quality is the defining feature of the week.
Spreads compressed modestly despite higher UST yields, supported by elevated all-in yields and persistent demand for carry, particularly from duration-sensitive buyers. Credit continues to behave as if macro conditions remain manageable, with investors prioritising income over spread protection. However, demand is no longer indiscriminate. The market is increasingly defined by selectivity, with investors showing greater sensitivity to issuer concentration, structure, and sector exposure.
Primary markets remained exceptionally active. April IG issuance reached ~$178B, including a $25B jumbo deal, while HY issuance exceeded $38B, the busiest month YTD. The market remains fully open, but order books are less aggressive than prior peaks, and borrowers are increasingly required to offer concessions or stronger protections. This reflects a marginal shift in the balance of power back toward lenders, even as overall demand remains robust.
Global dispersion is further reinforced by developments in EM Asia IG, where spreads have compressed to historical extremes. EM Asia IG spreads tightened to ~56bp, the tightest level since 2009, trading ~22bp inside US IG. A rare inversion driven primarily by supply scarcity and regional demand rather than relative credit fundamentals, with Asian IG issuance down ~17% YTD to $49.5B versus >$810B in US IG, creating a scarcity premium. Regional capital is rotating into local USD credit, reducing reliance on US assets amid geopolitical uncertainty. Fundamentals remain stable, but spreads are increasingly disconnected from risk, leaving a limited buffer against macro volatility.
Supply dynamics across developed markets remain structurally driven. Hyperscaler capex expectations continue to expand, with ~ $820B projected for 2026 (vs ~$250B estimated for 2025), implying sustained issuance pressure. This is beginning to weigh on the tech credit complex, where spreads have converged toward lower-quality sectors. Investors are increasingly demanding concessions and stronger covenant protection, reinforcing a transition from liquidity-driven demand toward fundamentals-driven allocation.
High-yield markets are showing clearer signs of strain at the margin. Data-centre-linked financing remains a key driver of issuance, but pricing is becoming more sensitive, with recent deals requiring yield adjustments to clear. A SoftBank-linked transaction priced near ~9%, the highest for this theme YTD, highlights growing resistance from the marginal buyer. The market remains open, but risk is being priced more explicitly, particularly in longer-duration and higher-beta structures.
Private credit risks are now moving from theoretical to observable. Concerns about underwriting quality and rapid asset-class expansion are becoming more explicit, particularly among newer entrants that deployed capital during the easy-money period. Weak underwriting vintages are beginning to surface, especially in software-linked deals where valuation compression has materially eroded collateral buffers. The Medallia situation, implying a ~$5B loss, is a clear example of LTV deterioration and mark-to-market stress.
At the same time, structural weaknesses in private markets are becoming more visible. Continuation vehicles are increasingly being used to recycle assets internally rather than exit positions at market-clearing prices, raising concerns around valuation integrity and investor alignment. This reflects a broader shift toward delayed price discovery, where reported stability masks underlying deterioration.
The maturity wall narrative is gaining traction, with peak refinancing pressure expected around 2028, but the more immediate risk lies in valuation resets rather than liquidity constraints. Loans originated at ~40% LTV are increasingly vulnerable when enterprise values have halved, particularly in legacy software and PIK-heavy direct-lending structures. This creates a scenario where refinancing risk is less about access to capital and more about the inability to sustain prior valuation assumptions.
Flows and sentiment are becoming a key inflexion point. Retail participation in private credit is showing early signs of fatigue, while institutional capital remains more stable but increasingly selective. The growing reliance on retail capital introduces structural fragility, particularly where liquidity expectations mismatch underlying assets. At the same time, limited transparency continues to amplify “unknown risk” premia, reinforcing caution despite stable headline spreads.
Distress remains contained but visible. Cases such as Spirit Airlines and the $5.5B Brightline restructuring highlight that while the broader market remains functional, weaker business models and overleveraged capital structures are beginning to fail. These are not yet systemic signals, but they reinforce that stress is emerging in pockets rather than across the full market.
Overall, the credit cycle is not turning uniformly, but the direction of travel is becoming clearer. Investment-grade remains supported by earnings resilience, global demand, and yield-driven inflows, particularly on the long end. However, leveraged credit (especially software, private credit, and weaker business models) is transitioning toward a more fragile regime defined by weaker underwriting, valuation pressure, and rising dispersion.
The key takeaway is not that credit has broken, but that the market is increasingly bifurcated. Public credit continues to price stability, while private credit and select leveraged segments are beginning to reflect a more challenging underlying reality. Market shift from liquidity-driven compression to fundamentals-driven differentiation.
Equity
U.S. equities extended gains, with the S&P 500 +0.91%, Nasdaq +1.12%, Dow +0.55%, and Russell 2000 +0.93%. The S&P 500 and Nasdaq posted a fifth straight weekly advance and closed at fresh highs, while the Russell 2000 rose for a sixth consecutive week. Equal-weight S&P gained 0.4%, recovering most of the prior week’s loss, though leadership remained earnings-driven and uneven beneath the surface.
Sector performance was led by communication services +4.54%, energy +3.24%, consumer staples +1.14%, real estate +1.02%, and financials +0.91%. The rest of the market was positive but materially less dynamic: utilities +0.70%, healthcare +0.66%, consumer discretionary +0.39%, industrials +0.25%, and technology +0.11%. Materials were the only negative sector, down -1.95%. The muted technology performance despite strong moves in select mega caps highlights offsetting weakness in semis and parts of the AI infrastructure complex.
The week’s defining theme remained earnings dispersion, particularly within large-cap technology, where headline beats masked important differences in quality and sustainability. The market was driven by a clear hierarchy, with U.S. megacap tech and AI monetisation as the dominant forces, while broader equity performance remained a function of exposure to AI infrastructure or energy dynamics. Alphabet +12.0% was the standout, delivering a very strong quarter with EPS of $5.11 (+90% vs $2.68 consensus) and revenue of $109.9B (+22% YoY), driven by cloud and AI demand, with advertising also remaining resilient. Importantly, the stock reaction reflected not just the beat, but clear evidence that AI capex is translating into revenue growth, operating leverage, and product traction.
Amazon also delivered a strong quarter, with EPS of $2.78 (+70% vs $1.68 consensus) and AWS accelerating to 28% growth, while AI-driven capex surged to $ 44.2 B. The market response remained more muted, as investors increasingly require a visible link between elevated capex and margin expansion, highlighting a shift toward more disciplined evaluation of AI spending.
Microsoft reported solid but more measured results, with EPS of $4.27 and revenue up 18% YoY, while AI revenue grew 123% to a $37B run rate, confirming strong enterprise adoption. However, shares declined by 2.5%, reflecting elevated expectations and a growing market preference for visible share gains and clearer incremental returns on AI investment, rather than absolute growth alone. Meta similarly beat expectations, with revenue up 33% YoY and strong engagement trends, but the stock fell 9.8% as investors focused on rising AI capex intensity and geopolitical risks. The reaction highlights a key shift: strong core earnings are no longer sufficient if the timeline for AI monetisation remains unclear relative to the scale of spending.
Beyond mega-cap tech, earnings were broadly constructive across financials, healthcare, and cyclicals. Visa +6.0% beat and raised, supported by resilient consumer spending and continued strength in cross-border volumes. Eli Lilly +8.9% rallied after a strong earnings beat driven by Mounjaro and Zepbound, reinforcing the durability of GLP-1 demand as a major earnings driver in healthcare. Caterpillar gained 7.1% on solid results and continued momentum in bookings, pointing to sustained demand in infrastructure and industrial activity. Starbucks +7.3% was supported by improving North America comps and stabilising traffic trends, suggesting early signs of a consumer recovery in discretionary spend.
Consumer and travel-related names showed more mixed dynamics. Booking -5.9% declined after a mixed Q1 and softer Q2 guidance, with management highlighting geopolitical disruptions, including the Iran conflict, as a drag on forward bookings. Domino’s missed expectations by 8.2%, with both U.S. and international comps below consensus, reflecting ongoing pressure on lower-income consumers and heightened competitive intensity. Spotify -14.8% fell despite user growth, as weaker ad-supported economics and margin concerns weighed on sentiment.
Software and AI-adjacent names provided a notable positive counterpoint. Atlassian +24.2%, Twilio +27.5%, and Five9 +34.4% all delivered strong results, alleviating near-term concerns about AI-driven disruption to SaaS models and reinforcing the view that AI is currently augmenting rather than displacing demand for enterprise software. In infrastructure, SanDisk +19.9% and Western Digital +6.9% both beat and rose, supported by continued strength in memory and storage demand tied to AI workloads.
Elsewhere, dispersion remained elevated. Roblox declined sharply by 19.5% after bookings and user metrics missed expectations, highlighting sensitivity to engagement trends. Coca-Cola +2.5% and Mondelez +6.5% delivered solid results, supported by volume growth and broad-based geographic strength, reinforcing the defensive bid in staples. GM -2.9% declined despite beating expectations, as investor focus shifted to the forward margin outlook and policy-related uncertainties, though management flagged a potential $500M tailwind from the Supreme Court tariff decision.
More broadly, the earnings season is increasingly being treated by the market as a referendum on AI economics. Investors are no longer indiscriminately rewarding AI spend; they are differentiating among companies showing clear monetisation, those with credible paths, and those where spending outpaces visibility into returns. This marks a transition to a more mature phase of the AI cycle.
Earnings remain strong and continue to support current equity levels, but the structure of that strength is concentrated. With ~63% of companies reporting, 84% have beaten EPS expectations and 81% have beaten on revenue, both above historical averages, while aggregate earnings surprises stand at +20.7%, well above the ~7% long-term range. The blended earnings growth rate has risen to ~27% YoY from ~13% in Q4’25, with revenue growth at ~11%, confirming a meaningful upward revision cycle rather than just in-line delivery. A large share of this improvement is driven by a small group of mega-cap names, particularly Alphabet, Amazon and Meta, which account for most of the increase in index-level earnings. The market reaction remains asymmetric, with negative surprises punished more than positive beats are rewarded.
Forward expectations remain firm despite macro and energy uncertainty. Analysts increased Q2 EPS estimates by +2.1% in April, the largest upward revision for this stage of the quarter in five years, versus a typical seasonal decline, with Energy estimates rising sharply (+45.1% for Q2 and +27.0% for CY26) on higher oil prices. This points to continued strength in underlying demand and earnings momentum, especially in AI-linked, technology and selected cyclical areas. The market remains supported by earnings, but leadership is narrow and sensitivity to earnings misses is elevated, given valuations of ~20.9x forward P/E.