Record Highs on the Back of Earnings and AI. Will Inflation Prove Sticky and Derail the Rally?

Many investors expect rates to remain structurally higher for longer given the persistence of geopolitical supply disruptions and broadening price pressures. Although the recent move in rates has been driven largely by an inflation repricing, which is typically a less favorable backdrop for equities, the underlying growth picture remains encouraging. Morgan Stanley Research notes that average quarterly returns have historically been strongest when PMIs are rising alongside rates, with the S&P 500 Equal Weight returning approximately 5.0% and the cap-weighted S&P 500 returning roughly 4.1% in such regimes. In other words, equities have historically been able to tolerate sticky yields when accompanied by healthy growth. Nearly two-thirds of S&P 500 companies are growing their top line by at least 5%, the highest share since 2023. This broadening earnings strength is visible across the wider market as well, with the median Russell 3000 stock posting EPS growth of 10% in Q1 2026, the highest since Q3 2021. If growth continues to hold up at these levels, it may provide a fundamental cushion that allows equities to absorb higher rates.

Economic data in Europe and the US have moved in opposite directions in recent months. The Citi Economic Surprise Index, which tracks whether macroeconomic releases are coming in above or below consensus forecasts, illustrates this divergence. The Europe index has fallen to around -80, suggesting data has consistently missed expectations, while the US index has risen to roughly +40, as releases have generally exceeded forecasts. The widening gap coincided with the onset of the Iran conflict, with Europe’s relatively greater exposure to Middle Eastern energy supply disruptions likely contributing to the softness in its economic data. This gap reinforces the relative resilience of the US economy and helps explain the outperformance of US equities versus their European counterparts since the war-driven lows.

Across various US Mega-IPOs, the vast majority posted negative one-year forward returns from their IPO date, with a median decline of 31%. Even those with strong early performance, such as Rivian (+45% at one week) and Visa (+49% at three months), ultimately gave back their gains over the subsequent year. Among the list below, only Airbnb (+25%) and Arm (+132%) bucked the trend over their first twelve months. With SpaceX set to debut on the Nasdaq in June at a valuation of approximately $1.8 trillion, this pattern warrants attention. However, several structural factors could differentiate this cycle. Major indices have adopted or are considering new fast-entry rules that would allow SpaceX to be included shortly after listing, potentially pulling forward significant passive buying from ETFs and index funds. Beyond index mechanics, SpaceX sits at the intersection of several secular growth themes, including satellite connectivity, commercial space infrastructure, and AI. Whether these structural tailwinds from passive flows and thematic positioning are enough to overcome the historically poor track record of mega-IPOs remains a consequential question for the second half of 2026.