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The most important charts and themes in markets and investing…
1) Money Making Machine
Earnings poured in and investors were thrilled with the results, pushing the S&P 500 to its 14th all-time high this year and above 7,300 for the first time.
The S&P 500 is now up 8% on the year, a return that is more than double its average for the year (+4%). This is a stunning turnaround from where it was at the end of March (down 7%).
What is driving this unrelenting rise?
The relentless movement of a company’s earnings higher with expectations of more profits in the future. The S&P 500 is on pace to increase its quarterly earnings by 27% year over year, which would be its strongest growth rate since Q4 2021. And net profit margins will also jump to another record high at 14.7% (the previous record high was 13.2% in Q4 2025). For the full year in 2026, revenue is expected to grow by 22%, a significant increase from expectations a month ago (+18%).
The biggest drivers of these profits are the largest technology companies, which continue to be money-making machines:
- Google Q1 revenue increased 22% compared to last year to a new level notes amounting to $110 billion. Net Profit increased 81% YoY to a notes $63 billion. Cloud revenue grew 63% YoY to a notes $20 billion. Operating profit margin rose to 36%, the highest since 2010.
- Apple’s revenue increased 17% compared to last year to a new level Q1 notes amounting to $111 billion. Net Income grew 19% year over year to new Q1 record of $30 billion. Gross margin increased to 49% (from 47% last year), the highest margin in company history.
- Amazon’s revenue increased 17% compared to last year to a new level Q1 record amounting to $182 billion. Net Profit increased 77% YoY to $30 billion, it highest quarterly profit in company history. Operating margin increased to a notes 13.4% from 12.0% last year.
- owned by Microsoft Q1 revenue increased 18% compared to last year to the new year record high amounting to $83 billion. Net profit grew 23% YoY to new Q1 record of $32 billion. Azure and cloud services revenue increased 40% YoY, beating estimates.
- Meta revenue increased 33% compared to last year to the new year Q1 record amounting to $56.3 billion. Net profit increased 61% YoY to new record high amounting to $26.8 billion. A net profit margin of 47.5% is new all-time high.
2) Ignoring Iran?
While stock markets ignored the ongoing standoff in Iran, bond markets did not.
The 30-Year Treasury yield moved above 5% earlier this week, not far from its highest level in the past 20 years.
What prompted this?
Rising gas prices and rising inflation expectations.
Gas prices in the US have risen to $4.56 per gallon, the highest level since July 2022. The 53% jump over the past 10 weeks ($2.98/gallon to $4.56/gallon) is the largest we have seen in the last 30 years.
Market-based inflation expectations have risen to 2.72% (5-year breakeven), which is the highest level since August 2022.
If a peace deal is announced and the Strait of Hormuz is reopened, we will likely see a rapid reversal as prices of many commodities will plummet. However, the longer this drags on, the greater the impact will be on the already rising global inflation rate.
3) Where Inflation Occurs
The Fed increased the money supply by nearly $9 trillion under Jerome Powell’s tenure and the US National Debt increased by $18 trillion.
And inflation has averaged >4% per year over the past 6 years, more than double the Fed’s target rate.
Powell’s explanation? This is almost entirely due to “supply shocks” that the Fed cannot control.
The reality: this inflation is happening in Washington as usual – because of too much government borrowing/spending and too much government money creation.
4) A Divided Fed
Kevin Warsh will take over as Fed Chair next week when Jerome Powell’s term ends.
What awaits him will likely be the most divided Fed we’ve seen in a long time.
The four dissents at the last FOMC meeting were the most of any meeting since 1992.
One dissent came from Stephen Miran, a Trump appointee who has called for further rate cuts. And 3 other dissenters (Beth Hammack, Neel Kashkari, and Lorie Logan) wanted to remove the “easing bias” from the Fed statement.
With Jerome Powell announcing that he will remain on the board of governors as a voting member (saying he will only leave when the DOJ investigation into him is “well and truly concluded”), this means one less vote for the dovish camp (President Trump will be able to appoint a new governor if Powell resigns). And although Powell said he plans to “keep a low profile,” it is unlikely he will push back against continued attacks on the Fed’s independence as the White House calls for an immediate rate cut.
What is the market price?
There is no change to the Fed Funds Rate at all this year with a slightly higher chance of a rate increase at the end of the year than a rate cut.
If Kevin Warsh goes against the markets and argues that the Fed should start lowering interest rates again in June despite all the evidence pointing to higher inflationary pressures, then his independence will immediately be called into question. Whether he is willing to take the risk remains to be seen.
5) Some Interesting Statistics…
a) 0.1% of accounts on Polymarket have earned 67% profit.
b) South Korean shares have more than tripled in the last 16 months, outperforming other countries.
c) Berkshire Hathaway’s Cash Stack soared to a record $397 billion in the First Quarter, more than tripling over the last 3 years.
d) Apple has repurchased $732 billion worth of stock over the past 10 years, greater than the market capitalization of 488 companies in the S&P 500.
e) Combined revenue of the big 4 US technology companies reached a record $1.94 trillion over the last 12 months. This amount is greater than the GDP of all but 13 countries.
And that’s all for this week. Thanks for reading and have a great rest of the week!
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