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A 14% Quarter Against a 4.1% Price Tag
On the morning of March 31, the S&P 500 sat at roughly 6,500. Oil was above $100 a barrel. The Strait of Hormuz was still closed. Goldman Sachs had just pushed its first rate-cut forecast to June 2027. The mood in the advisory world was not optimism. It was triage.
Ninety-one calendar days later, the same index closed at 7,449. That is a 14.4% gain in a single quarter. The Dow crossed 52,000 for the first time in its 130-year history, finishing June at a record 52,319. The Nasdaq posted its best quarter since mid-2020, up nearly 20%. The Russell 2000 turned in its strongest opening half since 1991. From the March lows, the rally measured 16.6%, according to Hightower Advisors. Every fear the first quarter produced, the second quarter repriced.
What paid for it. Earnings. S&P 500 first-quarter profits grew 27.9% year over year on revenue growth of 11.7%, per FactSet. That is the strongest earnings quarter since Q4 2021 and the sixth consecutive quarter of double-digit growth. Eighty-four percent of companies beat estimates, the highest share since Q2 2021. Information Technology margins expanded from 25.2% to 30.7%. Corporate America did not just recover from Q1. It outran the inflation it was supposed to be fighting.
What it costs. The forward price-to-earnings ratio on the S&P 500 is 21, per FactSet. That is above the five-year average of 19.9 and the ten-year average of 18.9. The CAPE ratio, at roughly 42.5 per Morningstar, has only been higher during two windows in the last four decades: the dot-com peak and the pandemic. You are paying a multiple that historically delivers low-single-digit real returns over the following decade.
Meanwhile, the Fed’s own inflation gauge just printed 4.1%. Core PCE, which strips energy, landed at 3.4%. The Fed’s target is 2%. It has missed that target for five consecutive years. Kevin Warsh, who has been Fed Chair for exactly forty days, told markets at his first press conference that price stability would be delivered “unambiguously and unanimously.” Nine dot-plot participants now see at least one hike in 2026. Deutsche Bank expects two, bringing the funds rate to 4.1% by December.
Where the tension breaks. Today, Warsh sits on the closing panel of the ECB Forum in Sintra, Portugal. It is his first international appearance as Chair. He shares the stage with Christine Lagarde, Andrew Bailey, and Tiff Macklem at 1:00 PM GMT. Warsh has already signaled he will not offer forward guidance. Markets will parse tone, not text. If he leans on inflation, the hike camp gets louder. If he spends time on growth risks, equities get a second wind.
Then comes Thursday. The June employment report lands at 8:30 a.m. ET, one day early because markets close Friday for Independence Day. May delivered 172,000 jobs, more than double the 85,000 consensus. If June prints anywhere near that range, it gives the Fed every reason to hold rates where they are or move higher. If it misses badly, markets have to ask whether the earnings growth that justified the last 14% is durable.
Here is the arithmetic the market has not yet reconciled. The consensus calls for 23% S&P 500 earnings growth in full-year 2026, per FactSet. Goldman Sachs maintains a year-end target of 7,600. That implies roughly 2% upside from here. A six-month Treasury bill yields above 4%. You are being asked to take equity risk for a return that a risk-free instrument already matches.
The last time the S&P 500 rallied 14% in a single quarter while the Fed’s preferred inflation gauge was running above 4%, rates were near zero and the recovery had nowhere to go but up. This time the funds rate is 3.5% and the dot plot tilts toward 4%. The rally is real. The earnings are real. But the spread between what stocks cost and what cash pays has not been this narrow in twenty years. Thursday’s number from the Bureau of Labor Statistics will tell you whether the market remembers that.
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