Biweekly Investment Insights: Resilient economic data, looser financial conditions & record moves in semis

Yanni Angelakos, Head of Investment Insights, Nasdaq Capital Access Platforms

Mike Cho, CFA, Senior Research Analyst, Nasdaq Capital Access Platforms

Tony Kristic, Senior Research Analyst, Nasdaq Capital Access Platforms

Key Points

• In addition to strong Q1 earnings, upside U.S. economic surprises & looser financial conditions also underpinning equities
• Largest ever 2-month gain in Nasdaq Philadelphia Semiconductor Index (SOX; +69.1%)
• Investment consultants’ capital market assumptions (CMAs) show lower expected returns for U.S. versus international equities, while private markets dominate 10-year CMA expectations 

Biweekly Chart in Focus: Drop in WTI pushing equity volatility below 5-year average

Source: Blomberg

Summary

While investors have had a bit of break in the data following Q1 2026 earnings season, the markets will not have too long of a respite before shifting attention to the May nonfarm payrolls (June 5^th) and key inflationary data (CPI on June 10^th and PPI on June 11^th)—leading up to new Federal Reserve Chair Kevin Warsh’s first meeting on June 17^th. A move is not expected in June. But the markets are pricing in around a 70% chance of a 25-basis point hike by the end of 2026 and these key economic data points over the next couple of weeks will further inform the Fed outlook.

Per our prior piece, a near-term risk for equities is the step-up in Treasury 10-year yields given inflation and fiscal concerns, and the market’s less dovish outlook for the fed funds rate. Headlines remain mixed regarding a peace deal between the U.S. and Iran. Yet with WTI crude oil prices lower by 17% since the early April highs, equity volatility has compressed per our Biweekly Chart of the Week. The drop in oil prices has also loosened financial conditions to pre-Iran war levels, helping risk appetite. Somewhat overlooked amidst the geopolitics on one end and Q1 earnings helping to drive U.S. equities to new highs on the other, is the resilience of the U.S. economy—the Citi U.S. Economic Surprise Index is hovering near its highest since early February 2026.

The epicenter of new U.S. equity highs has been the semiconductor complex with the SOX notching its strongest 2-month returns on record going back to 1994. The insatiable demand for computing power and memory storage has pushed estimated 2026 EPS growth rate to over 90% for SOX (per Bloomberg). The fresh highs for U.S. equities, led by the technology sector, have expanded equity valuations. While tech valuations are at an 18% premium to the S&P 500, this is still 1.3 standard deviations below the 5-year average premium as strong earnings growth has kept valuations relatively in check.

Appreciating that it is difficult enough to forecast market returns 10 months from now let alone 10 years on, investment consultants’ CMAs serve as a good anchor for future return expectations. The Nasdaq eVestment synopsis further below of leading consultants’ latest CMAs shows a preference for international and emerging markets (EM) relative to U.S. equities. Overall, private markets are expected to have the highest average annualized returns.

Details

Resilient U.S. economic data & a loosening in financial conditions also supporting risk assets

Strong Q1 earnings were a key catalyst for the latest surge in U.S. equities, driven by the AI theme—e.g., Nasdaq-100® Q1 EPS growth of 46% YoY, marking its 12^th straight quarter of double-digit YoY earnings growth (for more, see here). Given the heightened macro volatility, it is likely a stretch to say that the U.S. economic story in the very near-term was “overlooked”.

Yet it felt tertiary in May given the focus on a potential resolution of the Iran war and the various implications along with the more bottom-up earnings dynamics. As the markets pivot away from Q1 earnings, the focus will return to the economic fundamentals which have also been supportive for U.S. equities. As a proxy, Figure 2 shows that the Citi Economic Surprise Index hit 48 in mid-May—which is its highest level since early February (greater than 0 indicates more data beating expectations than missing).

Figure 2: U.S. economic data remains resilient, also underpinning equities

Source: Bloomberg

While economic data has been steady despite high energy prices, U.S. consumers have likely been buttressed by tax refunds which are higher by around 17% YoY, with the average refund up about $320 per Morgan Stanley. However, if gas prices in the U.S. average $3.60 a gallon ($4.29 nationally per AAA as of June 1^st), these higher prices at the pump will neutralize the benefit of higher tax refunds for consumer spending according to Morgan Stanley estimates (Figure 3).

Figure 3: A 15% increase in gas prices would likely offset the average 2025 tax refund

Source: Morgan Stanley

Also supporting risk assets recently has been the drop in oil prices which have helped to loosen financial conditions (Figure 4). While WTI oil is still higher by over 60% year-to-date, it has dropped by 17% from its recent highs. Similarly, while higher by over 50 basis points from the February 27^th lows immediately prior to the Iran war, Treasury 10-year yields have come in from their highs of 4.67% to hover around 4.45%. 10-year yields are basically flat from the tightest levels in Bloomberg’s Financial Conditions Index around March 30^th, which also marked the lows in equities and the highs in equity volatility—two key drivers for looser financial conditions.

The drop in oil prices reflects the scaling back of right tail risk scenarios in the Middle East. As risk appetite increased, U.S. corporate credit spreads concurrently tightened relative to Treasurys, which then further loosened financial conditions and stoked further risk-taking.

Figure 4: Elevated but recent easing in oil prices have loosened financial conditions

Source: Bloomberg

A parabolic move in semiconductors

Hyperscaler capex commitments from the likes of Microsoft, Meta, Alphabet, and Amazon continue to accelerate, driving avid demand for AI accelerators and the memory chips that power them. High-bandwidth memory (HBM) emerged as the critical bottleneck in the AI buildout as SK Hynix—Nvidia’s dominant HBM supplier—reportedly could not build AI memory chips fast enough. Additionally, investors fundamentally have re-rated semiconductors memory from cyclical commodities to structural AI infrastructure plays.

This demand for AI computing power and memory storage drove a 2-month gain in SOX of 69.1% from April to May 2026 in semiconductors, eclipsing the prior 2-month record of 66.1% during January and February 2000 (Figure 5). Per Bloomberg, semiconductor names accounted for roughly 41% of the S&P 500’s near 20% rally since the March 30^th lows (as of June 1^st). This parabolic move has naturally been met with consternation as the natural analogue is the dot com era of the late 1990s and early 2000s. While the other lofty 2-month moves in SOX also came during this era, from a fundamental perspective we refer to Figure 6 which shows the ramp up in EPS growth rates for the semiconductor space.

Figure 5: Largest 2-month SOX increase on record going back to 1994

Source: Bloomberg

Figure 6: YTD ramp up in SOX 2026 EPS growth expectations (YoY%)

Source: Bloomberg

With semiconductors leading the latest equity rally, valuations have also rebounded with the Nasdaq-100’s forward price/earnings ratio back to 25 (per Bloomberg data). Yet this is back to end of January 2026 levels given the increase in earnings expectations. Further, when looking at the S&P 500 technology sector relative to the broader index, it trades at an 18% premium to the S&P 500 (Figure 7). However, that premium is 1.3 standard deviations below its 5-year average as this strong earnings growth has kept the tech premium relatively muted.

Figure 7: Technology sector at a premium vs. S&P 500, but -1.3SDs vs. 5-year average

Source: Bloomberg Intelligence

Investment consultants’ 2026 CMAs

Turning to the annual 2026 Nasdaq eVestment report on consultant CMAs, the average annualized expected return is 6.4% for broad U.S. equities over the next 10 years. This is notably lower than the historical rate of total return of closer to 10% since 1929 for U.S. equities with key factors cited by consultants for this lower expected rate of return including:

• Higher starting valuations
• Increased macro headwinds
• Expectations of some mean reversion given U.S. equities’ notable outperformance over the past 15 years (e.g., Nasdaq U.S. Benchmark Index^TM (NQUSB^TM) is up by 453% versus Nasdaq DM ex-U.S.^TM (NQDMXUS^TM) higher by 114% from January 1, 2011, to June 1, 2026).

Conversely, consultants are calling for higher average annualized returns for non-U.S. equities across international and emerging markets as expectations are in the 7% to 8% return range. While international equities have outperformed U.S. equities by around 18% since January 2025, the story has of course been U.S. equities massively outperforming over the past 15 years.

Based on the investment consultants’ CMAs for the ensuing 10 years, expectations for private market returns are leading the CMAs as venture capital, opportunistic real estate, and credit opportunities in private debt are expected to return between 8.5% and 9% on an average annualized basis (Figure 8). While private debt is still in the upper half of the return spectrum, we note that the segment saw the deepest year-over-year cuts in projected returns in the private markets complex in our CMA report. In the subset shown below, private markets strategies overall account for 8 out of the top 10 expected returns, with the other two spots going to international equities.

Figure 8: Private markets account for 8 of the top 10 expected returns in this CMA subset

Source: Nasdaq eVestment Market Lens. Notes: “Broad” category forecasts (e.g., U.S. Equity Broad, Private Debt Broad, Hedge Fund Broad) reflect top-line asset class expectations and are averaged separately from the subcategory forecasts provided. Broad and subcategory averages are drawn at times from distinct consultants and are not hierarchically linked in this analysis. Sample sizes vary due to differences in consultant coverage.

Disclaimer:

_{Nasdaq^®, Nasdaq-100^®, and Nasdaq Stock Market^® are registered trademarks of Nasdaq, Inc. The information contained above is provided for informational and educational purposes only, and nothing contained herein should be construed as investment advice, either on behalf of a particular security or an overall investment strategy. Neither Nasdaq, Inc. nor any of its affiliates makes any recommendation to buy or sell any security or any representation about the financial condition of any company. Statements regarding Nasdaq-listed companies or Nasdaq proprietary indexes are not guarantees of future performance. Actual results may differ materially from those expressed or implied. Past performance is not indicative of future results. Investors should undertake their own due diligence and carefully evaluate companies before investing. ADVICE FROM A SECURITIES PROFESSIONAL IS STRONGLY ADVISED.}

_{© 2026. Nasdaq, Inc. All Rights Reserved.}