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Sweet Spot For The Labor Market
April’s employment report had lots of good news for the labor market. Ed & Elias discuss some of the news that seemed to be bad but really wasn’t on closer inspection. In their view, the April jobs report amounts to a vote of confidence in the narrative that the labor market is stabilizing and may even be improving without boosting inflation. Meanwhile, retiring Baby Boomers are weighing on wages, payroll employment, disposable income, and the personal saving rate. But they are boosting consumer spending by spending their substantial net worth. … Incoming Fed chair, Kevin Warsh is likely to find that the majority of his FOMC colleagues will want to eliminate the easing bias in the committee's next statement. … Dr. Ed reviews Remarkably Bright Creatures (+ +).
ECONOMIC WEEK AHEAD: May 11-15
The S&P 500 closed Friday at 7,398.93, another record high. The index is 9.2% above its 200-day moving average. Earnings have done the heavy lifting so far this year. The Q1-2026 earnings reporting season is winding down, with companies representing 1% of the S&P 500’s market cap reporting this week and another 12% the following week. Industry analysts’ consensus Q1-2026 earnings forecasts for the S&P 500 companies in aggregate represent growth of 18.0% y/y, while their full-year estimates imply 2026 growth of 24.0%, well above the 11.7% and 13.6% posted in 2024 and 2025 (chart). The growth expected in 2027 is 14.9%. The week ahead is dominated by inflation reports, with both April headline CPI (Tue) and PPI (Wed) expected to push above 3.5% y/y, as the average national retail gasoline price climbed to $4.58 per gallon, and nearby gasoline futures to $3.53, last week (chart). The Trump-Xi meeting (Thu and Fri) is the most under-discussed event on the calendar and the most consequential, particularly with the Iran conflict still unresolved and Beijing's posture on the war and tariffs all in play. Finally, we will see the appointment of Kevin Warsh as Fed chair when Jerome Powell's term as chair ends (Fri). With that said, here are the key releases most likely to shape investors' thinking this week: (1) Inflation. The Cleveland Fed Inflation Nowcasting model has Tuesday’s headline CPI rising 0.45% m/m, enough to push the annual rate to 3.56% y/y, up from 3.30% in March. Core CPI looks more benign, rising 0.21% m/m, with the annual rate edging down to 2.56% y/y from 2.60% (chart). More consequentially, May’s preliminary Nowcast points to headline inflation rising to 3.89% y/y, a trajectory that would constrain Warsh from easing monetary policy from day one. The ISM Prices-Paid Index, a six-month forward inflation signal, rose to 155.3 in April, the highest reading since December 2022, suggesting upside risk to April's Final Demand PPI inflation rate (chart). (2) Retail Sales. April retail sales (Thu) will arrive amid a chorus of predictions of an imminent consumer retrenchment, which weekly data refute. Redbook same-store sales rose 7.8% y/y for the week of May 1, the highest reading since late 2022 (chart). Spending is advancing, not retreating. (3) Unemployment. Initial jobless claims (Thu) rose to 200,000 for the week of May 1, with the four-week moving average at 203,200 (chart). Continuing claims came in at 1,766,000, with the four-week moving average at 1,794,000. Friday’s April payroll employment report beat expectations, confirming our assessment that the labor market is improving enough to keep the Fed on hold. The six-month average gain in payrolls climbed to 55,000 in April, the highest since May of last year. (4) Industrial Production. April industrial production (Fri) should show a solid increase given the recent strength of the national M-PMI (chart). The bright spot should remain technology production, with communications equipment, computer and peripheral equipment, and semiconductor output all at record highs during March (chart).
MARKET CALL: Raising Our 2026 S&P 500 Target Range Due To Earnings-Led Meltup
We are raising our year-end S&P 500 target from 7700 to 8250. We've been bullish on earnings but not as bullish as the recent consensus of industry analysts. We've never seen consensus earnings expectations rise so quickly for the current and coming years as they have in recent months. The result has been an earnings-led meltup in the stock market. Our 2026 and 2027 EPS estimates have been $310 and $350, respectively, since late last year. Those were bullish estimates back then. Consensus EPS estimates have rocketed above our targets in recent weeks. They are currently $336.49 (up 22.0% from last year!) and $386.70 (up 14.9% from the 2026 consensus estimate) (chart). We are raising our EPS estimates to $330 this year and $375 next year. We are sticking with our forward P/E range of 18.0-22.0, resulting in a year-end range for the S&P 500 of 6750-8250, assuming (as we do) that forward earnings per share will be will be $375 at the end of this year. The latter is already at $354. We are also raising our S&P 500 RPS by $100 for both 2026 and 2027 to $2,200 and $2,300 (chart). Those numbers are nearly the same as the current consensus. Our outlooks for EPS and RPS imply that the S&P 500 forward profit margin will rise to 15.0 this year and 16.3 next year (chart). These forecasts are a bit higher than the current consensus. Our key assumption is that the economy will remain resilient, and so will earnings. That's been our mantra since we first started writing about the Roaring 2020s during the summer of 2020. We could certainly have another recession scare along the way, as we did in early 2025 and 2026 (chart). We are now also raising our subjective probability of a continuation of the Roaring 2020s to 80% from 60% simply by merging it with our meltup scenario (previously at 20%). We are doing so because we believe that any meltdown will be a buying opportunity and won't trigger a recession or bear market similar to the 1999-2000 Tech Bubble and Tech Wreck. We are sticking with 20% odds of a recession that causes a bear market. We reiterate that the upward revisions to consensus 2026 and 2027 earnings estimates have been impressive, as companies have been reporting stronger-than-expected earnings results (chart). Consequently, S&P 500 forward earnings has been rising at an accelerating pace. By definition, it will converge with the consensus 2027 estimate at the end of the year. The latter is already at $386.70. Our $375 year-end estimate for forward earnings is conservative, in case the analysts are too exuberant. The analysts' exuberance is on full display in their consensus estimates of S&P 500 EPS growth for each of this year's four quarters (chart). Again, we've never seen anything like this. The percentages of S&P 500 companies with positive y/y growth in forward RPS and EPS continue to increase, reaching 89.6% and 84.6%, respectively, during the week of May 7 (chart). The recent rapid widening of earnings breadth is bullish. The widening of earnings breadth is also evident in the record highs in forward EPS for the S&P 400 MidCaps and the S&P 600 SmallCaps (chart). At the start of this year, we predicted a stock market pullback partly because the Bull/Bear Ratios (BBR) we monitor showed too many bulls (chart). We called the March 30 bottom one day later, partly because there were too many bears. Now the BBRs have rebounded, but they remain low enough that we aren't anticipating another pullback for now. Then again, some sectors of the S&P 500/400/600 do seem overbought when comparing Friday's prices to their 200-day moving averages (chart). However, it has been an earnings-led melt-up since March 31, driven by Q1's blockbuster earnings reporting season. We are sticking with our Go Global recommendation, which has been our advice since December 7, 2025. The war in the Middle East upended the strategy during March. However, we think there are relatively cheaper opportunities overseas, particularly in emerging market economies, which have gained market-cap share in the All Country World MSCI index since early 2025 (chart). On a ytd basis and in US dollars, emerging markets have led the global performance derby (chart). We've suggested Go Global using EMXC (EM ex-China) rather than EEM (EM Index). So far, so good. What could possibly go wrong? The war in the Middle East isn't over, though that hasn't kept stock markets from soaring around the world in April and so far in May. That's because oil prices have remained around $100 per barrel (chart). The shock waves from the war could still hit the global economy. Another round of fighting could be even more troublesome, as it could result in stagflation. A more persistent inflation problem would force central banks to raise interest rates. The Bond Vigilantes would likely push bond yields higher in this scenario. Nevertheless, for now, we are sticking with our 10,000 target for the S&P 500 by the end of 2029. It might arrive ahead of schedule. Happy Mother's Day!
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