Stalemate to Checkmate?

North American markets witnessed historical recovery with the S&P 500 Index advancing by ~+9.6% and S&P TSX Index by ~+3.0% in April. While the ceasefire announced on April 7th ignited investor enthusiasm on hopes of a truce between the United States, Israel and Iran; the positive momentum was accentuated by the first-quarter earnings season starting in late April. As of this writing, nearly 90% of the companies in the S&P 500 Index have reported first calendar-quarter earnings; where approximately 83.56% have delivered better-than-expected earnings and approximately 73.56% have delivered better-than-expected revenues. For context, during the prior earnings season these figures were +74.95% for positive earnings surprise and +64.33% for positive revenues surprise. The positive momentum is also visible in earnings growth estimates of S&P 500 Index and S&P TSX Index. As per Bloomberg data, for the year 2026, the earnings-per-share growth for S&P 500 Index has increased from +13.8% at the turn of the year to +21.7% and for S&P TSX Index has increased from +16.0% to +25.6%, as of this writing.

Improving earnings growth momentum put together with reduction in geopolitical risk premium led to the whipsaw in North American equity markets during the last two months. Equity markets generally do well in an environment where earnings are growing and economic data is supportive. The headline inflation in the United States jumped from +2.4% year-over-year in February to +3.8% year-over-year in April. The jump was driven by prices in energy, energy commodities, and airfares. The core inflation, which excludes the impact of food and energy, also jumped from +2.5% year-over-year in February to +2.8% year-over-year in April however, the jump can be largely attributed to statistical adjustments made by Bureau of Labor Statistics. While an argument can be made inflationary pressures are yet to show up in core inflation and hence less worrisome, we think more datapoints persistently pointing to risks of higher inflation in the future will force investors to take notice at some point. The headline Producers Price Index in the United States for the month of April jumped to +6.0% year-over-year from +4.0% year-over-year in March and was ahead of expected +4.8% year-over-year.

In Canada, the headline inflation increased to +2.4% year-over-year in March from +1.8% year-over-year in February and unemployment inched up to +6.9% year-over-year in April from +6.70% year-over-year in March. Bank of Canada has maintained the wait-and-watch stance and decided to hold current policy rates at +2.25%. The situation in the middle east along with expected tense negotiations during the upcoming the Canada-U.S.-Mexico Agreement (CUSMA) review on 1st July 2026 has added to the uncertain outlook for Canada. The Federal Reserve in the United States also maintained the wait-and-watch approach and held the policy rates at +3.75%. The uncertainty on duration of disruption in the middle east and the potential of prolonged energy shock to translate into sustained inflationary pressures has kept the market participants guessing on the policy rates outlook. The expectations of fixed-income market participants have changed dramatically over the course of the conflict. In the United States, the expectations have gone from two 25 basis-points rate cuts as on 27th February to no rate cut by the end of the year 2026; and in Canada, the expectations have gone from no rate cut on February 27th to two rate hikes by the end of the year 2026 (See Figure 1 and 2).

Figure 1. Canada: Implied rate and # of hikes/cuts in Overnight Index Swaps

Source: Bloomberg

Figure 2: United States: Implied rate and # of hikes/cuts in Fed Funds Futures

Source: Bloomberg

The warring parties in the Middle East remain far apart in their list of demands and the stalemate has continued since the announcement of ceasefire. The blockade builds economic pressure on both sides – on Iran by impeding its ability to export crude oil and on the United States as economic pressures build on its allies and global economy along with political pressure domestically. Both sides are sticking to their demands and hoping that enough pressure builds on the other side to blink first. As both sides await the situation to move from stalemate to checkmate in their favor, the world economy’s fate also hangs in balance; in our view. The longer the stalemate continues in the middle east, the probability of higher inflation creeping up across the global economies increases. If shortages become acute, the net oil importing economies will likely get hit the hardest.

Overall, we think the appetite for both sides to restart the violence appears low, which is a near-term positive for markets. Layering on the improving earnings growth story, the near-term set-up looks good for the North American equity markets, in our view. However, over the medium-term, investors need to watch out for the signs of deteriorating economic data that might bring in fresh bouts of volatility in the markets.

Source: Bloomberg

Vipul Arora is a Portfolio Manager with CI Assante Wealth Management Ltd. The opinions

expressed are those of the author and not necessarily those of CI Assante Wealth

Management Ltd. Please contact him at 613-258-1997 or visit ofarrellwealth.com to discuss

your circumstances prior to acting on the information above. CI Assante Wealth Management Ltd. is a member of the Canadian Investor Protection Fund and the Canadian Investment Regulatory Organization. Insurance products and services are provided through Assante Estate and Insurance Services Inc