Macro
The macro backdrop remained resilient but increasingly uneven, with the April payroll report reinforcing the “stable, not overheating” narrative. The key macro data point was another resilient but uneven U.S. labour report. Nonfarm payrolls rose 115K versus expectations near 65K, the unemployment rate held at 4.3%, and wage growth stayed contained at 0.2% m/m and 3.6% y/y. Beneath the surface, however, the report reinforced a “low-hire, low-fire” equilibrium rather than a broad-based reacceleration. Labour-force participation slipped to 61.8%, federal government employment fell another 9K and is now down 348K, or 11.5%, since October 2024, while job gains were concentrated in health care (+37K), transportation and warehousing (+30K) and retail (+22K). Markets ultimately interpreted the report as broadly Goldilocks: strong enough to keep recession fears contained, but not inflationary enough to force a material hawkish repricing from the Fed.
At the same time, several forward-looking labour indicators increasingly suggest stabilisation rather than continued deterioration beneath the headline payroll trend. Job openings surprised to the upside, the quits-layoffs spread showed early signs of bottoming, and broader measures such as the Conference Board labour differential and NFIB hiring indicators also improved modestly. Wage growth trackers similarly appear to have stabilised after decelerating through much of 2025. The Beige Book increasingly pointed to labour stabilisation occurring through temporary hiring, reduced layoffs and longer working hours rather than aggressive permanent hiring. The result is an economy where labour demand remains soft but no longer clearly deteriorating, reinforcing the Fed’s ability to remain on hold while monitoring whether higher energy prices eventually generate broader second-round inflation effects.
The consumer picture remains increasingly K-shaped. Aggregate spending and employment continue to hold up, but corporate commentary increasingly points to mounting pressure at the lower-income end of the economy, where higher gasoline prices and limited real wage growth are weighing on discretionary demand. Several U.S. companies highlighted signs of negative cash-flow behaviour among lower-income households, rising sensitivity to fuel prices and weaker affordability conditions beneath otherwise resilient headline macro data. Whirlpool described demand conditions in parts of the consumer economy as approaching financial-crisis-era weakness, while restaurant and consumer-facing businesses continued to signal weaker pricing power and softer traffic trends. By contrast, higher-income cohorts remain supported by wealth effects, stronger balance sheets and ongoing fiscal support. The divergence remains important because headline macro data still reflects resilience, while conditions beneath the surface continue to deteriorate for more rate-sensitive and lower-income households.
Energy remained the dominant macro transmission channel, although markets increasingly treated the Iran conflict as a “fragile ceasefire” rather than a renewed systemic escalation. Despite further skirmishes involving U.S. destroyers in the Strait of Hormuz, tanker incidents and continued military exchanges, cross-asset reactions remained notably more muted than during the initial escalation phase. Oil prices briefly moved back toward the $100 level and global equities softened, but investors increasingly continued to price a prolonged but manageable “low-intensity conflict” rather than a disorderly systemic shock. Markets appear increasingly conditioned to episodic flare-ups so long as energy infrastructure and shipping flows remain only partially disrupted. Brent and WTI remained elevated versus pre-conflict levels but broadly stable into week-end trading, reinforcing the market view that physical supply disruptions are likely manageable unless the Strait faces a prolonged closure. Markets increasingly focused less on geopolitical headlines themselves and more on whether supply disruptions persist long enough to generate broader second-round inflation effects across transportation, food and consumer prices.
The conflict is also accelerating a broader structural shift toward energy security and infrastructure investment. Asian policymakers and investors increasingly view the Hormuz disruption as a wake-up call for energy independence, reinforcing long-duration investment themes across renewables, utilities, battery supply chains, power infrastructure and AI-related electricity demand. ASEAN economies discussed coordinated energy-security responses and strategic fuel-sharing mechanisms as rising oil and shipping costs increasingly pressure import-dependent economies across the region. At the same time, semiconductor and AI-linked economies continue to outperform. South Korea’s current-account surplus widened to a record $37B, driven by exceptionally strong semiconductor exports and AI-related demand. The macro cycle therefore continues to evolve away from a traditional consumer-led expansion toward a more concentrated capex- and infrastructure-driven regime tied to AI deployment, industrial policy and strategic energy resilience. This increasingly supports industrial activity, semiconductors, cloud infrastructure and data-centre construction even as parts of the consumer economy soften.
AI-related investment increasingly remains the dominant global business-cycle driver. U.S. and Asian AI supply chains continue to see exceptionally strong capex demand, with AI-related imports into the U.S. reportedly still growing at an ~80% pace even as broader goods imports soften. Markets increasingly treat AI infrastructure spending as the primary offset to broader cyclical slowing, particularly across semiconductors, power management, electrification and data-centre infrastructure. This increasingly explains the strong relative performance of Taiwan, Korea and selected European industrial and utility exposures tied to electrification and power demand. However, debate is also intensifying around whether AI-driven productivity gains will ultimately prove sufficient to offset structurally tighter labour markets and recurring supply-side inflation pressures.
Policy conditions remain trapped between resilient activity and renewed supply-side inflation risks. Fed officials have little justification for aggressive easing while payrolls remain positive, unemployment stable and financial conditions supportive, but the data also do not yet justify a renewed tightening cycle. Fed communication shifted incrementally toward a more explicit “higher for longer” stance, with policymakers increasingly emphasising that the key policy question is whether elevated oil and commodity prices spill into broader inflation expectations and consumer behaviour. San Francisco Fed President Mary Daly stated that markets are correctly pricing roughly balanced probabilities between cuts and hikes, while emphasising that the labour market remains stable and non-inflationary for now. Officials increasingly acknowledge, however, that a prolonged conflict and persistent energy shock could delay the return to the Fed’s 2% inflation target and extend restrictive policy settings further into 2027. The result is an increasingly uncomfortable equilibrium where the Fed remains patient, markets continue pricing eventual cuts, and both sides remain heavily dependent on the duration of the energy shock.
Globally, macro divergence is becoming increasingly visible. Energy importers across Europe and Asia remain significantly more vulnerable to the oil shock than the U.S., where energy independence and AI-driven capex continue to cushion activity. European equities have materially underperformed U.S. indices since the ceasefire period began, reflecting Europe’s structural underweight to AI and greater exposure to imported energy inflation. UK growth indicators also continue to soften beneath sticky inflation dynamics, reinforcing expectations that weaker growth will ultimately force a more dovish Bank of England stance despite current market pricing for further tightening.
Tariff and trade risks also remain an important secondary macro variable. A federal trade court ruling against Trump’s 10% global tariff created fresh legal uncertainty around trade policy implementation, while the administration simultaneously escalated negotiations with both Europe and China ahead of next week’s summit in Beijing. Markets continue to treat tariffs as negotiable and headline-driven rather than a decisive macro shock, but the broader policy mix remains mildly inflationary at the margin and continues to complicate the Fed’s reaction function. Rare earths, semiconductor supply chains and AI export restrictions also remain increasingly central to the broader geopolitical competition between the U.S. and China.
The geopolitical backdrop is also increasingly reshaping long-term strategic and economic relationships. China remains highly focused on reopening and stabilising the Strait of Hormuz given its dependence on imported energy flows, while simultaneously using the conflict to assess U.S. military positioning, supply-chain vulnerabilities and strategic resource dependencies. Markets increasingly view the conflict not as a short-term geopolitical shock, but as another step toward a more fragmented and strategically competitive global economic order centred around energy security, semiconductor independence and AI infrastructure leadership. Longer term, investors are also increasingly debating whether fragmentation within OPEC and rising non-OPEC supply incentives could eventually structurally reshape global energy markets beyond the immediate crisis itself
Rates
Treasury markets traded in a relatively tight range despite another week dominated by Middle East headlines, highlighting how resilient both risk appetite and U.S. macro data remain. U.S. 2Y yields ended the week near 3.90%, remaining above the Fed funds rate for the first time since 2021, while 10Y yields held around 4.38% and the long bond remained close to the psychologically important 5% level. The curve modestly bull-flattened during the week, with 2s10s compressing toward ~48 bps, though the broader debate increasingly shifted toward whether the next major move in rates comes from renewed term premium expansion and inflation expectations rather than additional front-end repricing. Real 10Y yields remained elevated near 1.96%, keeping financial conditions relatively restrictive despite strong equity market performance.
Importantly, several Fed dynamics turned incrementally more hawkish beneath the surface. Chicago Fed President Austan Goolsbee, previously among the more dovish policymakers, openly acknowledged rising concern around stalled disinflation and core services inflation, while expressing greater sympathy toward Kevin Warsh’s skepticism of aggressive forward guidance and easing bias. Goolsbee explicitly noted that inflation data over the past several months had “deteriorated,” particularly in categories beyond tariffs and energy, reinforcing the idea that the Fed’s tolerance for upside inflation surprises is becoming increasingly limited. More broadly, investors increasingly expect a future Fed under Warsh to operate with less explicit forward guidance, greater tolerance for policy uncertainty, and a more flexible reaction function focused on prospective structural shifts rather than purely backward-looking macro analogues.
At the same time, the market continues to grapple with a potentially important structural debate around AI-driven capex, productivity, and the neutral rate. Multiple investors argued that the AI investment cycle is beginning to alter traditional macro relationships, supporting stronger nominal GDP growth, elevated corporate pricing power, and tighter financial conditions without necessarily generating broad wage inflation. Several large companies continue to announce substantial capex increases alongside labour-force rationalisation, reinforcing expectations that productivity gains may partially offset inflation pressures over the medium term even as near-term inflation risks remain elevated. This partly explains why equities continue to perform strongly despite elevated yields: investors increasingly view large-cap equities as a superior long-duration asset relative to sovereign bonds in an environment where nominal growth remains high and Treasury supply continues to expand aggressively.
Geopolitics remained the dominant macro risk factor throughout the week, though market pricing increasingly diverged from physical energy fundamentals. Despite continued skirmishes between the U.S. and Iran, tanker seizures near the Strait of Hormuz, and uncertainty around negotiations, Brent crude still finished the week lower by roughly 6–7%. However, several market participants argued that the paper oil market is materially understating underlying physical tightness. Commentary from energy specialists suggested that real physical Brent pricing and freight dynamics imply substantially tighter supply conditions than benchmark futures currently reflect, while inventory drawdowns across major consuming regions continue to accelerate. This disconnect between financial pricing and physical market stress remains an important risk for breakevens, inflation expectations, and ultimately term premium.
Treasury supply dynamics were also increasingly discussed as a structural headwind for duration. Investors highlighted the stark technical contrast between equities and Treasuries: corporate buybacks continue to absorb equity supply, while Treasury markets face persistent and exceptionally large gross issuance requirements. This supply imbalance partly explains why equities and bonds continue to send very different macro signals despite operating within the same underlying economy.
Overall, rates markets remain trapped between two competing narratives. On one side, softer wage growth, stable unemployment, and slowing hiring continue to support the case for eventual policy easing. On the other, persistent services inflation, elevated energy uncertainty, AI-driven investment demand, structurally larger fiscal deficits, and sustained nominal growth continue to keep long-end yields elevated and term premium sticky. The market increasingly resembles a late-cycle equilibrium where the front-end remains anchored by a cautious Fed, while the long end remains vulnerable to renewed inflation shocks, higher neutral rate assumptions, and supply-related repricing. Underneath the relatively calm weekly moves in Treasury yields, the underlying macro regime continues to shift toward a structurally more volatile and less duration-friendly environment.
Equities
U.S. equities extended their advance, with the S&P 500 rising 2.1%, the Nasdaq +3.4%, and the Russell 2000 adding 1.2%, as investor focus remained firmly concentrated on artificial intelligence infrastructure, hyperscaler capex, and the accelerating monetisation of generative AI. Market leadership once again narrowed toward mega-cap technology and semiconductors, while cyclicals and defensives delivered more mixed performance. Equity sentiment remained supported by resilient macro data, easing recession concerns, and continued evidence that AI-related demand is translating into tangible revenue growth across both private and public markets.
Technology and communication services led sector performance, supported by another strong week in semiconductors, cloud infrastructure, and AI software beneficiaries. Investors increasingly focused on the scale of hyperscaler revenue growth and the sustainability of AI-driven capex cycles. Amazon Web Services reached an annualised revenue run rate of roughly $150B, Microsoft Azure surpassed $100B, while Google Cloud continued to accelerate rapidly with growth above 60% YoY, reinforcing the view that enterprise AI adoption remains in the early innings rather than approaching saturation.
AI infrastructure remained the dominant market theme. Discussions around power availability, GPU scarcity, and data-centre capacity continued to drive positioning across semiconductors, electrical equipment, utilities, and digital infrastructure. Nvidia-related ecosystem names, memory manufacturers, and data-centre beneficiaries continued to outperform as investors increasingly viewed compute and power as the critical bottlenecks of the next phase of AI monetisation. Memory names such as SK Hynix, Micron, and Samsung remained a key area of institutional interest given accelerating AI server demand and favourable pricing dynamics.
A major development during the week was the growing focus on xAI and Elon Musk’s emerging AI infrastructure ecosystem. Markets reacted positively to reports surrounding the leasing and monetisation of Colossus compute capacity, reinforcing the view that AI infrastructure itself may become one of the highest-margin areas of the value chain. Investors increasingly framed xAI not only as a model developer, but as a potential hyperscaler and compute utility provider competing alongside traditional cloud platforms. The discussion also reinforced broader market conviction that AI revenues are increasingly supply-constrained by compute and power availability rather than by end-user demand.
Corporate commentary across technology remained notably constructive. Management teams continued to emphasise accelerating enterprise demand for coding agents, inference workloads, and AI-enabled productivity tools. Importantly, the market narrative increasingly shifted from speculative AI enthusiasm toward measurable revenue generation and operating leverage. Several investors highlighted that AI adoption is already beginning to improve software development productivity, reduce operational costs, and support margin expansion across parts of the technology ecosystem, even if broader economy-wide productivity effects remain early and uneven.
Outside technology, equity performance was more selective. Financials broadly remained supported by resilient economic activity and healthy capital markets conditions, while industrials benefited from ongoing infrastructure and electrification themes tied to data-centre expansion. Consumer-facing sectors delivered mixed performance, with investors continuing to monitor whether AI-related productivity gains eventually translate into broader consumer demand and earnings growth beyond the current concentration in mega-cap technology.
Macro conditions remained broadly supportive for equities. Treasury yields were relatively stable despite continued debate around inflation, tariffs, and fiscal policy, while labour-market conditions remained resilient enough to support the soft-landing narrative. Investors increasingly viewed the current environment as “Goldilocks” for risk assets: growth remains sufficiently firm to support earnings, while inflation has not reaccelerated enough to materially tighten financial conditions.
Positioning and sentiment remain heavily skewed toward AI-linked beneficiaries, with market breadth still relatively narrow beneath strong index-level performance. While enthusiasm around AI monetisation continues to strengthen, investors also increasingly acknowledge that the next critical phase for equities will be proving durable economy-wide productivity gains and sustainable margin expansion outside the hyperscaler and semiconductor complex. For now, however, liquidity, earnings momentum, and continued AI capex acceleration remain powerful supports for U.S. equities heading into the second half of 2026.