2026 Q2
April 1st 2026
Our quarterly S&P 500 forecast for 2026 Q2 (average price returns) is a 0.83 percent growth over the first quarter of 2026. Our monthly forecast for April is lower than March’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.
Getting closer to the correction territory?
The US stock markets’ 2025 bullish rally, with gains reaching 16.4 %, extended to January 2026. Despite the geopolitical tensions involving Venezuela, Greenland, and Iran, the S&P 500 at some stage approached the 7000 mark.
The picture appeared less rosy in February. Although inflation was still not a big concern owing to the low energy prices, new tariff worries, slowing GDP growth, and rising geopolitical tensions took their toll on the markets. At the end of February, the S&P index was down 0.9 % over the previous month.
After the February attacks on Iran, the escalating war in the Middle East has been the main cause of the surging oil prices. Benchmark U.S. oil futures have climbed above $100, a first since 2022 when Russia invaded Ukraine. Rising energy prices have taken their toll on the global stock markets. The S&P 500 is pushed into the correction territory. The index was down 4.81 % in 2026 Q1 over the end of 2025 Q4. The S&P 500 index is down 5.4% from its most recent peak (March 2). A correction would be the index being 10% lower than its peak.
As we enter the second quarter, the length of the war remains an important determinant of the stock performance in the second quarter. If the oil price remains elevated at its current level, rising inflation and a stagnating economy become inevitable, raising the probability of a US recession. We cannot speculate on the course of the war. Our predictions are based on econometric models that rely on historical data.
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 remains over the $100/barrel for a long time, this is an unlikely scenario.
U.S. GDP grew more slowly than previously estimated
The US economic growth in 2024 Q4 was sharply revised down to 0.7% from the advance estimate of 1.4%. This was sharply slower than Q3 (4.4%) and well below the market forecasts (1.4%) (Source: Bureau of Economic Analysis (BEA)). The government shutdown running from Oct. 1 to Nov. 12 clearly hurt growth more in 2025 Q4 than initially thought. Downward revisions to exports, consumer spending, government spending, and investment, as well as the upward revision in imports, contributed to the downward revision of the GDP.
Although US GDP growth in 2025 Q3 was very impressive, the immense scale of the AI investment in that quarter blurs the actual strength of the economy. One thing is clear: if the massive spending on data centers had been stripped away, the Q3 GDP growth would have looked more modest. That said, the latest downward revision looks more alarming when combined with deteriorating inflation prospects caused by the war in the Middle East. It is quite likely that the US economy is entering a stagflationary phase, as there is not much room for the Fed to cut interest rates.
Consumer spending is related to job creation. Nonfarm payrolls shed 92,000 jobs in February, following 126,000 job gains in January. This was much worse than the market forecast of 59,000 job creation. The unemployment rate ticked up to 4.4% from 4..3% in January. If the inflation prospects were more favourable, the latest job market signals would have been a consideration for lower rates. However, this is unlikely under the circumstances.
Retail sales remain stable, and home sales recover slightly
Starting with the economic data, the retail sales remained stable with a small downtick in January. Home sales recovered slightly in February.
The advance estimate of U.S. retail and food services sales was down 0.2% in January and up 3.2 percent from January 2025. The February data were not released due to a backlog in data collection caused by the previous government shutdown.
The National Association of Realtors’ index of pending home sales rose 1.8% in February (m-o-m). The Pending Home Sales Index typically lags existing home sales by one to two months. Despite the rate cuts, the US housing sector is only slowly recovering. The war in the Middle East could lead to higher mortgage rates, as the increase in oil prices is likely to lead to higher inflation and interest rates.
‘Low hire, low fire’ trend continues
In the week ending March 21, the advance figure for seasonally adjusted initial claims was 210,000, an increase of 5,000 from the previous week’s unrevised level of 205,000. The 4-week moving average was 210,500, a decrease of 250 from the previous week’s unrevised average of 210,750.
The advance seasonally adjusted insured unemployment rate was 1.2 percent for the week ending March 14 (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, most US companies are not creating enough jobs. The expression ‘low-hire, low-fire’ describes the current state of the US labor market. The market narrative is that US companies have been reluctant to lay off workers despite the labor-saving AI technology. The low initial jobless claims on one hand, and the falling job creation numbers on the other, the time-lags in data collection make it difficult to judge the stability of the US labor market. So far, 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 unlikely.
PMI deteriorates, consumer confidence improves
The Chicago Purchasing Managers’ Index (PMI) fell to 52.8 in March, after rising to 57.7 percent in February. The latest figure was below the market estimates of 55. This is the third time the index has been above the 50 mark since November 2023. The contraction in business activity has been a theme over the last two years. The latest data indicate that the market turnaround owing to new orders has started to lose steam.
The Conference Board’s consumer confidence index edged up by 0.8 points in March to 91.8 (1985=100), from 91.0 in February. The Present Situation Index—based on consumers’ assessment of current business and labor market conditions—increased by 4.6 points to 123.3. The Expectations Index—based on consumers’ short-term outlook for income, business, and labor market conditions—declined by 1.7 points to 70.9.
The survey period for preliminary results was March 1 to 24, 2026. Although consumers appeared less pessimistic in March, the war in the Middle East is likely to dampen any positive sentiment if the war with Iran drags on.
Inflation remains steady
The annual inflation rate in the US came in at 2.4% in February 2026 as expected, holding steady at its January level, which was the lowest figure since May 2025. Falling energy prices were the biggest contributor to cool inflation.
The personal consumption expenditures (PCE) index, a key barometer of inflation and consumer spending, rose at a 2.8% annual pace in January, compared with 3% in December. The market forecast was 2.9%.
Core PCE, which excludes the more volatile food and energy categories, grew 3.1% in January, up from 3% in December, in line with market forecasts.
Both inflation indicators are above the Federal Reserve’s annual inflation target of 2%. This was not a serious concern before the February 28 attacks, as the inflation rate was tame enough for the Fed to consider further rate cuts. Currently, the short to medium-term inflation picture looks very different. Even before the war broke out, the PPI, which measures the average change in prices that producers receive for their goods and services, was up 3.4% from a year ago, well above the market expectations and the January figure of 2.9%. 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 show up in the inflation numbers, no doubt the inflation picture will look much worse.
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 in its January meeting. We believe that a rate cut is unlikely in the Fed’s March 17-18 meeting. In fact, depending on the length of the war, an interest rate cut could be ruled out for 2026.
US corporate earnings look strong
The US corporate earnings with inventory valuation and capital consumption adjustments (domestic industries) were up 3.3 percent in 2025 Q3 from the previous quarter and up 6.9 percent over 2024 Q3.
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 2025 Q4, we expect the company earnings to be 0.4 % lower than 2025 Q3 and 3.6 percent higher than 2024 Q4. For 2026 Q1, we expect the earnings to be 2.6% lower than 2025 Q4, but 1.2% higher than 2025 Q1. US corporate earnings encompass a broader range of companies than the S&P 500. As a result, these earnings are not dominated by those of the ‘Magnificent 7’ and portray a more representative picture of the health of the US economy.
The historical data from March 31st 2025
The S&P 500 enters the fair-valuation zone
According to Factset Insights from March 27, the forward 12-month P/E ratio for the S&P 500 is 19.9. This P/E ratio is equal to the 5-year average (19.9) and slightly above the 10-year average (18.9). For 2026 Q1, FactSet reports that the blended (year-over-year) earnings growth rate for the S&P 500 is 13%. If 13% is the actual growth rate for the quarter, it will mark the 6th consecutive quarter of double-digit earnings growth.
Overall, the index remains slightly overvalued in a long-term sense, although the latest correction in March pulled the P/E value well below that of the previous month (21.6). 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 extend to the second quarter of the new year.