Growth, Geopolitics, and the Fed's Crossroads
April saw a strong reversal in market sentiment and performance, as equities recovered March’s losses and pushed to new all-time highs despite a geopolitical backdrop that remained highly uncertain. The S&P 500 surged 10.49% for the month, its strongest monthly gain since November 2020, and closed April at record levels above 7,100. The rally was supported by an early-month U.S.-Iran ceasefire announcement that briefly eased energy-market fears, a strong first-quarter earnings season that renewed enthusiasm around AI investment among large-cap tech leaders, and labor-market data that continued to show resilience. By month-end, however, the ceasefire remained fragile, oil prices were still elevated, and the Fed stayed on hold as it weighed growth, sticky inflation, and heightened uncertainty from the Middle East.
“Markets, initially buoyed by the avoidance of tail-risk outcomes, are now adjusting to a more persistent backdrop of elevated geopolitical uncertainty, one characterized less by acute shocks and more by a sustained energy risk premium.”
The markets experienced a sharp shift in geopolitical expectations in April. Early in the month, reports of a U.S.–Iran ceasefire helped catalyze a relief rally across risk assets, as markets quickly repriced the probability of a near-term escalation scenario. Equities moved higher while oil prices pulled back, reflecting a temporary easing in supply disruption fears.
That relief, however, proved short-lived. Although the ceasefire held through month-end and was extended in late April, conditions in the Strait of Hormuz, which facilitates roughly 20% of global oil flows, remained strained. Elevated security risks and intermittent disruptions to shipping activity kept energy markets on edge, with crude prices rebounding materially from pre-conflict levels. At the same time, Pakistan-mediated diplomatic efforts faced persistent challenges, particularly around Iran’s nuclear program, regional influence, and the scope of sanctions relief.
As May began, the fragility of the truce remained evident. While worst-case escalation risks had appeared to diminish, maritime security concerns continued to weigh on global trade flows, prompting an increased U.S. and allied naval presence to safeguard commercial transit. Markets, initially buoyed by the avoidance of tail-risk outcomes, are now adjusting to a more persistent backdrop of elevated geopolitical uncertainty, one characterized less by acute shocks and more by a sustained energy risk premium.
The other major driver of April’s rally emerged in the final week of the month, as the largest technology companies reported first-quarter results that broadly exceeded expectations. While results reinforced the scale and durability of the AI investment cycle, they also prompted a shift in how investors evaluate that spending—moving from enthusiasm around capability expansion toward a more disciplined focus on monetization and return on capital.
Alphabet stood out favorably, with Google Cloud’s 63% growth providing the clearest evidence that capex is converting into revenue. Microsoft posted similarly strong AI and Azure metrics but sold off on 2026 capex guidance ($190B) that came in roughly $35B above consensus. Meta declined after raising its capex range to $125–$145B, with investors questioning near-term payback despite a 33% revenue gain. Amazon landed in between, with AWS (Amazon Web Services) revenues increasing by 28% year-over-year, but a roughly $200B capex commitment kept the cost-intensity question front and center.
Across the broader market, Q1 earnings were strong, with a large majority of S&P 500 companies beating both earnings and revenue estimates, supporting the April rally even as the market became less willing to reward AI spending on faith alone.
The Federal Reserve’s April 29 meeting – the final meeting under the leadership of Chairman Jerome Powell – highlighted deepening policy tensions amid conflicting data. The FOMC held the federal funds rate at 3.5%-3.75% for the third straight meeting, as expected. Inflation remained sticky: March headline PCE hit 3.5% year-over-year (core 3.2%), with monthly gains driven by energy costs from the Iran conflict, complicating any dovish pivot. Growth softened, with Q1 GDP at 2.0% (below 2.2% expectations), while consumer spending leaned on falling savings rates (now at 3.6%). Labor remained resilient, with jobless claims near multi-decade lows, underscoring the current “low-hire, low-fire” dynamic.
Powell noted Middle East risks had elevated uncertainty and inflation “reflecting higher global energy prices,“1 offering no clear path to cuts. Markets responded by pricing zero cuts through the remainder of 2026. The transition to Kevin Warsh as Chair – which goes into effect mid-May – adds complexity: Powell stays on the Board of Governors, and Warsh’s balance-sheet hawkishness will need to find consensus on a Committee where dissent is already running in both directions.
April’s rally reflected genuine market resilience, but the durability of that resilience now depends on whether energy prices normalize, AI capex continues converting into revenue, and the Fed transition produces policy continuity rather than friction. With sticky inflation and a divided Committee, the path forward is narrower than the April tape suggests.
Signal Update
The economic backdrop — CIGNX
0%20%40%60%80%100%1980198819962004201220202024Our CIGNX Economic Indicator has a reading of 41.6, a decrease from last month’s revised reading of 48.3. The reading suggests unfavorable economic activity and is below our baseline threshold of 50.0. The indicator remains above our secondary baseline reading of 40.0 for a second consecutive month, which indicates the economy appears to be continuing a trend towards recovery. Our overall economic outlook is unfavorable.
| 2026 | JAN | FEB | MAR | APR | MAY | JUN | JUL | AUG | SEP | OCT | NOV | DEC |
|---|---|---|---|---|---|---|---|---|---|---|---|---|
| CIGNX (Revised) | 37.7 | 39.2 | 48.3 | 41.6 | — | — | — | — | — | — | — | — |
| CIGNX Trendline | 37.1 | 37.4 | 37.6 | 37.9 | — | — | — | — | — | — | — | — |
The market trend — Alpha & Omega
02,0004,0006,0008,00020002004200820122016202020242026Our short-term signal (Alpha) and our intermediate-term signal (Omega) both flipped Positive in April, indicating the near-term and intermediate-term outlooks both appear to be favorable. Accordingly, we have adjusted each of our Dynamic and Tactical portfolios into a “Bullish” positioning with increased exposure to equities. Our overall market sentiment is Bullish.
| 2026 | JAN | FEB | MAR | APR | MAY | JUN | JUL | AUG | SEP | OCT | NOV | DEC |
|---|---|---|---|---|---|---|---|---|---|---|---|---|
| ALPHA | Sell | Sell | Sell | Buy | — | — | — | — | — | — | — | — |
| OMEGA | Buy | Buy | Sell | Buy | — | — | — | — | — | — | — | — |
Two positive signals give a Bullish outlook and Risk-On positioning; mixed signals give Caution; two negative signals give Bearish and . The economic indicator describes the backdrop and does not by itself change positioning.
Market segment review
| Segment | Index | Month | Year to date |
|---|---|---|---|
| U.S. Stocks | S&P 500 Index | 10.49% | 5.70% |
| U.S. Stocks | S&P 400 Index | 7.86% | 10.56% |
| U.S. Stocks | S&P 600 Index | 10.41% | 14.29% |
| U.S. Bonds | U.S. Bond Index | 0.11% | 0.07% |
| Alternative Assets | S&P GSCI Index | 6.42% | 49.01% |
| U.S. Real Estate | S&P 1500 Real Estate | 8.66% | 10.92% |
U.S. Large Cap Stocks
April saw a strong reversal in market sentiment and performance, as equities recovered March’s losses and pushed to new all-time highs despite a geopolitical backdrop that remained highly uncertain. The S&P 500 surged 10.49% for the month, its strongest monthly gain since November 2020, and closed April at record levels above 7,100. The rally was supported by an early-month U.S.-Iran ceasefire announcement that briefly eased energy-market fears, a strong first-quarter earnings season that renewed enthusiasm around AI investment among large-cap tech leaders, and labor-market data that continued to show resilience. By month-end, however, the ceasefire remained fragile, oil prices were still elevated, and the Fed stayed on hold as it weighed growth, sticky inflation, and heightened uncertainty from the Middle East.
U.S. Mid Cap Stocks
U.S. mid-cap equities rebounded in April, with the S&P MidCap 400 advancing 7.86% for the month and bringing its year-to-date return to 10.56%. Following March’s macro-driven pullback, the recovery was supported by an improvement in risk sentiment and a stabilization in economic expectations, which helped lift more domestically oriented and economically sensitive segments of the market. Mid-caps benefited from renewed confidence in earnings resilience and an overall flip to risk on environment despite ongoing uncertainty around rates and the broader macro developments.
U.S. Small Cap Stocks
U.S. small-cap equities rebounded strongly in April, with the S&P SmallCap 600 advancing 10.41% for the month and bringing its year-to-date return to 14.29%. Following March’s more challenging backdrop, the recovery was supported by improved risk sentiment and a stabilization in macro conditions. Small-cap stocks outperformed their mid-cap peers during the rebound, as easing macro concerns and renewed investor confidence drove a stronger recovery in more economically sensitive, higher- small cap companies.
U.S. Bonds
Core was broadly flat in April, with the Bloomberg U.S. Aggregate Bond Index advancing 0.11% for the month and bringing its year-to-date return to 0.07%. After March’s decline, performance stabilized as interest rate expectations became more balanced and volatility in Treasury yields eased. While inflation and policy uncertainty remained in focus, the month was characterized more by consolidation than directional repricing, allowing core bonds to regain some stability as a diversifier within portfolios.
Alternative Assets
posted more moderate gains in April, with the S&P GSCI Index rising 6.42% for the month and bringing its year-to-date return to 49.01%. Following March’s sharp, energy-driven surge, performance was more balanced as commodity markets stabilized alongside easing geopolitical tail risks. While energy remained a key driver, April highlighted a more normalizing backdrop for alternatives, with returns still supported by elevated macro uncertainty and lingering supply-side risks.
U.S. Real Estate
U.S. real estate equities rebounded sharply in April, with the S&P 1500 Real Estate Index advancing 8.66% for the month and bringing its year-to-date return to 10.92%. Following March’s rate-driven selloff, performance improved as interest rate pressures eased and broader risk sentiment stabilized. The recovery reflected a partial unwind of prior sensitivity to rising yields, with real estate benefiting from improved financial conditions and a more constructive tone across rate-sensitive sectors, though the asset class remains closely tied to the path of rates and macro uncertainty.
Disclosures
The information presented herein is based on data derived from various underlying data sources. The figures presented, while deemed accurate, are not guaranteed. A Smarter Way to Invest makes no representation or warranties as to the accuracy of the information presented, the underlying source data, or the source data providers. The content of this letter is provided for informational purposes only and is not advice or a recommendation for the purchase or sale of any security. Carefully consider your investment objectives, risk factors, and charges and expenses before investing. There are risks involved with investing, including possible loss of principal. This information reflects the views of the Smarter Way To Invest Portfolio Management Team on the date made and may change without notice. We will not be responsible for any investment decisions, damages or other losses resulting from or related to the use of the information we provide. When applicable, we have provided references where information was acquired for use in this newsletter.
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