Revisiting Our Market Cycle Framework

Research evidence excerpt

Revisiting Our Market Cycle Framework

Macro Research

Portfolio Strategy

Accounting and Tax Policy

Special Situations

May 11, 2026

Without AI, The U.S. Economy Would be in Late Cyle!

Key Points

Another Solid Week for Stocks. Stocks notched their 6th week in a row of gains narrowly

led by the Tech sector with blow out earnings results among some companies feeding

euphoria and a buying frenzy in Semiconductors, which have grown from a 7% weight in

the S&P 500 in 2024 to 17% today. The concentrated rally off the bottom has widened

the difference between the S&P 500 median and market weighted P/E to ~3-turns while

the valuation for the S&P 400 mid-cap index is a reasonable 16.3x in line with its 10y

average. Earnings results have not been the only key driver, as last Friday’s solid payrolls

report gave investors relief that the U.S. economy is much more resilient in the face of

higher energy prices due to the conflict in Iran. Further, looking at 1Q 2026 GDP, the

economy has become more dependent on AI as a source of growth, given Information

Processing Equipment contributed ~40% of QoQ GDP growth. As such, absent another

spike in oil prices or a hot core CPI print, our sense is that the recent market strength has

further momentum to go over the very near-term. This week brings key economic data

releases testing the market’s hypothesis that the U.S. economy can withstand the conflict

in the Middle East. Key economic releases include CPI (5/12), PPI (5/13), and Retail Sales

(5/14) with NVDA EPS after the close the following Wednesday 5/20.

Market Cycle. The ISM Manufacturing Index moved into expansion in January after three

years in contraction putting our market cycle work in Early Acceleration (2nd phase) in