Acceleration Nation

As investors, we are constantly evaluating new data releases and the headlines that follow. Recently, headlines have skewed heavily toward the increased uncertainty and volatility caused by the war in the Middle East, but there is some data that’s sending a more upbeat message. This makes expectations for the Federal Reserve’s benchmark interest rate even more interesting this year.

For starters, the labor market is showing signs of life after months of very low activity raised concerns that it was weakening. Payroll growth has accelerated in the most recent readings from the Bureau of Labor Statistics and ADP. The March BLS report saw a strong rebound from a very weak February reading, and ADP payrolls for April came in at their strongest level since Jan 2025.

While this data is usually well covered in news headlines, one thing that’s not typically covered is the component of the JOLTS (Job Openings and Labor Turnover Survey) report that tracks hiring rates. In April, the number of overall hires rose and there was an improvement in the hiring rate after many months of being flat-to-down. Both registered their highest levels since early 2023 despite no increase in job openings. This suggests that openings are being filled more quickly.

We’re not hearing much about labor improving because it’s not obvious in the headline numbers. It’s also more of a recovery after a soft patch than it is a newfound reacceleration. Regardless, we have to respect the data: We’re seeing increased activity in labor, which is a positive message.

Growing Through It

The labor market is an important gauge of economic strength, and it feeds into economic growth: As long as consumers are employed, and as long as businesses can find efficient labor, growth is likely to remain intact.

We just got the read of first-quarter GDP, which came in at 2%. That’s slightly below expectations, but healthy nonetheless. Beyond that, the Federal Reserve Bank of Atlanta’s GDPNow forecast is a widely watched GDP expectations number. In its most recent reading on May 5, second-quarter GDP is tracking toward a considerably stronger 3.7%.

This can still change a lot before the end of the quarter, but positive contributions from consumer spending, nonresidential fixed investment, and inventories indicate strong underlying demand. According to the current situation, growth is in a good place.

Earnings Keep Hitting the Jackpot

At this point, first-quarter earnings season is almost complete and to say earnings growth surprised to the upside would be an understatement. With roughly 80% of the S&P 500 reported, year-over-year earnings growth is a whopping 25.7%, compared to expectations of 13.1% growth at the end of March. Earnings for the index overall were almost 19% higher than expected, and all 11 sectors have reported positive earnings surprises.

The sectors most tied to AI are still the main contributors to earnings growth, which isn’t surprising. But there are other sectors showing strength as well, which makes this fundamental picture even more attractive.

One could argue that even earnings are starting to look inflated due to AI, and that may end up being true. But right now, I’m not willing to fight the trend and continued tailwind that technology is bringing to the U.S. economy.

It’s Only May

It’s not lost on me that we’re not even five months through the year, and we’re still dealing with sharply higher oil prices and uncertainty around the effects of the war. Safe to say it’s not lost on the Federal Reserve either.

We started 2026 with a market that expected two to three rate cuts by the end of the year, but as I write this, it’s pricing in a very small probability of a rate hike. Much of the volatility in rate expectations has been driven by inflation concerns, but when we layer on the stronger data I just laid out, it’s looking less and less likely that we see any Fed rate cuts this year.

I view hikes as highly unlikely, and would expect the Fed to use other tools (e.g. balance sheet reduction or hawkish signaling) to tighten conditions if officials deem it necessary. But with a new Fed chair and a committee that’s very divided, holding steady on rates for the foreseeable future seems like the only plausible option.

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