Like almost all major asset classes, US equities have been rather volatile of late, though not quite as much as oil or gold. Between geopolitical fears impacting the oil supply and worrying inflation dynamics at the tail end of Q1 2026, many investors have been concerned about the potential for a protracted bear market. And yet, after losing nearly 10% during March when war gripped the Middle East, and the crucial mercantile artery of the Strait of Hormuz was closed, the S&P 500 and Nasdaq 100 have now regained all lost ground and even gone on to set new all-time highs of $7,143.26 and $26,937.28, respectively.
Despite talks between the US and Iran in Pakistan, the regional threat to global trade and fuel supplies is far from over. Meanwhile, the macroeconomic picture both in the US and beyond suggests that markets could be susceptible to any increase in inflation and potential interest rate movements. Much will only become clear in the next weeks, when it is revealed whether the worst-case scenario has already been priced in or not. In this piece, we'll examine all of these key fundamental factors and more as we seek to provide an informed overview of where the stock market could be headed in the medium term.
A mixed bag
As has been the case for years now, US equities continue to trade near record highs. The S&P 500 is currently hovering around the 7,000 mark, leaving the index up significantly on a multi-year basis but increasingly sensitive to valuation and discount-rate dynamics. In terms of forward earnings, the index is trading at a multiple of roughly 20–21, with trailing P/Es closer to the high-20s. This makes valuations noticeably high compared to long-term historical averages, which are much closer to the 15–20 range. At the same time, forward earnings per share for the index sit broadly in the $340–$345 range, implying expected earnings growth of roughly 14–20%. This growth is driven disproportionately by large-cap technology stocks and AI-related capital spending cycles, which creates a distorted picture of market-wide performance and could lead to another bubble in these sectors.
However, price action has now become increasingly driven by macro constraints as opposed to pure earnings potential and momentum. Despite surprisingly resilient corporate performance in this ongoing environment of supply-chain uncertainty, investors' bullishness is still being held in check by the restrictive interest rate environment. The Fed most recently held its funds rate at 3.75%, which is much higher than Donald Trump and many investors would like it to be. As a result, US 10-year Treasury yields remain between 4.3–4.6%, which reduces the equity risk premium and makes bonds more attractive relative to stocks. It's expected that Trump's pick for Fed chair, Kevin Warsh, will enact more dovish policy at his earliest opportunity, but the FedWatch tool doesn't see another cut coming until at least Q4 2026.
Waiting for a push
Beyond valuation and rates, other macro forces are now influencing sectoral rotation, if not the direction of the index as a whole. The recent strengthening of the US dollar has created headwinds for multinationals' earnings, especially in those sectors with high overseas revenue exposure. Meanwhile, this same force has helped to moderate inflation further, which now sits much closer to the 2–3% range in headline terms after a slight scare in March following the start of the Iran war. This dynamic has helped to support corporate margins, but at the same time, it has reduced the urgency for aggressive monetary easing. Nonetheless, equities continue to be underpinned by sustained structural demand, with sustained net inflows into index funds and ETFs helping to keep downward moves minimal even during periods of volatility. Indeed, $21.25 billion flowed into US equity funds in the latest reported week (13–17 April), which shows a significant uptick from March, where the entire monthly net inflows were estimated at $60–70 billion.
As we mentioned earlier, it's important to note that the disproportionate weighting of high-tech and AI stocks in any upward moves is surely contributing to amplified gains during periods of growth, and this does leave the indices exposed to larger drops if the tide turns. Looking ahead, the outlook for US equities will depend on whether the present double-digit earnings growth, which currently sits around the mid-teens, can continue to offset the above-average discount rates we're experiencing right now. If not, we'll need to see a shift towards a more dovish central bank monetary policy to feed additional growth. In the current environment and barring any escalation in geopolitical tensions or new bubble formation, the most likely outcome remains largely range-bound growth for the S&P 500 and Nasdaq 100.