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- Equity markets recovered sharply in April, with leadership broadening across sectors, sizes, and geographies.
- Geopolitical and oil-related risks have eased in the headlines but remain unresolved beneath the surface.
- Corporate earnings revealed strong growth and broadening participation beyond mega-cap tech companies, but markets are being more selective about rewarding results.
- The Federal Reserve (Fed) is navigating a leadership transition, and expectations have shifted away from further tightening.
A Sharp Recovery from the First-Quarter Pullback
After a sharp decline in March, markets pushed higher to end April near or at recent highs. Performance has been positive across equity markets, and the S&P 500 Index climbed roughly 10.5% for the month. The recovery has been broad, with market leadership expanding beyond large-cap technology companies to include meaningful participation by small-cap companies and international markets.1
Markets often move ahead of the headlines, pricing in improvement before the underlying conditions are resolved. This tendency was on display in April, with broad market indices pulling ahead despite the Iran conflict, oil supply risk, and uncertainty surrounding the confirmation of a new Federal Reserve chair. For investors who stayed the course through the first four months of the year, the recovery has more than offset the earlier drawdown.
Improved Headlines and Strong Earnings Drive Markets
While the conflict in the Middle East continues, April offered a brief reprieve from the worst of the headlines. A negotiated ceasefire reduced concerns about a near-term escalation, but the Strait of Hormuz continues to be a focal point, and oil prices remain volatile. The markets responded positively to improving sentiment, even as conditions remain uncertain.
Meanwhile, first-quarter corporate earnings continue to come in strongly, with a blended year-over-year growth rate of 27% and 84% of companies that have reported so far beating expectations. Earnings strength is continuing to broaden beyond a narrow group of large-cap technology companies.2 At the same time, markets are becoming more selective in how they reward earnings results, and companies that meet expectations without raising guidance have been treated less generously than in prior quarters.
Against this backdrop, investor sentiment and risk appetite have returned quickly. Credit spreads have tightened, volatility declined through much of April, and investors have meaningfully increased their risk exposure.3
Source:FactSet, MarketDesk
Economy Reflects Moderation Rather Than Deterioration
According to data released April 30th, the U.S. economy grew at a modest annualized pace of 2% during the first quarter of 2026. During April, consumer activity held up despite the spike in energy prices triggered by the ongoing conflict in the Middle East, and the labor market has continued on a path of balanced softening, characterized by a low-hire, low-fire environment.4 The inflation picture is more complex. Headline inflation remains elevated, largely driven by energy prices, while core inflation, which excludes energy and food prices, has been more contained. Taken together, the economic backdrop is one of moderation rather than deterioration.
Source: Source: U.S. Census Bureau
The Fed in Transition
A leadership transition is underway at the Fed as Chair Jerome Powell prepares to hand the reins to a successor. At the same time, the April Federal Open Market Committee notes growing divisions among committee members about the path of interest rates. Four members dissented from the decision to hold rates steady at 3.50%-3.75%, with three preferring to remove language in the statement that implied a bias toward future rate cuts, and a fourth voting for a quarter-point rate cut.5
The path ahead is uncertain. While markets are no longer pricing in additional tightening, the timing and pace of eventual easing are unclear. As markets await the confirmation of the next Fed chair, they are likely to react sharply to any shifts in expectations.
The Current Market Setup
Several factors are supportive of equity market performance today: The U.S. is enjoying stable economic conditions, market sentiment has improved markedly since the first quarter, and strong earnings are broadening beyond large-cap technology companies.
Still, there are risks in the outlook. Oil and geopolitical tensions remain unresolved, even though the headline noise declined in April. Equity valuations are elevated, particularly among large-cap technology stocks, driven largely by sustained momentum in artificial intelligence. While breadth has improved, market leadership still shows signs of underlying concentration. Expectations for earnings and economic growth continue to climb, raising the bar for what markets will consider a positive surprise.2
Heading into May, the outlook for equity markets is constructive overall, reflecting improved conditions alongside unresolved risks. This environment may leave less margin for error. For equity market performance to continue, several factors may need to improve, including economic expansion, corporate earnings growth, moderating inflation, and a resolution of geopolitical tensions.
Portfolio Perspective
In our view, the current environment does not call for chasing recent performance or stepping away from markets. As we’ve seen over the past several months, diversification continues to do its job, with different parts of portfolios contributing in different ways. Exposure across growth, income, and inflation-sensitive assets remains relevant. Our stance is that diversification is the backbone of long-term investing, and it is designed to help investors navigate environments like this one.
What We Are Watching
Several market and economic factors are at play today that could impact equity market performance. Over the next month, we will monitor oil markets and supply dynamics in the Middle East. The ability of vessels to pass through the Strait of Hormuz unimpeded is essential to reducing oil price volatility. We are also watching inflation trends beyond energy to confirm that core inflation continues to ease. Labor market dynamics will be another focus as we track employment for signs of a sharper decline, rather than the gradual softening we have seen to date. We will also monitor corporate earnings expectations and revisions as the bar for corporate earnings continues to rise. Of course, the leadership transition at the Fed and communications about the potential path of interest rates is likely to make headlines and may impact markets.
Source: FactSet
Staying Disciplined
The past several months served as a reminder of how quickly conditions can shift. Going forward, we expect markets will continue to respond to short-term developments. For investors, our lesson remains the same: Staying focused on long-term goals and maintaining discipline as the environment evolves remain critical factors in achieving financial outcomes.
1 Morningstar
2 Factset
3 Bloomberg
4 Wall Street Journal
5 Marketdesk
Cary Street Partners is the trade name used by Cary Street Partners LLC, Member FINRA/SIPC; Cary Street Partners Investment Advisory LLC and Cary Street Partners Asset Management LLC, registered investment advisers. Registration does not imply a certain level of skill or training.
Any opinions expressed here are those of the authors, and such statements or opinions do not necessarily represent the opinions of Cary Street Partners. These are statements of judgment as of a certain date and are subject to future change without notice. Future predictions are subject to certain risks and uncertainties, which could cause actual results to differ from those currently anticipated or projected.
We undertake no duty or obligation to publicly update or revise the information contained in this letter. In addition, information related to past performance, while helpful as an evaluative tool, is not necessarily indicative of future results, the achievement of which cannot be assured. You should not view the past performance of securities, or information about the market, as indicative of future results.
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