Headlines Take a Backseat to Fundamentals in Rally

MIKE TOWNSEND: After a rocky first quarter of 2026 for the equity markets, April turned things around and then some. The S&P 500^® was up more than 10% in April, the best month for the index in more than five years. The Nasdaq's 13% increase in the month was its best in six years. Investor sentiment is up across the board, and volatility is down. While investors are undoubtedly happy with their portfolio's performance in recent weeks, any are confused by the market's resilience in the face of geopolitical headwinds, a huge increase in gas prices due to the war in Iran, and a continuing slow but steady rise in inflation. Even Federal Reserve members are deeply divided on which direction interest rates should go. So what's the explanation? Well, a key factor is that this earnings season is knocking it out of the park. As of the close of the market on May 1, nearly two-thirds of companies had reported earnings, and 84% had beaten estimates. And sector rotation has helped the indexes to record highs even as churn beneath the surface has produced bigger swings in individual companies' stock prices. 

So the big question for investors is whether the rally is sustainable? Will the persistently high cost of gas force companies to continue increasing prices, potentially slowing the market's momentum? How confident should investors be as we head towards the summer? 

Welcome to WashingtonWise, a podcast for investors from Charles Schwab. I'm your host, Mike Townsend. And on this show, our goal is to cut through the noise and confusion of the nation's capital and help investors figure out what's really worth paying attention to.

Coming up in just a few minutes, I'm going to chat with my colleague Liz Ann Sonders, chief investment strategist here at Charles Schwab and co-host of our sister podcast On Investing, to get her thoughts on how investors should be thinking about this market and if it is likely that April's strong market performance can continue. But before we get to that conversation, here's a quick update on what's going on right now in Washington.

As April ended, there was a flurry of activity on several key topics that I've been following and discussing here on WashingtonWise, so I wanted to provide some updates. Topping the list of big developments, Fed Chair Jerome Powell ended one of the biggest mysteries in Washington last week when he announced that he will stay on as a regular Fed governor when his term as chair ends on May 15. Powell will become just the second Fed chair to remain on the board after his term ends, joining Marriner Eccles, who stayed on the board for nearly three years after his term as chair ended in 1948.

Speaking at his news conference following the Fed's monetary policy meeting last week, Powell said he had no choice but to stay on the board to protect the central bank's independence from political influence. He described recent actions by the administration, from the president's relentless attacks on Powell and the Fed board for not lowering interest rates as much as he would like, to the effort to fire Fed Governor Lisa Cook, to the recent criminal investigation of Powell himself as unprecedented in the Fed's 113-year history. "I worry that these attacks are battering the institution and putting at risk the thing that really matters to the public, which is the ability to conduct monetary policy without taking into consideration political factors," Powell said. Powell can stay on the board until his term as a governor ends in 2028. By doing so, he blocks the president from nominating someone new to the seven-member board.

And it means that incoming chair Kevin Warsh will go into the seat currently occupied by Stephen Miran, the board's biggest dove, who has dissented from every vote the FOMC has taken on monetary policy since he joined the board last September, always favoring a rate cut. Warsh himself was also in the headlines. On April 29, the Senate Banking Committee approved his nomination as chair after Republican Senator Thom Tillis of North Carolina ended his months-long block of Warsh when the Department of Justice dropped its investigation of Powell. The final steps for Warsh's confirmation will take place the week of May 11 when the Senate returns to Washington from its current recess. It will take three separate Senate votes. First, a procedural vote to end debate on his nomination, then one to confirm him as a Fed governor, and a final vote to confirm him as chair. The votes need just a simple majority in the Senate. So Warsh is expected to be confirmed in time to join the board when Powell's term as chair officially ends on May 15. But the board that Warsh will be joining does not seem likely to share his enthusiasm for cutting interest rates anytime soon. At last week's meeting, four Fed officials dissented from the decision to hold the fed funds rate steady for the third consecutive meeting. 

One of the dissents came from Stephen Miran in favor of a cut. But the other three came from Fed regional bank presidents, all of whom objected to the statement accompanying the decision, arguing that it did not adequately reflect their view that, given the direction of inflation and other economic data, a rate increase could be the Fed's next move, not a rate cut.

The four dissenting votes were the most at a Fed meeting since October of 1992. Clearly, a message was being sent to Warsh that he may not have many allies at the FOMC when he arrives later this month. 

Elsewhere, there was also news last week for retirement savers. The president signed an executive order to boost retirement savings opportunities for workers who don't have access to a retirement plan through their employer. That's about 56 million Americans. The executive order directs the treasury to launch a website next year that will act as a sort of one-stop shop for individual retirement accounts, better known as IRAs. Workers who earn less than certain income limits will be allowed to pick a provider, open an IRA, and get up to $1,000 in matching contributions from the federal government. Accounts offered through the site can come from any financial institution but will have to meet certain criteria for low fees, no account minimums, and access to low-risk diversified investment options. It's hard to argue against this idea, a version of which already exists in 18 states. With uncertainty about the long-term fiscal health of the Social Security program, both the federal and state governments are trying to set up additional vehicles for saving for retirement.

There was also an interesting development on an issue that I've started to pay a lot more attention to in recent months: the prediction markets. Last week, the Senate voted unanimously to ban itself from betting in these markets, where individuals can place bets on everything from sports to elections to oil prices to pop culture developments. They've been in the headlines recently because of growing concerns about insider trading, the result of a number of suspicious, anonymous bets placed right before major political developments. The ban applies to senators and all Senate staff, effective immediately. Leaders of both parties praised the action and called on the House to do the same. We'll see if that happens. Democrats renewed their calls to pass legislation that would ban administration officials from betting in the prediction markets. And while there appears to be some bipartisan support for that, it's something that would have to be passed by Congress as a law, which is a much longer shot.

Finally, a few words on the decision last week by the Supreme Court to overturn a key provision of the 1965 Voting Rights Act by disallowing the use of race when drawing congressional district lines. The immediate ramification is that it will escalate the ongoing gerrymandering wars that started last year when the Texas legislature redrew its lines to give Republicans as many as four more seats in the House.

California countered with new districts that could net Democrats five seats. Other states followed, including Virginia voters passing new lines last month that favored Democrats, and Florida following days later with a new map that favors Republicans. As a result of the Supreme Court decision, Louisiana's governor postponed the May 19 congressional primary so that new lines can be drawn for this year's election, setting up a confusing situation where voters will go to the polls later this month to vote in the Senate primary, and then again later this summer for the rescheduled House primaries. Tennessee is considering a redraw that could eliminate that state's only Democrat in Congress, and Alabama may take similar action. Georgia's governor said that state would wait until next year to draw new lines for 2028, while other southern states were still considering how quickly they can make changes to their congressional maps. Democrats said they would push for changes in blue states to counter the efforts by Republicans in red states. 

The impact for 2026 may be mostly a wash with neither party gaining more than a seat or two. But the redrawing of district lines to favor one party or the other may become a feature of our political system every two years. Redistricting used to happen once a decade, after the 10-year census resulted in population adjustments that altered how many representatives in Congress each state received. Now, we may be in for back-and-forth fights as a precursor to every election. And the other result is likely to be a further dwindling of competitive House races across the country. Already, just 16 of the 435 congressional races in 2026 are rated as toss-ups by the nonpartisan Cook Political Report. That number is likely to shrink even further, ensuring that almost every congressional seat is decided not in November every other year, but in the primary elections.

On my deeper dive today. I want to take a broader look at the market and the economy. From a market perspective, April was a huge month. The S&P 500 surged more than 10%, its best month since November 2020. The Nasdaq went up more than 13%, its best month in six years. Both ended April at all-time highs. But there continue to be some worrying signals from the economy. GDP grew 2% in the first quarter of the year, but inflation continues to tick up, with prices rising at 3.5% pace in March. And of course, much of that has been driven by a 56% increase since the beginning of 2026 in the price of a gallon of gas. 

The big questions are how are the markets and the economy working together right now? And what does it all mean for individual investors? There's a lot to unpack. And for this discussion, I am so pleased to welcome back to the podcast Liz Ann Sonders, chief investment strategist here at Charles Schwab.

Liz Ann has a long and distinguished career as a sage observer of how the economy can drive the equity markets, including nearly 27 years here at Schwab. Liz Ann, so great to have you back on the podcast.

LIZ ANN SONDERS: It's so great to be here, Mike. I always enjoy our conversations, many of which are behind-the-scenes conversations. So I'm glad we get to let your listeners in on one today. So thanks for having me.

MIKE: Well, this is going to be great. I want to start with thinking about how the market has sort of changed its focus over the last couple of months. So since the start of the Iran conflict on February 26, feels like the market spent about the first month of that responding to every headline about the war. The market was up, down, up, down, sort of on repeat—depending on whether the war seemed like it was going to end or keep going. 

Now it seems that the markets are back to looking at fundamentals like earnings and other factors like sector rotation and high energy prices that are positively impacting the markets. Overall market sentiment is up. So are you seeing this as a turn away from the headlines about geopolitical events that are driving the markets and investors sort of getting back to a more fundamental approach?

LIZ ANN: So Mike, I'd say in general, yes. I don't know whether that will last in perpetuity. I think that the timing of this shift from what was, you're right to point out, the first four or five weeks of the war, where both on a day-to-day and an intraday basis, there was a very, very high inverse correlation between oil prices and the S&P 500. So it wasn't even just the headlines specifically, but it was the impact on oil prices that drove the market on a day-to-day basis and again on an intraday basis in the opposite direction of what oil prices were doing. Then I think the market essentially started to price in that things were not going to escalate and get significantly worse from there. I don't think the market is maybe fully pricing in a sustained period of elevated oil prices. But I think what allowed the market to shift its focus back to fundamentals was the start of earnings reporting season for the first quarter. And it's been a gangbusters quarter from an earnings standpoint. A little bit of a concentration issue, much like we've had from time to time in the past several years in the market. There is a concentration in terms of where earnings growth has been strongest. It's concentrated in areas like technology and communication services. Basic materials to some degree, and a lot of the driver of earnings being just a few individual stocks. So that's something to be mindful. We'll just have to see whether once earnings season ends, whether the market shifts back to day-to-day reaction to war news.

MIKE: On our last episode here, I talked to our colleague, Joe Mazzola, about what, at that time, seemed like a relief rally and whether it was sustainable. We've now added a couple more weeks to that rally. There was a brief pullback, but now we're sort of back to record highs that the indexes are showing. Sometimes feels like it's two steps forward, one step back, but now we feel like we're on a real step forward. So is the rally that started in early April still in progress? If so, will it tend to continue?

LIZ ANN: It is still in progress, notwithstanding some weakness as you and I are taping this today, we are sitting around all-time highs for the S&P 500. If you were going to nitpick a little bit with that terrific statistic, it's relatively narrow breadth. So we can talk about percentage of stocks relative to moving averages, but I think maybe more important and an easier to understand way to think about breadth for a broader audience is with the S&P at or slightly below all-time highs, only 9% of the stocks within the S&P 500 are trading at a 52-week high. Now, if we shorten that, it's only 16% of the index that's trading at just a four-week high. So we've had this surge, but the surge has been driven well up the cap spectrum. Those prior darlings like the Magnificent 7, the tech space, the communication services space, that's where the big mega-cap names are. So that accrues to the benefit of a cap-weighted index like the S&P, but the story under the surface is a little bit less robust. So that's just something to keep in mind.

MIKE: Well, let's talk about some of those big names for a minute. AI headlines continue to be a huge generator of market action. It's an exciting time for AI, but I think from an investor point of view, kind of hard to know how and where to find opportunities. Obviously we all wish we were in on Nvidia very early. Is there a good way to sort through and identify companies that could stand out in the AI ecosystem?

LIZ ANN: This is a complex topic because three and a half years ago, back to the creation of ChatGPT and the start of the boom in large language models, it was a little bit more of a sort of a simple focus that people had on those LLM creators and the hyperscalers. And then there's many more layers now to this story. You've got the obvious, the creators, but you've got the energy and the power, the infrastructure, the compute hardware, just the foundational models, all of the AI-related applications. And they represent sort of different pockets in terms of investment opportunities. And I think a mistake that investors make right now is still trying to treat AI or AI exposure as some monolithic thing.

So you just have to be a little bit more segmented. And I think maybe the most important thing is to differentiate who are sort of the creators, who are the enablers, and who are the adopters. Also, in parallel with who's adopting it and who's allowing it to enable them is the disruption part of this. And before the war started, that was what we were dealing with in the market. That was sort of the big story. Who are the beneficiaries of AI?

And within the tech space, it was seen as semiconductors who was getting hit or disrupted by AI. And that would have been at the time the software space. So even within one monolithic sector that is technology, you had multiple stories going on. And then, of course, you've got the power, and the energy, and the consumption that is needed. So that's more of an infrastructure story, a little bit of an energy story on top of the war-related energy story. And then I think maybe the most important thing that investors should do is we're very narrative-driven in the market these days across the spectrum. We talked about it as it related to narratives around the war, but it's important for investors to separate narrative from actual demonstrated economics. And I think that is a process that's underway now. One of the reasons why, across the spectrum in the market, but also specific to the tech space, is you're seeing more dispersion. You're seeing a wider spread between the AI-related winners and AI-related losers. So I'd say that is an important distinction to make as an investor.

MIKE: To me, one of the most fascinating aspects of all this is the sort of growing pushback on data centers, these big data centers that are being built all over the country. Maine just became the first state to formally ban the building of data centers in that state. And I've talked about on the podcast before how I live in Northern Virginia, where there's a huge, huge number of data centers, and there's starting to be a pushback on the power usage, the water usage, and that sort of thing. So it's becoming a bit of a political issue, which I find really interesting. But maybe shifting away from AI, I think it's easy for investors right now to think that's kind of the only game in town, but it's really notable that information technology, for example, as a sector, not even in the top three performing sectors in the first quarter. So what other areas of the market should investors be keeping an eye on?

LIZ ANN: I would say be mindful of not thinking the key to success is a monolithic sector view. Like, I just buy this sector or avoid this sector. I think there's frankly opportunities and risks in every one of the 11 sectors. And that's why our focus has been at least as much on factor-based investing. So screening for, looking for opportunities based on characteristics, which is what factor is another word for. So positive earnings outlook, strong profit margins, healthy balance sheets, strong cash flows, reasonable valuations, and then apply filters like that on top of any more monolithic sector-based decisions because the sector rotations are wild. I mean, even a sector like communication services that right now for the trailing 12 months is at the top of the leaderboard. But if you look at a month-to-month basis, it's all over the map. So you get these really dramatic swings. And unless you are an incredibly adept trader at the sector level, it's very difficult to do consistently well, and it'll probably drive you crazy along the way. So I think there has to be that focus on the fundamental factors and apply that within sectors. It's also interesting that you've seen a lot of this flip-flopping happen. So you're right to point out that technology not even in the top three in the first three months of the year, still not in the lead year-to-date, but it and communication services absolutely on a tear since the low on March 30. So it also depends on how you're segmenting. You're segmenting by month, by quarter, by year-to-date. And I just continue to think that some of these rotations and the churn that is happening, I think that backdrop is likely to persist. And it does make it a little bit tricky to just sort of make a blanket, "I like this sector," "I don't like this sector" call.

MIKE: I think it's a great point that you make about how the sectors have changed leadership month-to-month. So as you look across 12 months, they may have this ranking, but they've been all over the map over the course of those 12 months. I think it's really interesting. I want to ask you about something that is, I think of under-reported right now, and that has to do with tariffs, and in particular, the tariff refund process that is underway.

So the government reports that the first tariff refunds for companies that paid tariffs that have now been ruled unconstitutional by the Supreme Court, the first refunds are coming May 11. And we're talking about north of 75,000 companies of all sizes, from gigantic to very, very small, have already applied for refunds. Getting that money back obviously seems like a good thing for shareholders, but then the question becomes sort of what do companies do with that?

Are they going to lower prices or try some other way to get that money back in the hands of their customers? Maybe purchase new equipment. Maybe add it to their cash reserves. How should investors be thinking about this big influx of cash that is coming into some of the companies that they may be invested in?

LIZ ANN: Yeah, it's a great question. There isn't a universal answer for that because it depends on where companies sit in that sort of chain associated with the tariff-related supply chain issue. There has been news just very recently from both GM and Ford, and they have announced that they are going to book a fairly large benefit.

They'll book refunds as a favorable profit and loss adjustment. So I think it was both GM and Ford, they'll report a refund benefit and, in both cases, raise their full-year earnings guidance. Not fully because of that, but that was a big component of it. Then you've got the intermediaries. So examples of that would be a FedEx or a UPS. And they have said that they will likely return tariff refunds to customers because as a logistics firm, they basically just act as the intermediary in tariff collection. And then for importers that directly absorbed the costs of tariffs, and I probably should have said this right up front, Mike. I think you know where I'm going here. A lot of people still don't realize that a tariff on China or a tariff on Canada or a tariff on Mexico, fill in the blank of the country, no matter where the tariff is aimed, it's paid for by the U.S. companies importing the products from those countries. So shame on the shorthanded headlines associated with this because it often sends the impression that it's the foreign nation paying the tariff when it's the U.S. companies. But for importers that directly absorb the costs of tariffs, some have said or suggested that they might use the refund to finance debt reduction. Some have said maybe we'll buy back more stock or increase our capital spending. Not many have come out directly and said, "We're just going to pass that directly back to customers via lower prices." So unfortunately, that's probably pretty low on the list of what is likely to be done with some of those tariff refunds. But it's going to be industry by industry and company by company.

MIKE: Yeah, I think it's going to be fascinating to see how different companies choose to sort of market to the consumer how they're benefiting from a refund. 

Let's switch gears. Want to talk Fed for a minute. Glide path ahead, I think, for Kevin Warsh to be the next Fed chair by the middle of May. But he's heading into a committee that just signaled very clearly that they are not much interested in cutting rates anytime soon. Three of the regional Fed bank presidents cast dissenting votes because they did not like the language in the Fed statement. They thought it conveyed too much expectation that the next move for the Fed will be to cut. Inflation, of course, running still way ahead of the Fed's 2% target. And you and I have talked about this a lot, but ordinary people don't think about the inflation rate. They think about prices. All they know is what cost $100 five years ago cost $120 today. Warsh's work really seems cut out for him. How do you expect him to convince the Fed members to cut rates?

LIZ ANN: You know how I'm going to answer that, Mike? I don't think he's going to convince them. I'm not sure Warsh is quite the uber dove in perpetuity here. I think he said a lot of things that maybe were seen as sort of beneficial commentary when he was, let's call it, interviewing for the job. And I'm not suggesting he was trying to pull the wool over anybody's eyes, but I've known Kevin since 2003. He's a very smart guy. I do believe he is sort of faithful to the importance of the independence of the Fed and don't think he would try to exert undue pressure against what seems to be a growing body of voting members that are not raising their hands saying, "Yeah, we think lower rates make a lot of sense here."

So I don't think he's going to buck that, call it system, if it looks like the lean, as it did with the most recent meeting, is away from being on some glide path toward cutting interest rates. So I think it's a decent chance the Fed stays on hold for all of this year. What I would say is I think a move to cut rates would probably only come if we saw significant deterioration in the labor market. In turn, I think a move to hike rates would only come with a significant acceleration in inflation from here. So sort of the rate side of things keying off the labor market part of the dual mandate and the hike side keying off the inflation part of the Fed's dual mandate.

MIKE: As I've heard you say, Liz Ann, in the past, the most important letter in FOMC is the C for committee; it's not chair. And Warsh is going to have to find a way to navigate the data, not the mood or the directives from elsewhere. 

LIZ ANN: Yes, it's not chair.

MIKE: There's an old adage I've also heard used in the investing world, "Sell in May and go away."

Catchy phrase, of course. For many years, it actually was in sync with lower volatility and lower returns during summer months. That's really no longer the case. We see summer months having close to the same performance as winter months. When you really boil down what's going on, what insights can you give us for how we should be viewing our portfolios as we head into the summer months?

LIZ ANN: I think you have to be really careful with some of this seasonal stuff, but you're right to point out that it has been less impactful, and you've seen a convergence in terms of performance, and you've had many instances where the May-to-October period has been very strong in the market, and there's really no fundamental difference necessarily that drives periods where that sort of adheres to that adage and doesn't adhere to the adage. It also sometimes stays in focus because September is historically the worst month for the stock market. So we're all probably pretty familiar with some of the fairly ugly Septembers, and some degree Octobers as well, which falls in that period of time, but I would not suggest trading around something like that. I think that the nature of earnings growth, the type of cycle of the economy when you're dealing with such an innovation-led economy, which has very strong earnings, it tends to be smoothed over time, and there's less seasonality associated with it. So I'll end where I started. It at times heeds the adage, but don't make it an investment decision-making part of your tree.

MIKE: I think just what we talked about earlier in our conversation around all that's happened this year, both at the index level but within individual stocks, just illustrates that there's so many factors pushing and pulling and what month it is is not very high on that list. Liz Ann, before I let you go, I want to ask you about an issue that I know you feel really strongly about. One, we've been talking about on this podcast more frequently, and that is the increasingly blurry lines between investing and gambling. I know you've thought a lot about this. What worries you about the direction this is heading, and maybe what's your best message for investors on how to keep focused on the difference?

LIZ ANN: Well, I think the craze in this really started with the legalization of sports betting in many states, and it really took off from there. And sadly, the numbers are just not in favor of the gamblers on these platforms. It's about 95% or 96% of people put more money in than they ultimately take money out. So the loss rate is pretty high. We know that gambling, by its nature, the odds are against you. The house generally wins. And I think the way to think about it as it relates to the blurring of the lines that has happened with, not just sports betting, but now the prediction markets is that a lot of particularly younger people, they view betting and investing as something similar. They feel like they're being left behind. They don't have confidence in sort of the future of whether it's retirement systems like Social Security. Plus, there's so much of the marketing that is bells and whistles and confetti and fireworks suggesting "Hey, this is your get-rich-quick scheme." 

And it's unfortunate because, when you're betting, you're really just a spectator. You're putting money in, you're stepping back, you hope that you have a windfall, but if not, you walk away with nothing. That's being a spectator. When you're an investor, you're a participant, and the odds are in your favor because you are investing in the future cash flows of a company. You're basically investing in what is capitalism. And that's why a tagline that I've been using is "Investing is about owning, and gambling is about hoping." And those are two entirely different things. And there's so many statistics that are rampant out there about how difficult a process this is. And we're here, hopefully, as Schwab, because we believe in financial literacy and education for investors, that we help unblur those lines between gambling and investing.

MIKE: It's a great point. The Wall Street Journal came out just recently with a study of one of the major prediction markets and found that 67% of the winnings went to 0.1% of the accounts, which I think was a really stark message. As always, Liz Ann, great conversation, great insights. I just want to thank you so much for taking the time to join me today.

LIZ ANN: Thanks for having me, Mike.

MIKE: That's Liz Ann Sonders, chief investment strategist at Charles Schwab. She's a must follow on X, where you can find her @LizAnnSonders and on LinkedIn. She's also co-host of our sister podcast On Investing, which I cannot recommend more highly. So check that out.

That's all for this week's episode of WashingtonWise. We'll be back in two weeks with a new episode. Take a moment now to follow the show in your listening app so you get an alert when that episode drops and you don't miss any future episodes. And don't forget to leave us a rating or a review—those really help new listeners discover the show.   

For important disclosures, see the show notes or schwab.com/WashingtonWise, where you can also find a transcript.   

I'm Mike Townsend, and this has been WashingtonWise, a podcast for investors. Wherever you are, stay safe, stay healthy, and keep investing wisely.