View from the Observation Deck

We update this post on an ongoing basis to provide investors with insight regarding the earnings climate of the S&P 500 Index (“Index”). While quarterly earnings estimates are a useful indicator of a company’s financial performance, they are not guarantees. Equity analysts continually adjust their projections as new information is obtained. That said, a comparison of analyst estimates with actual company results may offer investors insight into broader equity market health, in our opinion. As of 5/11/26, 453 of the 503 stocks (90.1%) that comprise the Index had reported Q1’26 earnings, according to data from FactSet.

The percentage of Index companies that beat earnings expectations in Q1’26 (84.0% as of May 8, 2026) is above the 5-year average of 78.0%.

At 84.0%, Q1’26’s earnings beat rate is the highest in today’s dataset. Seven of the eleven sectors that comprise the Index reported year-over-year (y-o-y) earnings growth rates of at least 10% in Q1’26.

FactSet reported that the Index’s Q1’26 blended, y-o-y earnings growth rate registered a staggering 27.7% as of 5/8/26.

Should these levels hold, they will mark the highest y-o-y earnings growth rate reported by the Index since Q4’21 (when companies had considerably weaker comparisons due to COVID-era shutdowns). It will also mark the sixth consecutive quarter of double-digit earnings growth for the Index.

Earnings surprises are exceeding historical averages.

The first quarter’s results have been stunning compared to analyst estimates. As of 5/8/26, reported earnings were 18.2% above estimates on average. For comparison, the 5-year average earnings beat rate is 7.3%.

Calendar year earnings estimates continue to climb.

FactSet data shows that analysts increased their calendar year 2026 Index earnings estimates from 311.15 to 333.21 between December 31, 2025 and May 8, 2026. The current figure represents a y-o-y increase of 21.4% in 2026.

 The three sectors with the highest Q1’26 y-o-y earnings growth rates and their percentages were as follows (as of 5/8/26): Information Technology (50.7%); Communication Services (48.8%); and Materials (43.2%). For comparison, the lowest y-o-y earnings growth rates were experienced by Consumer Staples (6.1%); Energy (0.7%); and Health Care (-3.1%).

Takeaway: This quarter’s S&P 500 Index earnings results have been remarkable, with an above-average number of Index constituents (84.0%) reporting earnings above estimates in Q1’26. Calendar year earnings growth rates reflect the quarter’s trend. FactSet reported that the Index’s 2026 bottom-up calendar-year earnings estimates totaled a record 333.21 on May 8, 2026, representing a y-o-y increase of 21.4%. For comparison, calendar year 2026 earnings were estimated to total 311.15 at the start of the year. Revenue estimates lend support to analysts’ earnings optimism. The Index’s blended revenue growth rate totaled 11.3% in Q1’26, marking its 22^nd consecutive quarter of revenue growth, according to FactSet. Are equity markets overpriced, or are current values justified by persistent earnings and revenue growth? Stay tuned!

This chart is for illustrative purposes only and not indicative of any actual investment. The illustration excludes the effects of taxes and brokerage commissions and other expenses incurred when investing. Investors cannot invest directly in an index. The S&P 500 Index is an unmanaged index of 500 companies used to measure large-cap U.S. stock market performance, while the S&P sector and subsector indices are capitalization-weighted and comprised of S&P 500 constituents representing a specific sector or industry.

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View from the Observation Deck

We update this table from time to time to monitor the impact of interest rate policy on the longer-term fixed income market, as represented by the U.S. 10-Year Treasury Note (T-note). At a minimum, bond investors typically seek to generate a yield that outpaces the rate of inflation over time, allowing them to maintain a base level of purchasing power. A bond’s real yield - calculated by subtracting the most recent inflation rate, such as the Consumer Price Index (CPI), from the bond's current yield - is a simple way to measure this.

The yield on the benchmark 10-year T-note was 4.43% (4.4% rounded) on 5/5/26, above the 3.3% trailing 12-month rate on the CPI in March 2026. That equates to a real rate of 1.1%.

For comparative purposes, over the 30-year period ended 4/30/26, the average monthly yield on the 10-year T-note was 3.63% (3.6% rounded), while the CPI averaged 2.5% between 3/31/96 and 3/31/26, according to data from Bloomberg. Those figures translate into an average real yield of 1.1%, on par with the current real rate offered by the T-note. For continued comparison, the S&P 500 Index experienced an average annual total return of 10.3% for the 30-year period ended 4/30/26.

As of 4/30/26, the federal funds target rate (upper bound) stood at 3.75%, down from its most recent high of 5.50% on 8/30/24.

As the table shows, the trailing 12-month rate of change in the CPI was 3.3% at the end of March 2026, significantly lower than its most recent peak of 9.1% in June 2022, but up substantially from 2.4% in February 2026. As we see it, recent increases in the pace of rising prices may explain, in part, the recent policy inaction at the Federal Reserve (“Fed”). The federal funds target rate has been unchanged since 12/11/25 when it declined from 4.00% to 3.75%.

Takeaway: At 1.1%, the real yield offered by the 10-year T-note currently matches its long-term historical average. Recent energy price shocks resulting from the closure of the Strait of Hormuz and persistent war in Iran pushed the pace of consumer price increases to their highest level since May 2024. Central bank policy rate expectations adjusted in lockstep, with the futures market implying zero interest rate cuts in 2026, down from more than two cuts at the start of the year. As always, these estimates are likely to change with new information. We suspect energy prices will plummet at the resolution of the Iranian war, which could put rate reductions back on the table as the rate of change in the CPI declines. Stay tuned!

The information presented is not intended to constitute an investment recommendation for, or advice to, any specific person. By providing this information, First Trust is not undertaking to give advice in any fiduciary capacity within the meaning of ERISA, the Internal Revenue Code or any other regulatory framework. Financial professionals are responsible for evaluating investment risks independently and for exercising independent judgment in determining whether investments are appropriate for their clients.

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View from the Observation Deck

The FDIC reported that total assets held by the 4,336 commercial banks and savings institutions it insures increased by $1.2 trillion year-over-year to $25.3 trillion in 2025. While the largest banks hold the majority of these assets, regional and community banks comprise the lion’s share of individual U.S. banking institutions. For example, the FDIC insured 3,909 community banks, representing $2.8 trillion in deposits in 2025. Since the unexpected demise of Silicon Valley Bank in March 2023, the profitability of regional banks, which the Federal Reserve (“Fed”) defines as organizations with total assets of $10 billion to $100 billion, has been the topic of much debate. For today’s post, we set out to examine several potential catalysts behind the recent surge in equity valuations within the regional banking subsector and discuss potential barriers to near-term growth.

The S&P Regional Banks Index increased by 8.45% on a total return basis year-to-date (YTD) through 5/1/26. For comparison, the S&P 500 and S&P 500 Banks Industry Group Indices saw total returns of 6.00% and -1.01%, respectively, over the same time frame.

According to the federal funds rate futures market, investors estimate the Fed will no longer cut its benchmark interest rate in 2026 (as of 5/1/26), down from expectations of at least two cuts on 12/31/25. Banks earn a profit on the spread between interest paid and interest earned on deposits, over time. In our view, buoyant policy rates are likely to reinforce current banking sector profitability. Net interest margin (the difference between interest and dividends earned on interest-bearing assets and interest paid to depositors and other creditors) of all FDIC-insured community banks surged to 3.65% in 2025, up from 3.34% in 2024.

Regional bank valuations are attractive compared to their peers and the broader market.

The S&P Regional Banks Index’s forward 12-month price to earnings (P/E) ratio was 10.71 on 5/1/26, compared to P/E ratios of 12.24 and 20.71 for the S&P 500 Banks Industry Group Index and the broader S&P 500 Index, respectively, as of the same date. 

Final outcomes of proposed Basel III “Endgame” capital requirements remain unknown. 

When we last covered this topic in 2024, Basel III regulations were estimated to raise capital requirements among the largest U.S. banks by 9%, representing a significant reduction in assets that could be utilized to generate profit. These estimates have fallen drastically in recent months, with Reuters reporting a proposed increase of just 1.4% as of March 2026. That said, there is no guarantee regulators will agree to the proposal. 

Takeaway: The S&P Regional Bank Index is off to a strong start this year, increasing by 8.45% (total return) YTD through 5/1/26. In our view, this performance is likely explained by buoyant profit expectations driven by stable Fed policy rates. Net interest margins increased in 2025, with FDIC-insured banks seeing the metric increase to 3.30% in 2025, up from 3.22% in 2024. Margins improved among community banks as well, with net interest margin increasing to 3.65% in 2025, up from 3.34% in 2024. While diminished, regulatory risks remain, with the largest U.S. banks seeking clarity regarding the impact of proposed Basel III capital requirements. Commercial real estate (CRE) exposure poses a potential risk to smaller banks, with the share of CRE loans held by community banks that were 30 days or more past due (or in nonaccrual status) increasing to 1.19% in Q4’25. While headwinds exist, we believe regional banks and community banks are pivotal to the economic growth of the locales they serve and are vital to a competitive and resilient banking system.

This chart is for illustrative purposes only and not indicative of any actual investment. The illustration excludes the effects of taxes and brokerage commissions or other expenses incurred when investing. Investors cannot invest directly in an index.
The S&P 500 Index is an unmanaged index of 500 companies used to measure large-cap U.S. stock market performance. The S&P 500 Banks Index is a capitalization-weighted index. The S&P Banks Select Industry Index comprises stocks in the S&P Total Market Index that are classified in the GICS Asset Management & Custody Banks, Diversified Banks, Regional Banks, Diversified Financial Services and Commercial & Residential Mortgage Finance sub-industries. The S&P Regional Banks Select Industry Index is comprised of stocks in the S&P Total Market Index that are classified in the GICS regional banks sub-industry.

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View from the Observation Deck

The old axiom in the stock market about selling your stocks at the close of April and buying them back at the start of November used to make some sense from a seasonality standpoint. Back when the U.S. was more of an industrialized economy, it was common for plants and factories to close for a month or longer in the summer. This downtime allowed businesses to retool and gave employees time to vacation. The “Sell In May” theory was that companies would conduct less commerce in that six-month span, which would likely translate into lower earnings, and temporarily reduced stock prices. In our view, the U.S. economy has become so technologically advanced and globally competitive that companies can no longer afford these extended periods of stagnation.

• From 2006 through 2025, there were just three instances (2008, 2011 & 2022) in which the S&P 500 Index posted a negative total return from May through October.
  
  
• The average total return for the S&P 500 Index for the May-October periods in the table was 4.84%.
   
• Seventeen of the twenty top-performing sectors in the table posted total returns in excess of 10.00% and eight of them returned at least 20.00% (May-October). 

Takeaway: We publish today’s table on an annual basis as a reminder to investors that not all market maxims should be taken at face value. In this case, the data presented does not support the notion that investors should “sell in May and go away”. Over the last 20 years, an investor who remained fully invested in the S&P 500 Index from May through October enjoyed an average annual total return of 4.84% during those months alone, a significant figure when compounded. We continue to advocate that investors consider their time horizons and take risk as appropriate.

This chart is for illustrative purposes only and not indicative of any actual investment. The illustration excludes the effects of taxes and brokerage commissions and other expenses incurred when investing. Investors cannot invest directly in an index. The S&P 500 Index is an unmanaged index of 500 companies used to measure large-cap U.S. stock market performance, while the 11 major S&P 500 Sector Indices are capitalization-weighted and comprised of S&P 500 companies representing a specific sector.

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View from the Observation Deck

In today’s discussion, we investigate the catalysts behind the year-to-date (YTD) price returns of five major U.S. equity indices through 4/24/26. As the chart reveals, equity prices continue to march upward, despite a tenuous geopolitical landscape, surging energy prices, and increasingly hawkish monetary policy expectations.

Small and mid-sized companies outperformed their peers by a large margin over the period. For reference, YTD price returns for the five indices in today’s chart were as follows: 

S&P SmallCap 600 Index: 13.0%
S&P MidCap 400 Index: 10.2%
S&P 500 Equal Weighted Index: 5.4%
S&P 500 Index: 4.7%
Bloomberg Magnificent 7 Index: 1.4%

Bloomberg Magnificent 7 Index: 1.4%Valuations for the S&P 500 Equal Weight, S&P SmallCap 600, and S&P MidCap 400 Indices remain more attractive than those of the Blomberg Magnificent 7 and broader S&P 500 Indices.

As of 4/24/26, the forward price-to-earnings ratios for each of the indices in today’s chart were as follows: Bloomberg Magnificent 7 Index (30.65); S&P 500 Index (21.85); S&P MidCap 400 Index (17.09); S&P 500 Equal Weighted Index (17.03); and S&P SmallCap 600 Index (16.13).

Takeaway: The S&P SmallCap 600 and MidCap 400 Indices are off to a phenomenal start this year, increasing by 13.0% and 10.2% (price-only), respectively, through 4/24. Larger companies have not fared as well, with the S&P 500 and Bloomberg Magnificent 7 Indices realizing price returns of 4.7% and 1.4% over the time frame. Early-year rate cut expectations faded as investors began accounting for surging energy prices amidst the Iranian war. Large caps appear to have borne the brunt of the resultant revaluation, with price returns declining to time-series lows near the end of March 2026 (see chart). Stretched valuations may offer insight into these results, with large cap P/E multiples hovering well-above their mid and small-sized counterparts. That said, analysts expect strong earnings results from each of these indices, which may lend support to elevated multiples. Notably, each index presented today is estimated to see earnings increase to record levels in 2026. As investors charge toward the second half of the year, we feel a good question to ask might be: “what investments are worth the weight they’ve been assigned in my portfolio?”

This chart is for illustrative purposes only and not indicative of any actual investment. The illustration excludes the effects of taxes and brokerage commissions and other expenses incurred when investing. Investors cannot invest directly in an index. The S&P 500 Index is an unmanaged index of 500 companies used to measure large-cap U.S. stock market performance. The S&P 500 Equal Weighted Index is the equal-weight version of the S&P 500 Index. The Bloomberg Magnificent 7 Price Return Index is an equal-dollar weighted equity benchmark consisting of a fixed basket of 7 widely-traded companies in the U.S. The S&P MidCap 400 Index is a capitalization-weighted index which measures the performance of the mid-range sector of the U.S. stock market. The S&P SmallCap 600 Index is an unmanaged index of 600 companies used to measure small-cap U.S. stock market performance.

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View from the Observation Deck

Tracking the direction of worldwide semiconductor sales can provide investors with additional insight into the potential demand for tech-oriented products and the overall climate for technology stocks, in our opinion. As evidenced by continued developments in artificial intelligence (AI) and robotics, as well as the vast market for smartphones, tablets, and wearables, we continue to find creative and innovative ways to integrate semiconductors into our everyday lives.

Worldwide sales of semiconductors surged 26.2% year-over-year (y-o-y) to a record $795.6 billion in 2025, up from $630.5 billion in 2024.

Semiconductor sales continue to benefit from rising demand. Global sales totaled a record $238.9 billion in Q4’25, an increase of 13.9% quarter-over-quarter. Demand increased the most in the Asia Pacific region, where semiconductor sales increased by 45.0% y-o-y in 2025, followed by the Americas (+30.5%) and China (+17.3%), according to the Semiconductor Industry Association.

Semiconductor sales appear to follow fluctuations in the price of technology stocks.

As observed in today’s chart, changes in semiconductor sales often mirror changes in the performance of the S&P 500 Technology Index (Technology Index). Case in point, the Technology Index realized a total return of 24.04% in 2025. As noted above, annual semiconductor sales increased by 26.2% over the same period.

Takeaway: Volatility among technology stocks has been elevated so far in 2026, with the Technology Index shedding 9.1% (total return) in the first quarter before rebounding by a staggering 15.2% month-to-date through April 21. Even so, it appears the general correlation between sales and total return persists, for now. AI’s impact continues to evolve in unexpected ways. One such development is the current global memory chip shortage. Nikkei Asia reported that memory chip shortages are expected to persist through 2027, with top U.S. and South Korean suppliers increasing production at a pace that will cover just 60% of estimated demand over the period. Insufficient supply growth has led to surging prices, sending the Philadelphia Semiconductor Index soaring by 36.44% year-to-date through 4/21/26. Record sales have led to astronomical earnings growth estimates. On 4/17/26, data from Bloomberg showed semiconductor subsector earnings are estimated to grow 88.9% in 2026 alone. As always, these estimates are subject to change. Stay tuned!

This chart is for illustrative purposes only and not indicative of any actual investment. There can be no assurance that any of the projections cited will occur. The illustration excludes the effects of taxes and brokerage commissions or other expenses incurred when investing. Investors cannot invest directly in an index. The S&P 500 Information Technology Index is capitalization-weighted and comprised of S&P 500 constituents representing the technology sector. The S&P 500 Communication Services Index is capitalization-weighted and comprised of S&P 500 constituents representing the communication services sector.

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View from the Observation Deck

In a sharp turn of events, investors directing capital into U.S. mutual funds and exchange traded funds (ETFs) favored active management over passive investing during the 12-month period ended 3/31/26.

Active mutual funds and ETFs reported estimated net inflows totaling $1,142 billion, compared to net inflows of $1,075 billion for passive funds over the trailing 12 months (TTM) ended 3/31/26. Net inflows into actively managed commodities surged amidst a rapidly deteriorating geopolitical landscape. TTM net flows into the category increased from $1 billion in Q4’25 to $1,258 billion in Q1’26.

Equity mutual funds and ETFs saw significantly lower inflows than their fixed income counterparts over the trailing 12-month period ended 3/31/26.

Combined, active and passive equities experienced inflows of $145 billion over the trailing 12 months (not in table). For comparison, the active and passive Taxable and Municipal Bond categories reported net inflows of $713 billion over the same time frame. The S&P 500, S&P MidCap 400, and S&P SmallCap 600 Indices produced total returns of 17.8%, 17.3%, and 20.6%, respectively, over the period. For comparison, the Bloomberg Global-Aggregate Bond, Bloomberg U.S. Aggregate, and Bloomberg Municipal Long Bond Indices saw total returns of 4.3%, 4.4%, and 3.2%, respectively.

Foreign and emerging market equities continue to outpace their domestic peers over the trailing 12 months.

Regarding foreign equities, the MSCI Emerging Net Total Return and MSCI Daily Total Return Net World (ex U.S.) Indices posted total returns of 29.6% and 23.0%, respectively, between Q1’25 and Q1’26. 

Takeaway: Active mutual funds and ETFs saw combined inflows of $1,142 billion compared to inflows of $1,075 billion for passive funds over the past 12 months. Commodities produced the largest disparity between active and passive flows, with active attracting $1,258 billion compared to inflows of $46 billion for passive funds. That said, declining precious metal prices and recent strength in the U.S. dollar has put pressure on the category. Morningstar reported that commodities suffered record monthly net outflows of $11 billion in March 2026. Recent geopolitical strife and building economic headwinds sent investors in search of safe haven assets, despite compelling performance from their equity counterparts. Combined net inflows among active and passive equity funds totaled just $145 billion compared to combined net inflows of $713 billion for active and passive fixed income funds over the TTM period ended Q1’26. International equity performance remains strong, but domestic mid and small cap stocks have taken the lead in 2026, increasing by 2.5% and 3.6%, respectively, year-to-date through 3/31. By comparison, the MSCI Net World (ex U.S.) declined 0.9% year-to-date through 3/31. 

This chart is for illustrative purposes only and not indicative of any actual investment. The illustration excludes the effects of taxes and brokerage commissions and other expenses incurred when investing. Investors cannot invest directly in an index. The S&P 500 Index is an unmanaged index of 500 companies used to measure large-cap U.S. stock market performance. The S&P MidCap 400 Index is a capitalization-weighted index that tracks the mid-range sector of the U.S. stock market. The S&P SmallCap 600 Index is a capitalization-weighted index that tracks U.S. companies with a small market capitalization. The MSCI Emerging Markets Index is a free float-adjusted market capitalization index that is designed to measure equity market performance of emerging markets. The MSCI World (ex U.S.) Index is a free-float weighted index designed to measure the equity market performance of developed markets. The Bloomberg Municipal Long Bond Index cover the USD-denominated long-term tax exempt bond market, including local general obligation, revenue, insured, and prefunded bonds. The Bloomberg U.S. Aggregate Bond Index measures the investment grade, U.S. dollar-denominated, fixed rate taxable bond market. The Bloomberg Global Aggregate Bond Index measures global investment grade debt in local currency markets. 

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View from the Observation Deck

The S&P 500 Index (“Index”) closed at 6,967.38 on 4/14/26, representing a price-only increase of 39.83% since its most recent low of 4,982.77 just over one year ago (4/8/25). The Index’s meteoric rise has many investors questioning whether current price levels are sustainable, especially given comparatively stretched valuation metrics, the Iranian war, and diminished interest rate cut expectations in 2026. Today’s post offers an alternative view of current price levels by plotting the Index’s valuation, as measured by its trailing 12-month price to earnings (P/E) ratio, against profitability, as measured by gross profit margins. Click here to view our previous discussion on this topic.

• As revealed in today’s chart, there appears to be a positive correlation between profit margins and P/E ratios.
  
  
• The Index’s P/E ratio increased from 15.03 in Q4’10 (start of our chart) to 23.51 in Q1’26.
   
• Analysts estimate that the Index’s profit margin will reach 14.18% in Q1’26, up from 9.64% in Q4’10, according to data from Bloomberg. For comparison, the Index notched a record profit margin of 14.45% in Q4’25.
   
• While not in today’s chart, data from FactSet revealed that the three Index sectors with the highest estimated net profit margins for Q1’26 were as follows: Real Estate (34.1%), Information Technology (28.9%), and Financials (19.6%).

Takeaway: As today’s chart reveals, the Index’s P/E ratio declined from 25.44 to 23.51 in Q1’26. Gross profit margin likely declined as well, falling from a record 14.45% in Q4’25 to an estimated 14.18% in Q1’26. For comparison, the Index’s profit margin averaged 11.55% between Q4’10 and Q1’26. In our last post on this topic, we posited that surging profit margins lent support to elevated P/E ratios. We believe this relationship remains in effect today, with investors rewarding companies for increasingly efficient capital deployment. Tellingly, the Index’s P/E ratio remains above its average of 18.92 over the observed time frame. While today’s data has largely examined historical results, future earnings estimates may lend further context to current price levels. On 4/14/26, the Index’s earnings per share were estimated to increase by 17.7% year-over-year (y-o-y) to a record 323.15 in 2026.

This chart is for illustrative purposes only and not indicative of any actual investment. The illustration excludes the effects of taxes and brokerage commissions and other expenses incurred when investing. Investors cannot invest directly in an index. The S&P 500 Index is a capitalization-weighted index comprised of 500 companies used to measure large-cap U.S. stock market performance, while the 11 major S&P 500 Sector Indices are capitalization-weighted and comprised of S&P 500 constituents representing a specific sector.

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View from the Observation Deck

We update today’s table on a regular basis to provide insight into the variability of sector performance by market capitalization. The table above presents the total returns of three major U.S. equity indices and their sectors over two distinct time frames: the 2025 calendar year, and year-to-date (YTD) through 4/10/26.

• The S&P 500 Index’s (“Index”) price was 6,816.89 on 4/10/26, representing a price-only return of 36.81% from its most recent low (4,982.77 on 4/8/25). Even so, the Index remains 2.32% below its most recent high of 6,978.60 (1/27/26). For comparison, the S&P MidCap 400 and S&P SmallCap 600 Indices were 2.34% and 1.64% below their respective all-time highs as of the same date. 
  
  
• Large-cap stocks, as represented by the S&P 500 Index, increased by 17.86% (total return) in 2025, outperforming the S&P MidCap 400 and S&P SmallCap 600 indices, with total returns of 7.48% and 5.99%, respectively, over the period (see table).
  
  
• We’re seeing the opposite occur so far this year, with the S&P 500 Index declining 0.09% vs. total returns of 6.97% and 8.49% for the S&P MidCap 400 and SmallCap 600 indices, respectively, over the same time frame.
  
  
• Sector performance can vary widely by market cap and have a significant impact on overall index returns. Communication Services and Consumer Staples were two of the more extreme cases last year. This year, Information Technology and Communication Services exhibit the largest performance difference between market capitalizations.

Takeaway: As revealed in today’s table, mid cap and small cap stocks outperformed their large cap counterparts YTD through 4/10. At the sector level, small-cap stocks beat out their large and mid-sized peers in seven of the eleven sectors presented. Notably, not a single large cap sector stood atop today’s YTD data. As we see it, there are several points to be made about large cap’s underperformance so far this year. First is that we believe it represents a continuation of the broadening out which began in the fourth quarter of last year. Surging energy prices and the consequent increase in the consumer price index is another factor, which led to heavily diminished expectations regarding U.S. rate cuts in 2026. The resultant revaluation appears to have hit large cap stocks harder than their peers. Even so, earnings are expected to increase among each of these market capitalizations this year, presenting investors with potential value opportunities. As of 4/10/26, earnings per share for the S&P 500, S&P MidCap 400, and S&P SmallCap were estimated to increase by 17.5%, 20.3%, and 16.6%, respectively, in 2026, up from 14.9%, 19.1%, and 15.5%, respectively at the start of the year.

This table is for illustrative purposes only and not indicative of any actual investment. The illustration excludes the effects of taxes and brokerage commissions and other expenses incurred when investing. Investors cannot invest directly in an index. The S&P 500 Index is an unmanaged index of 500 companies used to measure large-cap U.S. stock market performance. The S&P MidCap 400 Index is a capitalization-weighted index that tracks the mid-range sector of the U.S. stock market. The S&P SmallCap 600 Index is a capitalization-weighted index that tracks U.S. stocks with a small market capitalization. The 11 major sector indices are capitalization-weighted and comprised of S&P 500, S&P MidCap 400 and S&P SmallCap 600 constituents representing a specific sector.

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View from the Observation Deck

Today’s post compares the performance of consumer stocks to the broader market, as measured by the S&P 500 Index, over an extended period. Given that consumer spending has historically accounted for roughly two-thirds of U.S. gross domestic product, we think the performance of consumer stocks may offer insight into potential trends in the broader economy.

Staples have dominated their discretionary peers year-to-date (YTD). 

The S&P Consumer Staples Index had a strong start in 2026, increasing by 7.71% (total return) in January amidst ballooning AI capital expenditures and faltering consumer confidence. Consumer discretionary stocks, by contrast, increased by just 1.71% during the month. Since then, the performance differential between these indices has grown substantially, with staples increasing by 6.65% (total return) YTD through 4/7, compared to a decline of 9.82% for discretionary stocks over the period.

So, just how healthy is the U.S. consumer?

Real consumer discretionary spending totaled $14.2 trillion over the trailing 12-months ended January 2026, an increase of 2.9% from $13.8 trillion over the same period last year. We maintain that burgeoning U.S. household net worth is one catalyst behind the increase. The Federal Reserve reported that U.S. household net worth totaled a record $184.1 trillion in Q4’25, an increase of $2.2 trillion from the previous quarter, according to Bloomberg. Household debt levels also grew, increasing by $191 billion quarter-over-quarter to $18.80 trillion in Q4’25. Even so, consumers do not appear to be struggling with the increased debt burden. The share of consumers with accounts in collections fell to 4.6% in Q4’25, a near record-low for the data series. 

Takeaway: As shown in today’s table, total returns for the S&P 500 Consumer Discretionary Index generally outpace those of the S&P 500 Consumer Staples Index, over time. This year’s results have defied this convention, with staples extending their lead over discretionary companies through 4/7. Even so, we wonder if these results reflect systemic issues or near-term, exogenous factors like the Iranian war. The data appears to support the latter, in our view. While true that U.S. households carry more debt than ever before, their capacity to service that debt has also increased, resulting in the lowest share of accounts in collections on record. Furthermore, capitalism continues to prove itself as the world’s most potent wealth generation engine. According to the American Enterprise Institute, 31.1% of U.S. households earned enough to be considered “upper-middle class” in 2024, up from just 10.4% of households in 1979. Amazingly, 2024 was the first time in U.S. history where more households were above the “core middle class” (34.8%) than below it (34.5%). We truly live in unprecedented times! 

This table is for illustrative purposes only and not indicative of any actual investment. The illustration excludes the effects of taxes and brokerage commissions and other expenses incurred when investing. Investors cannot invest directly in an index. The S&P 500 Index is an unmanaged index of 500 stocks used to measure large-cap U.S. stock market performance. The S&P 500 Consumer Discretionary Index is a capitalization-weighted index comprised of companies spanning 19 subsectors in the consumer discretionary sector. The S&P 500 Consumer Staples Index is a capitalization-weighted index comprised of companies spanning 12 subsectors in the consumer staples sector.  

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