US equity index futures edged higher on May 1, with S&P 500 futures up 0.19%, Nasdaq 100 futures up 0.11%, and Dow futures adding 74 points, signalling Wall Street’s record-breaking April rally may extend into May, per exchange data. The underlying S&P 500 closed Thursday at 7,209.01, its first close above 7,200, capping a 10.4% monthly gain, the index’s best since November 2020.
How April Went Up Despite Everything
Oil above $100 for most of the month. The Strait of Hormuz effectively shut. PCE inflation at a three-year high. None of it stopped US stocks from posting their strongest month in over five years.
The Nasdaq surged 15.3% in April, its best month since April 2020. The Dow advanced 7.1%, its strongest monthly showing since November 2024. On Thursday alone, the Dow added 790.33 points to settle at 49,652.14, the S&P 500 rose 1.02%, and the Nasdaq gained 0.89% to close at 24,892.31, all three hitting fresh all-time highs, per CNBC data.
What drove it was concentrated in two places: AI infrastructure spending and tech earnings. The IT sector posted 45% year-on-year earnings growth in Q1, per FactSet. Alphabet jumped 10% on Thursday after its quarterly beat. Qualcomm surged 16% after a strong second quarter. Caterpillar, a global economic bellwether, popped nearly 10% after beating on both earnings and revenue, lifting its full-year revenue outlook in the same breath. After the close, Apple reported fiscal Q2 revenue of $111.2 billion and EPS of $2.01, both above estimates, with shares rising more than 2% in extended trading.
“As long as the economy continues to grow and companies are able to grow earnings, we can see higher stock prices even in the face of higher energy prices and inflation,” said Chris Zaccarelli at Northlight Asset Management.
Japan Stepped In and the Yen Is Already Slipping Back
The yen surged as much as 3% on Thursday, its biggest single-day move in over three years, after Finance Minister Satsuki Katayama issued a near-final warning to speculators and the Nikkei confirmed the government bought yen and sold dollars, per a government official. The currency hit 155.57 per dollar at its strongest, up sharply from 160.72 earlier in the session, a 21-month low. By Friday morning in Asia, it had pared back to 157.14.
That reversal tells you something intervention cannot fix. The Bank of Japan held its policy rate at 0.75% at its April 28 meeting, a 6-3 vote, with three board members dissenting in favour of a hike to 1.0%, per the BoJ’s official statement. The central bank raised its FY2026 core inflation forecast to 2.8% from 1.9% and signalled further hikes remain appropriate if conditions hold. Governor Ueda has the intent but not the urgency, and until the BoJ actually moves, the yen’s structural pressure from oil-driven import costs remains intact.
The Inflation Number That Complicated Everything
The Commerce Department confirmed on Thursday that headline PCE rose 0.7% in March, its biggest monthly jump since mid-2022, pushing the annual rate to 3.5%, the highest since spring 2023, per BEA data. Core PCE, which strips food and energy, ran at 3.2% annually. Energy goods and services alone surged 11.6% on the month.
GDP grew 2.0% annualised in Q1, short of the 2.2% consensus. Consumer spending rose just 1.6% as goods outlays fell 0.1%, a direct signal that energy costs are compressing household budgets. The one standout: initial jobless claims for the week ended April 25 came in at 189,000, the lowest since September 1969, per the Labor Department.
Oddly, that jobs number makes the Fed’s job harder. A tight labour market with inflation running 1.5 percentage points above target gives the committee no reason to cut and mounting internal pressure to consider hiking. The FOMC voted to hold rates unchanged this week, but with four dissents, the most divided vote in years. Three regional presidents voted against statement language implying the next move would be lower, per Fed records. The odds of a hike by the end of 2026 stand at just 8%, per CME FedWatch, but that number was near zero a month ago.
The Fed vs ECB Split Is the Under-Watched Story
While the Fed stays frozen, the ECB is heading the other direction. The ECB’s deposit rate currently sits at 2.0%, held steady since March, but eurozone inflation accelerated to 2.6% in March, the highest since July 2024, driven by war-related energy costs, per ECB data. Markets are now pricing a 79.5% probability of a 25 basis point hike at the ECB’s June 11 meeting, per Polymarket. Policymakers have signalled they will move unless energy prices ease or the Iran conflict resolves before then.
That Fed-ECB divergence, one frozen, one hiking, strengthens the euro against the dollar. For US multinationals reporting European revenues, a stronger euro helps on translation. For bond markets, it raises the question of whether capital flows toward higher-yielding European assets, adding pressure on US Treasuries already dealing with sticky domestic inflation.
“Investors will be watching how the Federal Reserve navigates this backdrop, with a likely more dovish chair entering what appears to be its most divided committee in decades,” said Bret Kenwell at eToro. Jerome Powell’s term ends this year. Trump’s nominee Kevin Warsh is considered more hawkish, a transition the bond market has not fully priced yet.
The base case for May, per Barclays US equity strategist Venu Krishna, is continued positive momentum driven by earnings and AI spending, but at a slower pace than April’s exceptional 10.4% run. “The story is good, so we remain optimistic. The pace of this recovery has been so strong in such a short period of time; it does leave some potential for a little bit of a breather in the short term,” he said. With Q1 earnings tracking at 13.2% growth per FactSet and no Hormuz resolution in sight, that breather, if it comes, will likely be shallow rather than a reversal.
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FAQ
Why did the S&P 500 post its best month since 2020 despite the Iran war?
AI-driven tech earnings carried the index. The IT sector grew earnings 45% year-on-year in Q1, per FactSet. Alphabet, Qualcomm, and Caterpillar all beat estimates in the final week of April. The S&P 500 gained 10.4% for the month and the Nasdaq 15.3%, per CNBC data.
What was US PCE inflation in March 2026?
Headline PCE rose 0.7% month-on-month and 3.5% year-on-year, the highest annual reading since spring 2023. Core PCE was 0.3% monthly and 3.2% annually, per the US Commerce Department.
Did Japan officially confirm currency intervention on April 30?
Yes. The Nikkei reported, citing a government official, that Japan bought yen and sold dollars on April 30. Finance Minister Satsuki Katayama issued a public warning to speculators hours before the move. The yen surged 3% to 155.57 before paring gains to 157.14 in Asian trading Friday, per Reuters.
