The first week of May unfolded against an uneasy backdrop of geopolitical uncertainty and shifting Federal Reserve leadership, yet markets continued to find support from a U.S. economy that remains resilient and a corporate earnings season that has been much stronger than anticipated. The data still point to an expansion that is increasingly uneven, but businesses, consumers, and investors are still moving forward.

Equity markets finished the week modestly higher, supported by strong earnings results during the peak of the first-quarter reporting season. The S&P 500 rose 0.9%, the Dow gained 0.6%, and the Nasdaq advanced 1.1%, with all three major indices extending their recent rebound. By week’s end, more than 60% of S&P 500 companies had reported, with earnings growth running near 27% year-over-year, more than double expectations at the start of earnings season. Beat rates have also been exceptional, with 84% of companies topping earnings estimates and aggregate earnings coming in more than 20% above expectations. Even after adjusting for some one-time benefits and unusually large gains tied to major tech companies, underlying earnings growth still appears to be running in the mid-to-high teens, a remarkable outcome given the higher rate and inflation backdrop and lingering policy uncertainty.

The drivers of this strength are broader than the AI story alone, though AI infrastructure spending remains a central pillar of market leadership. Capital spending from tech giants like Alphabet, Amazon, Meta, and Microsoft continues to rise sharply, supporting demand across cloud, semiconductors, electrical equipment, and related infrastructure. At the same time, consumer-facing companies have generally shown better resilience than feared, financials have benefited from healthy credit conditions and improving capital markets activity, and many companies continue to demonstrate pricing power despite renewed input-cost pressures. In short, the earnings backdrop has been one of the more encouraging offsets to the macro and geopolitical concerns that have dominated much of the year.

However, the consumer story is less uniformly positive. Much of the spring’s spending strength was fueled by tax refunds rather than income growth. Cumulative IRS refunds reached approximately $300 billion, up 16% year-over-year, but the bulk of that stimulus has now been disbursed. At the same time, higher gasoline prices have begun to erode real purchasing power. As a result, real disposable personal income has shown little to no growth over the past year, and the personal savings rate fell to 3.6%, the lowest level in more than three years.

The Federal Reserve remains firmly in wait-and-see mode. Policymakers held rates steady at last week’s meeting, but the tone of the statement was notably more hawkish. Headline PCE inflation stands at 3.5% year-over-year, while core inflation remains near 3%, well above the Fed’s 2% target. Importantly, inflationary pressures are not limited to energy. AI-driven demand has pushed prices for computers and electronic equipment sharply higher, with information-processing equipment prices estimated to have risen at an annualized pace near 40% in the first quarter. Futures markets now price no rate cuts for the remainder of 2026, with Oxford Economics expecting the first cut no earlier than December.

Recent economic data offered a more nuanced picture. First-quarter GDP grew at a 2.0% annualized rate, with equipment and software spending surging nearly 14% annualized, driven heavily by AI-related capital investment. Consumer spending grew a more modest 1.6% annualized, reflecting early-year weather effects, higher prices, and a slower pace of discretionary spending. Housing remains a secondary concern for markets: starts rebounded in March, but permits softened and mortgage rates near 6.4% continue to limit affordability.

This week investors will focus on whether higher prices are beginning to slow economic momentum, with ISM services, JOLTS job openings, jobless claims, and Friday’s April employment report all on deck. The Middle East also remains an important risk to monitor, with the Strait of Hormuz still disrupted and oil prices higher, but for now the market’s center of gravity has shifted back toward corporate fundamentals. On that front, first-quarter earnings have delivered a notably strong message: companies are navigating a complicated environment better than expected.

2026 The Long View | First Merchants Bank