By now, a lot (most?) readers are probably tired of hearing about equities’ purportedly uncanny knack for ignoring existential geopolitical tension.
Dare I belabor the point further and chance the ire of rally skeptics who spent the better part of the last two months on the sidelines?
I dare say “yes.” Yes, I’ll brave belaboring the point, if only to highlight a chart some of you have likely run across already this week.
The figure above’s from Deutsche Bank’s Henry Allen, and it puts the surge from the Iran war lows in historical context. Simply put: This is, on one vector anyway, history’s most anomalous rally.
There are precious few post-War examples of the S&P rising this rapidly over such a short time frame, where “precious few” means just four. Three of those episodes occurred during recession recoveries. The other a few months before Black Monday.
Allen offered some foreboding commentary. “Despite the catalysts driving today’s advance (e.g., AI excitement, strong data), the speed of the rally is now bucking all recent precedents for an economy that isn’t emerging from recession,” he said, cautioning that “we’re still in an environment of heightened geopolitical risk, and markets are now pricing in a Fed hike as more-likely-than-not for 2026 as well.”
That latter point — about the prospects for Fed tightening — is particularly concerning, Allen suggested. “Fed hawkishness has been correlated with several multi-asset selloffs of recent years, including 2015-16, late-2018, and 2022,” he said.
And yet, it’s important to consider the fundamentals. I’ve been on (and on) about Q1 earnings season, when S&P 500 companies collectively grew the bottom line by more than 25%, the strongest since 2021 (and in decades if you exclude that year).
I’ve also been keen to emphasize that it’s not “just Anthropic paper gains,” nor is it “just mega-cap tech.” S&P 500 earnings growth in Q1 2026 was 18% excluding the Anthropic write-up at Amazon and Alphabet, and the median company grew the bottom line by 14%.
If you’re still unconvinced, have a look at the figure below, which uses the latest BEA data to give you the broadest possible picture of margins across businesses in the US.
First note that we remain in a historic profit bonanza. Even at the local lows, margins were still far higher than any pre-2020s quarter.
Moreover, Q1’s 15.6% marked a re-acceleration and counted as the highest since Q4 of 2024.
The blue line in the figure shows you corporates’ interest burden as a share of profits. Long story short: That share’s never been lower. The fundamentals, as they say, are sound.
And yet, it does feel tenuous. The rally, I mean. As Allen’s colleague Jim Reid remarked on Wednesday, a 10th consecutive advance for the S&P this week would be the longest weekly run since 1985.
So, the pandemic, we are aware, was the green light for corporate to raise prices and, therefor, margins. And to sustain those high margins through the tariff period, they must have either cheated, forced price reductions on foriegn suppliers or pushed the tariff costs through to the consumer. Probably all of the above. But for how long can the American consumer support 15% corporate margins? I am fortunate to be living on the better leg of the “k” economy but my spending behavior has certainly changed especially in the service sector. And now, I see that services are doing great, so keep it up 9.9 percenters. Your dividends and capital gains depend on it.
Don’t ignore the role of government deficit spending. Every dollar of deficit spending goes to someone else’s bottom line. Everyone’s familiar with “run it hot” fiscal policy, but we’re firmly in the land of, “The red line on the tachometer is only a suggestion.”
Is the SpaceX IPO going to be the bell at the top? That valuation is about as absurd as I’ve ever seen: $1.77T on $18B in revenue?! I’m not one to bet against Musk, but does anyone really believe he alone is worth a premium in the trillions of dollars for Tesla and SpaceX? Obviously they do, but hard for me to imagine a bigger sign of froth than the valuations on those two companies. I can’t imagine xAI being a major player and SpaceX is a long, long way from anything close to that magnitude of profitability.
At least the semis and Mag7 (outside of Tesla) have the earnings to make a plausible argument for their valuations.
I keep thinking that, but it seems more likely that the OpenAI IPO will be the top. Not that the SpaceX IPO won’t be a debacle; rather, it can be a debacle (or a wild success) without being the bell at the top.
There’s another IPO I keep mentally circling back to. eBay. I can’t be troubled to look up the actual numbers, this is all from increasingly foggy memory, but the IPO was priced at something like $30, and at open it promptly gapped up to $90. And the thing is, that was most assuredly not the bell at the top, eBay’s IPO blow-out opener was like the bell at the Kentucky Derby that starts the race.
I love that eBay is still a going concern. And I love that it’s a takeover target of GameStop, which is absolutely hilarious. But most of all, I love that judging from appearances, their website hasn’t been updated since 1998.
While headwinds certainly exist, they are being overwhelmed by the magnitude of the AI tailwind. Capex spending is just enormous and propelling semis and others associated with it to the moon. Job growth has resumed
Lower K consumers might be struggling, but based on retail earnings they haven’t stopped spending. And even if they really do really stop spending at some point, is it enough to fully offset the tremendous AI spending growth?