2026 Q2- 2026 Q3
June 1st 2026
Our quarterly S&P 500 forecast for 2026 Q2 (average price returns) is a 6.3 percent growth over the first quarter of 2026. We forecast 2.8% growth for Q3 over the average of Q2. Our monthly forecast for June is only slightly lower than May’s average.
Volatility concerning frequent changes in tariff rates and timings, and geopolitical conflicts, cannot be captured in a forecast model. Thus, any uncertainty concerning these issues makes the 95 % confidence interval around the point forecast rather wide.
A strong start to Q2 gains further momentum
After the February attacks on Iran, the escalating war in the Middle East has been the main cause of the surging oil prices. In March, the rising energy prices pushed the S&P 500 index near the correction territory. The index was down 4.81 % in 2026 Q1 over the end of 2025 Q4.
The S&P 500 had a big turnaround in the first two months of Q2. The ceasefire between the US and Iran raised hopes for an end to the war in the Middle East. Although the issue of the Strait of Hormuz remains unresolved, investors seem more optimistic that the war will soon be over. The index was up 5.1% at the end of May over the end of April.
A broader-based market rally
Another reason for the stock market rally is the surprisingly robust earnings of the S&P 500 countries in 2026 Q1. The forthcoming $750 billion capital spending on AI infrastructure has broad market implications. From Semiconductors to Electricity utilities, the AI boom is lifting demand for many companies in the S&P 500 index. The S&P 500 company-earnings expectations at the end of March were half of what actually came out.
The US economy and labor market remain resilient despite the higher inflation risk in the coming months. The big dip in GDP growth in 2025 Q4 due to the government shutdown was reversed in 2026 Q1, calming any recession fears.
We cannot speculate on the course of the war. Our predictions are based on econometric models that rely on historical fundamental data. The impact of the AI revolution also increases forecast uncertainty. A forecast model can only capture economic events (oil price, inflation, employment, interest rates) that featured in the past.
Oil price, inflation, and GDP growth: a historical perspective
The US economy is relatively well-positioned in the face of rising energy prices in the global context. That said, if the war in the Middle East drags on for months, the prospect of a quick rebound in economic activity would vanish.
The graph below shows the US economic growth and oil price changes in the last 55 years. Apart from the OPEC oil shock of the 70ies, the impact of oil price spikes on the US economic growth from the Gulf War, Iraq War, and the Russia-Ukraine war was not very severe or long-lasting.
When Iraq invaded Kuwait in 1990, the oil price doubled in a few months. Consequently, US inflation hit 6% in 1990 (see the graph below). After 3 quarters of negative GDP growth, the US economy bounced back with 3.2% growth in 1991 Q2. US inflation fell back to 3% range. Thus, the impact of the 42-day Gulf War was a sudden shock on the economy that didn’t last, despite causing a US recession.
The Iraq War in 2003 also pushed the oil price up. However, the impact on the oil price was not as sharp and sudden as in the Gulf War. The oil price increased from $25/barrel to $140/barrel between 2003 and 2005, during which the US inflation increased from 1.6 % to 3.4%. The Iraq War did not cause a recession in the US. The economy continued a healthy expansion although the debt burden increased.
It would be difficult to disentangle the impact of the Russia-Ukraine War on the US economy, as the timing (2022) corresponded to the post-COVID era, which had its own negative effects on the US economy.
It remains to be seen if the latest war resembles the Gulf War and pushes the economy to a hard landing despite its short nature. What seems unlikely is that unless the oil price hovers around the $100/barrel for a long time, this is an unlikely scenario.
U.S. Q1 GDP growth is revised down
The 2026 Q1 advance estimate was 2%, a healthy rebound from the low growth rate in Q4 (0.5%). However, the second estimate for Q1 was revised down to 1.6%. This was caused by downward revisions to consumer spending and investment (Source: Bureau of Economic Analysis (BEA)). The consensus was for GDP to hold at the earlier 2% estimate.
Although the recovery in US economic growth still looks respectable, deteriorating inflation prospects caused by the war threaten household budgets. Moreover, much of consumer spending appeared to come from a reduction in the personal savings rate. The savings rate fell to its lowest level since June 2022. The US economy may enter a stagflationary phase, as there is little room for the Fed to cut interest rates.
Consumer spending is related to job creation. Nonfarm payrolls were 115,000 jobs in April 2026, and above market forecasts of 62K. Job gains occurred in health care, transportation, warehousing, and retail trade.
The unemployment rate remained unchanged at 4.3% in April, in line with expectations. The latest job market signals seem to vouch for labor market resilience.
Both retail sales and home sales recovered in April
Starting with the economic data, the retail sales rose in April. Home sales also continued to recover.
The advance estimate of U.S. retail and food services sales was up 0.5% in April and up 4.9 percent from April 2025.
The National Association of Realtors’ index of pending home sales rose 1.4% in April (m-o-m). The Pending Home Sales Index typically lags existing home sales by one to two months. The war in the Middle East could lead to higher mortgage rates, as rising oil prices are likely to drive up inflation and interest rates. That said, contract signings continued to recover in April despite higher mortgage rates, indicating a recovery in housing demand.
The labor market remains resilient
In the week ending May 23, the advance figure for seasonally adjusted initial claims was 215,000, an increase of 5,000 from the previous week’s revised level. The 4-week moving average was 209,000, an increase of 6,250 from the previous week’s revised average. The advance seasonally adjusted insured unemployment rate was 1.2 percent for the week ending May 16, unchanged from the previous week’s unrevised rate (Source: US Department of Labor).
The initial jobless claims remain well below the 250,000 mark. New unemployment filings were lower at the end of 2025 than they were at the end of 2024. That said, it was suggested that most US companies are not creating enough jobs. The expression ‘low-hire, low-fire’ describes a market where companies are reluctant to lay off workers despite labor-saving AI technology. As the latest job creation numbers are on the healthy side, it is too soon to judge if this trend is reversed.
So far, the backdrop of a resilient labor market is maintained. The Fed is to remain restrictive, as the unemployment rate remains below the critical value of 4.5% to warrant a rate cut. Even if this benchmark is reached, the rising oil prices make a rate cut very unlikely any time soon.
PMI improves, and consumer confidence is mainly stable
The Chicago Purchasing Managers’ Index (PMI) climbed to 62.7 in May from 49.20 in April. The index averaged 54.25 between 1967 and 2026. The contraction in business activity has been a theme over the last two years. The latest data turnaround is especially significant in the face of rising energy and material prices caused by the war in Iran.
The Conference Board’s consumer confidence index edged down by 0.7 points to 93.1 (1985=100) in May, from 93.8 in April’s upwardly revised reading. The Present Situation Index—based on consumers’ assessment of current business and labor market conditions—retreated by 3.2 points to 121.2. The Expectations Index—based on consumers’ short-term outlook for income, business, and labor market conditions—rose by 1 point to 74.4. The survey period for this month’s preliminary results was May 1-19, and presumably was positively affected by the recovery in the stock markets.
Although consumers’ confidence in May was not significantly different from that in April, any positive sentiment may be dampened if the impact of higher oil prices becomes more pronounced as rising consumer prices in the coming months.
Inflation sharply increases
The annual inflation rate in the US climbed to 3.8% in April from 3.3% in March 2026, slightly above the market expectation of 3.7%. This was the highest rate since May 2023. The war in the Middle East was the main cause of the sharp increase in inflation, followed by increases in materials prices caused by the disruption in the Strait of Hormuz, including fertilizers, aluminum, and helium.
The personal consumption expenditures (PCE) index, a key barometer of inflation and consumer spending, rose at a 3.8% annual pace in April, up from 3.5% in March, in line with the consensus estimate. Core PCE, which excludes the more volatile food and energy categories, ticked up to 3.3% in April from 3.2% in March, also in line with market forecasts.
Being over the target inflation rate (2%) was not a serious concern before the Iran war started. Currently, the short to medium-term inflation picture causes some concern. At the end of April, both the WTI crude and Brent crude were trading above the $100 mark. As the negotiations on the peace plan continue, oil prices dipped sharply below $100 at the end of May. The higher energy prices are not the only factor affecting the PPI index. The index rose 6% for the 12 months ended in April. This was the highest annual increase in more than three years. PPI is a potential indicator of the prices consumers may see in the coming months as producers pass the impact of tariffs on to consumer prices. Once the increases in oil prices fully show up in the inflation numbers, the inflation picture will look much worse.
No rate cut any time soon
In 2025, the Fed delivered three 25 bp rate cuts. The latest cut in December puts its key lending rate in a range of 3.5 % to 3.75%. The Fed held the rates unchanged for a third straight meeting at the end of April. The next Fed meeting is in June. We believe that a rate cut is unlikely, at least before December or even next year. In fact, given the resilience of the labor market and the economy, the appropriate course of action for the Fed would be to increase the interest rates.
The 6% PPI growth is a very worrying signal for future consumer prices. Kevin Warsh replaced Jerome Powell, whose term as Chair had ended on May 15, 2026. It remains to be seen if Warsh will be hawkish, given the challenges of rising consumer prices.
Surprisingly robust Q1 corporate earnings
The US corporate earnings with inventory valuation and capital consumption adjustments (domestic industries) were up 2.7 percent in 2026 Q1 from the previous quarter. The Earnings were up a whopping 11.3 percent over 2025 Q1. The AI boom is the main driver of this jump, followed by companies in Consumer Discretionary sectors such as Autos, which benefited from tariff refunds and improving supply chains. Furthermore, some outlier gains related to AI investments distorted the overall figure (e.g., Amazon’s stake in Anthropic)
Our consumer sentiment indicators are based on our ‘keyword’ algorithm related to ‘Google Trends’. Accordingly, these indicators are among the explanatory variables that predict US corporate profits. In 2026 Q2, we expect the company’s earnings to be 1% higher than in 2026 Q1 and 11.8% higher than in 2025 Q2. US corporate earnings encompass a broader range of companies than the S&P 500. That said, lately the AI boom has made the earnings impact of the ‘Magnificent 7’ more dominant. This inevitably blurs the more representative picture of the health of the US economy.
The historical data from May 30th 2025
The S&P 500 is slightly overvalued
According to Factset Insights from May 29, the forward 12-month P/E ratio for the S&P 500 is 21.2. This P/E ratio is above the 5-year average (19.9) and above the 10-year average (18.9). For 2026 Q1, (with 97% of S&P 500 companies reporting actual results) FactSet reports that the blended (year-over-year) earnings growth rate for the S&P 500 is 28.6%. If 28.6% is the actual growth rate for the quarter, it will mark the highest earnings growth rate reported by the index since Q4 2021 (32.0%).
Overall, the index remains slightly overvalued in the long-term sense. Nevertheless, company earnings have been surprisingly strong, bringing the forward 12-month P/E ratio close to its historical average.
For Q1 2026, 85% of S&P 500 companies have reported a positive EPS surprise, and 81% of S&P 500 companies have reported a positive revenue surprise. Moreover, the latest forward 12-month P/E ratio is well below the P/E values before the dotcom bust (over 25). Our forecast of the S&P 500 indicates that the move to the fair valuation zone may not yet come in the third quarter.