Key Takeaways from Strategas Research Areas

Investment Strategy

Jason Trennert, Chief Investment Strategist and Chairman

The major building blocks of employment, financial conditions and corporate profits all tilt toward a continuation of the bull market.

• Spending boom. The AI trade is real, and the capital spending boom is likely to continue. The CEOs of the biggest AI-related companies are at more career risk if they don’t invest heavily in AI than if they do and lose money. The provisions of the One Big Beautiful Bill provide further incentive to keep spending. Based on consensus estimates, Microsoft, Amazon, Google, and Facebook will only have $4 billion in free cash flow by Q3. A greater reliance on the debt markets may be necessary to sustain the growth in capital spending.
• Earnings soaring. Corporate profits remain supportive of the bull run; Q1 S&P 500 profits were up +28.6% year over year.
• Valuations rich. Valuation tends to be a poor timing tool, but the market has been expensive by almost any historical measure: trailing P/E, forward P/E, EV/Sales, EV/EBITDA, Price/Book, Price/Sales, etc. However, strong earnings have led to multiple compression in 2026, allowing the market to rise without becoming even more expensive.
• AI vs. Iran. Excitement over AI is more than offsetting concern about the war with Iran, despite the changeable nature of commentary on the prospect of the Strait of Hormuz re-opening.
• Yields on watch. We see early signs of inflation and the recent rise in 10-year Treasury yields as the biggest risks to the bull market. Over the past four years, a 10-year Treasury above 4.5% has been a tough environment for the market. We expect Inflation expectations (stable for now) to determine monetary policy at the Fed.
• Investment themes. Our major investment themes remain 1) Cash Flow Aristocrats; 2) Artificial Intelligence; 3) the Industrial Power Renaissance; and 4) Deglobalization.

Economics

Don Rissmiller, Chief Economist

We place the odds of a recession in 2026 at 35% (with 55% odds of solid growth and 10% chance of upside surprise).

• Growth. Fiscal stimulus for consumers has muted the impact of higher energy prices. If not for that shock, we could be talking instead about the U.S. economy reaccelerating due to cyclical sectors (e.g., manufacturing) improving. The AI capex story is a continued support.
• Inflation. The last wave of inflation peaked in 2022, and inflation expectations still look anchored. But history suggests that a second wave tends to build and given supply-chain interruptions in 2026, we may be seeing early signs of that. We’ll watch domestic rents and wages to gauge whether this pattern holds.
• Policy. 2024 and 2025 saw lower monetary policy rates, justified first by inflation coming down and reinforced by cracks in employment. The Fed looks to be on an extended pause. The textbook monetary policy response is to look through supply shocks, but that requires long-term inflation expectations to remain anchored.
• Risks. Fiscal supports that have aided growth have not been cost-free. While there’s no emergency, the federal budget deficit threatens to crowd out other economic activity. Fixing this abruptly risks an economic stop. Alternatively, inflation could return if expectations become unanchored due to repeated shocks. The market would likely demand higher interest rates in that scenario.
• Hope. Productivity can conceptually alleviate an inflation wave, as too much money chasing too few goods can be countered by producing more goods in the same amount of time. There is promise from tech advances, but we would like to see the profits of both the producers of AI and the users of that technology growing at the same time.

Washington Policy

Dan Clifton, Head of Policy Research

An Iran cushion in the form of stimulus, a test for a new Fed Chair, and midterm volatility building.

• Rates outlook. A key theme for 2026 was “shock-and-awe” economic policy, featuring individual and business tax cuts, reduced tariffs, and financial deregulation. That stimulus was set to accelerate U.S. growth but is now serving as a cushion against higher oil prices and other supply chain constraints. Although tax refund season has ended, companies will continue to benefit from business investment incentives in the OBBB passed last July, and importers will receive approximately $100bn in IEEPA tariff refunds. If Iran is not resolved in short order, consumers will feel the squeeze; policymakers are proposing new stimulus measures ahead of the midterms as a result.
• Lingering conflict. The U.S. and Iran are in a stalemate, with Iran seeking to control traffic through the Strait of Hormuz and the U.S. seeking to block ships from going into or out of Iranian ports. A quick deal remains elusive, as both countries think economic pressure will cause the other to fold first. While negotiating positions have moved closer, a build-up of economic pain will likely force a change.
• A tough environment for a new Fed chair. Kevin Warsh will face a polarized Fed Board, with the regional Fed presidents making it clear that they do not support rate cuts. In addition, Powell will stay on as Fed governor. Our sense is that he is worried that relinquishing his seat would allow Trump to replace regional Fed presidents (which would allow the Warsh Fed more influence to shift policy toward a lower balance sheet and lower rates in 2027). Powell could stay on through the election in November; if Democrats take the Senate, that would limit who Trump could get confirmed as a Fed nominee.
• Democrats remain in the midterm driver’s seat. Democrats continue to outperform in special elections since the beginning of Trump’s second term. They have outperformed by an average of 11 percentage points relative to the prior elections in those districts and flipped seats in Republican strongholds (TX, FL, GA, IA, and AR). That shift in the electorate is consistent with a loss of 27 House seats for the GOP and puts Republican-held Senate seats in play. Efforts at midcycle redistricting will mitigate Republican losses but may not overcome Democratic momentum. Democrats need just a net three seats take control of the House. In the Senate, Democrats need to win a net four seats.

ETF Research

Todd Sohn, Chief ETF Strategist

• Enthusiastic inflows. Equity ETFs are averaging over +$6 billion in inflows per day since the March low, reflecting reengagement. Still, trailing 3-month flows are in their 70th percentile, suggesting room for more participation.
• Semiconductors are aggressive. If there is one area that stands out for aggressive behavior, it’s the Semiconductors. ETF activity – both levered and unlevered – has exploded. Taiwan has taken the mantle of largest allocation within Emerging Market benchmarks. The tentacles of Semiconductors extend to Industrials, where broad sector ETF and Infrastructure exposures have also seen significant inflows. Ten Space ETFs launched in the last three months (multiple ETF launches within a similar theme can be a red flag). We’d consider each of these a sentiment risk for the sector as Q2 progresses.
• Energy has cooled. As for Energy, both flows and volumes have cooled over recent weeks, while volatility vs. the broader market has collapsed. In an environment where traditional Defensives (Healthcare, Staples) have struggled, Energy – and Natural Resource ETFs overall – could serve as a path for investors to diversify their large-cap Growth exposure.