Five for Friday

Shocks, Gas, Profits, The Fed, and Did You Know?

1. Shocks

For all the mathematicians that have worked to quantify the investing world in recent decades, the most important equation for success is the same as it was a century ago: “happiness = reality – expectations.” Expectations set beyond reality's capacity to meet them can lead to gloom, anxiety, and bad behavior. Markets have been fairly resilient in 2026 (down only 5% from January highs) despite headwinds. I take this as a positive sign that the underlying drivers of performance are still fairly sound. But we should also acknowledge that things could deteriorate from here and still be in line with a typical year (i.e., where our expectations should lie). Over the last 75 years, despite an average return of 13% for the S&P 500, the average intrayear drawdown is -14% peak-to-trough. We’d need a crystal ball to know how the war in Iran will play out, but we don’t need one to see that market volatility is a feature, not a bug, of long-term investing.  

2. Gas

One explanation for the market’s resilience in the face of higher gas prices is the offsetting consumer support from last year’s tax bill. Entering the year, our partners at Strategas (a Baird company) estimated that tax refunds to U.S. consumers would be $157 billion higher than 2025. On the other side of the ledger are gas prices: Thursday’s national average price of $3.88 per gallon is $0.78 above the 2025 average. Combining that with total U.S. gasoline consumption of ~137 billion gallons/year implies a drag of ~$107 billion on the consumer if higher prices persist for most of 2026 (something I still view as unlikely given the political ramifications). The U.S. economy is far more complicated than this back-of-napkin math implies, but we shouldn’t understate just how large the stimulus tailwind coming into the year was.  

3. Profits

Another area of support is corporate profits. Earnings estimates have not budged from their upward trajectory since fighting began, and this is still the case even if you take Energy stocks (whose profits tend to jump when oil prices spike) out of the picture. Earnings for 1Q26 are expected to grow at a 12% clip, which would mark the sixth straight quarter of double-digit earnings growth. In terms of outlook, the number of S&P 500 companies issuing negative earnings guidance for 1Q26 is actually below average (and airlines painted a rosy demand picture this week, despite jet fuel costs rising 60%+ in recent weeks. Simply put: for now, the profits that underlie U.S. stocks seem on solid ground – in large part because the U.S. economy is less oil-dependent than it once was.

4. The Fed

For a less rosy outlook, we look to the Federal Reserve. Amid a series of hotter-than-expected inflation reports, an energy shock, a tight labor market, and lingering anxiety over tariffs, the Fed’s meeting this week was hawkish. Markets came into the year anticipating two or three rate cuts but are now expecting zero – and are pricing a roughly 1-in-10 chance that the Fed will be forced to hike rates by December. Rate-sensitive stocks are feeling the sting, and given the breadth of inflationary pressures right now, it’s probably good practice to remove “rate cuts” as a bullish reason for any investment going forward. If the Fed does cut aggressively from here, it probably won’t be for reasons to get excited about.

5. Did You Know?

More than 4,500 objects were launched into space in 2025, a nearly eightfold increase from 2019. The big driver is the shift in strategy from a few large satellites to thousands of smaller, low-orbit satellites that are cheaper to launch and have lower latency. This underpins a space economy that could approach $1–2 trillion over the next decade.

Disclosures

This is not a complete analysis of every material fact regarding any company, industry or security. The opinions expressed here reflect our judgment at this date and are subject to change. The information has been obtained from sources we consider to be reliable, but we cannot guarantee the accuracy. Market and economic statistics, unless otherwise cited, are from data provider FactSet.

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