CEO Confidence Tumbled in Q2 2026

“CEO confidence fell back into negative territory in Q2 2026, reversing the surge in optimism in the first quarter,” said Dana M Peterson, Chief Economist, The Conference Board. “CEOs reported that the economy is materially worse now than it was six months ago and expected economic conditions to weaken further over the next six months. Regarding their own industries, CEO assessments about current conditions and expectations in six months deteriorated since last quarter.”

• 15% of CEOs said economic conditions were better than six months ago, down from 39% in Q1 2026.
• 47% said economic conditions were worse, up from just 8% last quarter.

• 33% of CEOs said conditions in their own industries were better than six months ago, down from 42% in Q1.
• 33% said conditions in their own industries were worse, up from 14% last quarter.

• 24% of CEOs expected economic conditions to improve over the next six months, down from 43% in Q1 2026.
• 40% expected economic conditions to worsen, up from 13% last quarter.

• 38% of CEOs expected conditions in their own industry to improve over the next six months, down from 51%.
• 22% expected conditions in their own industry to worsen over the next six months, up from 14%.

31% of CEOs expected to reduce their workforce, up from 27% in Q1 2026. This was higher than the share expecting to expand their workforce (28%, down from 31%). 40% of CEOs anticipated no change in their workforce.

The distribution of planned wage hikes concentrated in the 3-4% range, pulling from higher and lower ranges.

Fed’s Goolsbee Warns U.S. Economy Heading in ‘Stagflationary’ Direction

The energy crisis caused by the Middle East war has central banks in a dilemma: hike rates to fight inflation while imperiling growth, or wait and risk being too late.

In an interview on Thursday, Chicago Federal Reserve President Austan Goolsbee warned that the persistent combination of energy shocks and stubborn inflation could push the U.S. economy into a “stagflationary” direction characterized by a simultaneous rise in unemployment and price growth. (…)

I don’t think that tariff-driven inflation on goods has gone down nearly as rapidly as people wanted. And if you look at services inflation in the U.S., it’s high and rising — and that can’t be from tariffs, and that can’t be from oil. So there are some concerning aspects even separate from the war. (…)

I’m worried about the stagflationary direction—meaning inflation and unemployment going up at the same time. That is entirely possible and the worst-case scenario. That is among the most challenging situations that a central bank can face because raising, cutting or holding rates doesn’t fix the problem.

The more stagflationary shocks we get, the more we’re going to be put in this difficult position as a central bank where we have to choose which is worse: the beginning of a recession or igniting more inflation and expectations becoming unanchored. (…)

For me, the inflation danger is the more immediate threat right now. (…)

• Warsh’s New Challenge: Containing Fed Hawks as Inflation Simmers

The challenge may grow Thursday when new data is expected to show the Fed’s preferred gauge of inflation rose 3.8% in the 12 months through April — almost two full percentage points above the central bank’s 2% target. (…)

While President Donald Trump has said he wants Warsh to act independently as Fed chair, political pressure to bring rates down isn’t far from the surface.

Just hours after hosting Warsh’s swearing-in last week, Trump said he expected rates would come down “very quickly.” (…)

Long-term inflation expectations have taken a hit too. Looking ahead five to 10 years, consumers expect prices to rise an annualized 3.9%, up from 3.5% in April and the highest in seven months, according to the University of Michigan’s consumer survey for May. (…)

Home Alone: inflation and the new Fed chair

Michael Cembalest, Chairman of Market and Investment Strategy for J.P. Morgan Asset & Wealth Management

The new Fed chair Kevin Warsh, like Kevin McCallister in Home Alone, faces a lonely vigil: survive until the adults get home again.

The new Fed chair has highlighted an inflation measure that sends an all-clear signal on easing: “trimmed” PCE inflation. Good luck with that; trimmed inflation did a very poor job identifying the 2021 Biden-flation surge which the GOP understandably cites as a policy failure.

In this Eye on the Market we look at inflation signals Warsh faces as he deals with pressure from Trump, who stated that the Fed should cut rates ASAP and that the US should have “the lowest rates in the world”.

Similarly, when asked last December where rates should be a year from then, Trump responded by saying “1% and maybe lower than that.”

Before getting into the details, three big picture charts below:

• the surge in US commodity prices which may feed into core consumer and producer price inflation, at least temporarily;
• the rising sensitivity of the US business cycle to changes in inflation;
• and deteriorating US public finances.

 

During Warsh’s term (if he lasts as long as prior Fed chairs), he will preside over the dreaded crossover point: in 2031 entitlements, interest and other mandatory outlays are projected to permanently exceed Federal tax revenues for the first time. In other words, the scope for a monetary policy mistake is getting narrower by the day, and rising Treasury yields are rapidly shrinking the equity risk premium earned by investors.

Inflation indicators the Fed watches include labor market tightness, price pressures in the manufacturing sector, supply chain tightness and the “output gap” which measures how far actual growth is above/below potential growth. (…)current values are much closer to conditions that have historically prompted the Fed to raise policy rates rather than to lower them.

That may be why the futures curve is now pricing in Fed hikes instead of the cuts that were priced in at the start of the year.

Superwonky: averaging several different monetary rules of thumb (Taylor rules, inertial, alternative r*, forward-looking) yields a Fed Funds range of 4.00% – 4.85% compared to the current range of 3.50% – 3.75%.

Inflation expectations can be derived from household surveys and from inflation-linked bond markets. Both have risen a small amount since the war began. (…)

I’m not going to torment you by listing all the differences between PCE inflation and CPI inflation; the Fed looks at both but reportedly has a preference for the former. One major difference: housing inflation is more heavily weighted in CPI while computer software and accessories are more heavily weighted in PCE. Since March 2025, software inflation has exceeded housing inflation by 9% (12% vs 3%).

Producer prices are rising for several reasons: rising transport costs due to higher energy prices; copper and aluminum demand for energy storage, solar panels and EV production; soaring costs for electronic components and memory chips due to the AI boom; rising costs for application software (at least until the Agentic AI shock shows up in the data); higher US tariffs; and new export controls from China on rare earths and medical equipment.

Silver lining: core PPI is often a poor predictor of future PCE inflation.

While it’s impossible to know the precise reasons for it, US productivity has picked up since the launch of GPT in the fall of 2022 with even larger gains in the information sector and in the IT data processing subset. The Warsh view on AI focuses on its potential to boost the supply side of the economy which would argue for lower rates.

This differs from the Powell view that in the short run, AI capital spending is likely inflationary on the margin.

JP Morgan’s economists believe that the FOMC staff and much of the rest of the committee are likely more aligned with Powell on this issue, and do not foresee a scenario where the committee gets enough clarity on productivity gains (which generally come with a multi-year lag) to justify lower rates in the near term.

It’s also worth remembering that productivity gains often don’t get recognized by the Fed until years after the fact. In 2019, Fed researchers recalculated deflation in the Information and Communication Technology sector in the 1990’s and found roughly double the ICT deflation than levels reported in official statistics for both software and equipment. They also recomputed PCE inflation for consumer digital services (data, voice and video to households over internet, mobile and cable networks).

Even though the consumer digital access basket is only 2.5% of consumption, the revision was large enough to cut ~50 basis points from overall PCE inflation from 2008 to 2018. End result: in both cases, real growth and productivity gains were understated.

US 30-year Treasury yields have not consistently exceeded 5% since 2007 but have just crossed that threshold. The US equity risk premium (the estimated excess return in equity markets over bond markets) has been falling and now stands at its lowest level since the early 2000’s.

Also shown below: investor complacency is rising as illustrated by the declining price for downside protection on the NASDAQ.

A lot is riding on normalization of energy prices and an end to the Iran war, since fossil fuel energy independence hasn’t insulated the US from sharply rising US commodity prices.

Productivity gains from AI will be important to track since they might be the crux of Warsh’s argument that the Fed avoid hiking rates even if economic indicators suggest they should.

There’s also pressure that will come from the White House to ease, which might end up being the defining act of Warsh’s tenure at the Fed. Let’s hope for his sake that he does not end up like Arthur Burns, for whom the adults did not return in time.

What Could Possibly Go Wrong?

Ed Yardeni:

The bull case for the stock market remains intact. The S&P 500 rose to yet another record high today. The economy and the labor market remain resilient. Consumers are spending. The AI boom is boosting capital spending. Corporate earnings are soaring on strong revenues growth and higher profit margins. The odds of a recession in 2026 fell to 19% today, the lowest reading of the year. Stock prices are rising on FEMO (fabulous earnings momentum) rather than FOMO. (…)

But a disciplined bull monitors the risks. Here are the ones we’re watching:

(1) Elevated valuation.

(2) Earnings exuberance.

(3) Bond Vigilantes and hawkish Fed. An unexpected rate hike at the July meeting (which we are expecting) could unsettle the stock market.

(4) The war and oil prices.

(5) Concentration. Micron alone accounts for a staggering 51% of S&P 500 EPS growth revisions since February 27.

(6) Mixed sentiment. 54.8% of consumers expect stock prices to be higher in 12 months, well above the long-run average of 35.5%. That’s the most bullish reading on equities outside of the recent highs. From a contrarian perspective, that’s bearish. With household wealth increasingly tied to equity portfolios, a market sell-off would trigger a negative wealth effect more quickly and sharply than in prior cycles. That could cause consumers to retrench, resulting in a recession.

(7) Funky private credit.

(8) Monster IPOs. The deal’s 4.29% float is deliberately small, generating an estimated $42 billion shortfall between index demand and available float as SpaceX seeks fast-track index inclusion. Passive and active managers benchmarked to the S&P 500 would need to sell existing large-cap holdings to make room for that deal and for the gigantic IPOs of OpenAI and Anthropic.

(9) AI is too expensive. Our main concern currently is that agentic AI is a budget buster. AI is supposed to cut labor costs, increase productivity, and boost profit margins. There is another side to this story.

Ed could add to his long list “The war and input supplies”. It’s not just prices, it’s the availability of critical inputs to sustain world production.

One Million New-Car Buyers Are Gone and They’re Not Coming Back Soon High gas prices, rising interest rates and stubborn inflation are keeping buyers at home and cars on the lots

(…) consumers—stung by persistent inflation, rising fuel prices and high interest rates—are balking at prices that have risen to around $50,000 on average.

Americans were buying around 17 million cars and trucks a year before 2020; industry analysts don’t expect the market to return to that level until the end of the decade or later. They now forecast total annual sales of about 16 million vehicles or fewer this year, and that outlook has grown even dimmer as the conflict in Iran keeps gas prices high. (…)

While around one-quarter of models in the U.S. go for between $25,000 and $35,000, an even bigger share tops $55,000, according to data from the car-shopping website Edmunds.

Executives at the world’s biggest automakers say they recognize that a new car is out of reach for more Americans. Some have promised to bring out more affordable models. But no one predicts significant relief soon.

Historically, stagnating sales led automakers to juice demand by rolling out deals and incentives that eroded their profit margins. That isn’t the case this time, particularly as America’s automaking giants, GM and Ford, are making solid profits selling fewer vehicles.

“I don’t want to say automakers are OK with this level of sales, but they kind of are,” said Ivan Drury, an Edmunds automotive analyst. “It’s not like back in the day when they’d be hacking away at the price to lift sales.”

That’s because selling big trucks and SUVs that dominate those automakers’ lineups is more lucrative than selling larger volumes of cheaper cars. (…)

“For now, things are going well. But what happens if we hit another recession?”

Buyers are left with few options. They could turn to used cars, but those are similarly climbing in price. Many choose to keep their old cars running longer. The average car on U.S. roads is now about 13 years old, a historic high, according to S&P Global. 

Profits from more-expensive vehicles are helping offset the higher costs of doing business in the auto industry in the 2020s. Nearly every automaker is paying billions of dollars more each year to foot the bill for President Trump’s tariffs. Ford incurred about $2 billion on tariffs last year. Car companies are also erasing billions from their balance sheets as they walk back costly electric-vehicle investments. (…)

Yet introducing new cheap models isn’t part of GM’s plan. A spokesman said the company is “very comfortable” with its portfolio as it stands today, noting that developing a new vehicle is costly and money the company should spend only if a model will add value over time. (…)

John Murphy, a longtime auto analyst and corporate adviser, for years had been certain that the auto market would return to its 17-million-a-year days. He doesn’t think that anymore.

Reaching that level would require a big surge in vehicles available for less than $40,000, which doesn’t appear in the cards.

“Automakers are more disciplined,” Murphy said. Covid-driven supply-chain shortages showed automakers that they could make a lot of money selling fewer vehicles at higher prices. Before then, companies would slash prices to outsell one another, afraid of losing market share.

“It’s great for investors, great for stock prices and good for cost of capital,” he said. “They’re actually running the business in a much more focused way.” (…)

Elsewhere in today’s WSJ:

Several dozen Democratic lawmakers recently urged Trump to bar Chinese automakers from building cars in the U.S. and called for a ban of Chinese carsmade in Mexico or Canada, saying, “We must not cede the American auto industry to a strategic competitor intent on global dominance.” (…)

Some policymakers believe the investments could help reinvigorate local manufacturing industries. When Japanese carmakers expanded in the U.S. in the 1980s and 1990s, it forced U.S. carmakers and suppliers to adopt new approaches that ultimately made those companies more resilient and benefited car buyers. (…)

In yesterday’s Daily Edge:

EV sales are growing as more affordable models are available both from domestic manufacturers including Volkswagen AG and Stellantis NV, as well as Chinese brands led by BYD Co. In Germany, Europe’s largest market where a new subsidy is in place, EV sales jumped 41%.

FYI:

Entry-level electric cars like the BYD Seagull sell for under $10,000 USD, and there are over 200 EV and hybrid models available for under $25,000 USD. For comparison, the average price of a new car in the US is roughly $51,456 USD.

FYI #2 but unrelated:

• Asked whether he would be open to a deal under which Iran and Oman were handed control of the Strait of Hormuz, Trump said: “Nobody is going to control it. It’s international waters, and Oman will behave just like everybody else, or we’ll have to blow them up.”
• Trump again appeared to seek to pressure Washington’s Arab allies, including Saudi Arabia and Qatar, to normalise ties with Israel, suggesting it should be a condition for the US reaching a deal with Iran. “I think they owed that to us,” he said. “I’m not sure we should make the deal if they don’t sign.”

Remind me what were the objectives of that war again?

FYI #3 and also unrealetd:

The DOJ Wants to Know Who on Reddit and X Is Criticizing ICE’s Tactics In seeking identities of those behind anonymous social media posts, the Trump administration is intensifying its pursuit using grand jury subpoenas.

The US Justice Department is seeking the names, addresses, and banking information of Reddit and X users, ratcheting up efforts to identify social media critics of government deportation efforts.

The US Attorney’s Office for Washington, led by Jeanine Pirro, a close ally of President Donald Trump, has subpoenaed the social media companies as part of criminal investigations, asking for personal information on at least two anonymous posters behind accounts that have chided immigration enforcement efforts, according to records shared by attorneys for the users. (…)

Even if no charges ultimately are filed, the attorneys contended in interviews that rooting out identities of dissenters is at the very least an intimidation tactic. (…)

Anonymous speech is a bedrock of the US political system, said First Amendment Coalition Executive Director David Snyder. He pointed to The Federalist Papers, which are 18th century essays written to encourage ratification of the US Constitution by some of the nation’s founding fathers. They used the pseudonym “Publius.”

“They understood at a very visceral level that in order to speak your mind, sometimes you need to be able to do so anonymously,” Snyder said, “so the government doesn’t come after you.”

Europe Car Sales Rise for Third Straight Month on EV Demand

New-vehicle registrations rose 7% to 1.15 million last month, the European Automobile Manufacturers’ Association said Wednesday. Sales expanded in major markets including Germany and the UK, with EV deliveries jumping 38%. (…)

EV sales are growing as more affordable models are available both from domestic manufacturers including Volkswagen AG and Stellantis NV, as well as Chinese brands led by BYD Co. In Germany, Europe’s largest market where a new subsidy is in place, EV sales jumped 41%. (…)

Deliveries of hybrid cars also rose in the region last month, while sales of petrol and diesel vehicles fell, pointing to a continued structural shift of the market toward cars with a battery.

Tesla Inc. continued its recovery in Europe after a painful 2025, with the US manufacturer’s European sales jumping 47% in April. Volkswagen, Stellantis, Mercedes-Benz Group AG and BMW AG also posted higher deliveries.

Chinese brands continue to make inroads in Europe, providing relief from a brutal price war back home, with Geely and BYD among the top sellers from the country. Chery Automobile Co. was among the fast-growing with a 322% rise. Its Jaecoo sport utility vehicles are proving particularly popular with British buyers.

• Volvo Car Avoids US Ban on Connected Vehicles Tied to China

The Trump administration reached an agreement with Volvo Car AB that will allow the automaker to avoid a US ban on connected vehicles tied to China.

Volvo, which is majority-owned by China’s Zhejiang Geely Holding Group, received a specific authorization from the US Commerce Department allowing it to continue importing and selling connected passenger vehicles in the US, the automaker said Tuesday, confirming an earlier report by Bloomberg News.

The agreement spares Volvo from one of the US barriers that have effectively walled off the American market from Chinese cars over national and economic security concerns. Along with the Commerce Department’s ban on Chinese connected vehicle technology, Chinese cars also face punitive tariffs, including a 100% import tax on electric vehicles from the country.

Volvo builds vehicles in the US at a plant near Charleston, South Carolina, where it has invested more than $1.3 billion. The company also imports models from Sweden, where it’s headquartered, and started assembling one of its better-selling electric SUVs in Belgium last year in part due to the US raising tariffs on cars manufactured in China.

The US ban on connected vehicles and related hardware and software technology with ties to China takes effect starting with the 2027 model year. Many modern cars contain an array of sensors such as cameras that can collect data, as well as systems that can wirelessly transmit information beyond the vehicle, raising concerns that automobiles could become targets for hackers or foreign adversaries. (…)

Volvo’s approval does not appear to extend to Polestar, the EV maker that also is effectively controlled by Geely’s billionaire founder, Li Shufu. Polestar said in a statement that it continues to work with US authorities to meet the requirements of the regulations. (…)

The authorization followed “constructive discussions with the US Department of Commerce and other US officials regarding Volvo Cars’ governance, technology and data security,” the carmaker said in its statement. (…)

The timing of the decision comes as the company awaits shipments of 2027 model-year vehicles. It is unrelated to Trump’s recent visit to Beijing, nor is it a sign that his administration is considering approvals for other Chinese-owned carmakers, said US officials familiar with the matter, who asked for anonymity to discuss the decision. (…)

“It is about showing how we handle data, that US customer data isn’t transferred to China,” Samuelsson said in a March interview. “These are basic requirements, and our setup is no different from other Western manufacturers.”

Germany, Spain Push Back on Europe’s Plans to Ban Huawei Gear

Germany and Spain are leading opposition to European Commission plans to ban Chinese technology suppliers from telecom networks as part of new cybersecurity rules, according to people familiar with the negotiations.

Officials from the countries want to keep state-level control, and have expressed concerns that banning products from Huawei Technologies Co. and other Chinese suppliers at the EU level risks retaliation from Beijing, the people said, asking not to be identified as the discussions aren’t public. The states also warned that a ban risks making the bloc’s plans to build out artificial intelligence infrastructure more expensive, they said.

The commission has labeled Huaweiand compatriot ZTE Corp. “high-risk suppliers” for telecom networks, and Brussels has urged member states to exclude the two companies from connectivity infrastructure. While infrastructure decisions are made by national governments, the EU’s executive governing body is pushing for stronger oversight via a revision to its Cybersecurity Act.

The changes would expand cybersecurity assessments to include the risks of foreign state influence and dependency on particular suppliers, and would make the commission’s recommendations legally binding across the EU.

European governments are caught in the middle of a power struggle between the US and China, balancing the benefits of trading with the Asian nation and the need to scrutinize foreign sources of critical infrastructure. German Chancellor Friedrich Merz, previously critical of over-reliance on China, said this year that he’ll push ahead with a new effort to strengthen Sino-German ties. The EU is also planning to propose temporarily lifting sanctions on a Chinese chip supplier to shore up the automotive supply chain.

Lawmakers and security experts in Europe and the US have for years raised concerns that Chinese companies could embed backdoors into their equipment that would allow unauthorized access to Europeans’ personal data. Both Huawei and ZTE have denied such claims. A Huawei spokesperson said a proposal to exclude Chinese suppliers based on their country of origin “violates the EU’s basic legal principles of fairness.” (…)

Spain has also become a more vocal proponent of Chinese interests in the EU in recent years. Prime Minister Pedro Sánchez has traveled to Beijing four times in as many years as he courts Chinese investment in sectors such as electric vehicles and renewable energy.

Germany has joined that effort even as there is disagreement within the ruling coalition and between the different ministries concerned with the process, some of the people said. While parts of the government generally agree with reducing reliance on China, others have been calling the idea a political bombshell, the people said.

The German government agreed in 2024 to strip Huawei and ZTE components from the core 5G mobile network by the end of this year for national security reasons.

• Germany’s Reiche Tells EU to Avoid Harming Exports to China

German Economy Minister Katherina Reiche said the European Union should ensure that any measures it applies on Chinese trade don’t harm the bloc’s exports to the country.

In comments to reporters on Wednesday during her visit to Beijing, just days before Brussels officials consider whether to strengthen their stance on sales from the world’s second-biggest economy, she emphasized that any EU response shouldn’t get out of hand.

“As an exporting nation, we have two interests,” Reiche said. “We need to counter unfair competition, for example, in steel and ferroalloys, with appropriate measures, while at the same time ensuring that our companies can continue to export.” (…)

• EU Firms Warm to China Even as Tensions Spiral Over Export Surge

European firms in China are turning more upbeat about their business outlook, a new survey found, just as Brussels appears poised to take action against a swelling trade imbalance with Beijing.

About 35% of respondents reported being optimistic about their industry growing in China over the next two years, up from a record low of 29% in 2025. The annual poll, published on Wednesday by the European Union Chamber of Commerce in China, also showed that 47% of companies said the local business environment had become more politicized in the last year, the lowest share since at least 2023. (…)

About 68% of respondents said business had become more difficult in their industry over the past year, the second-highest proportion over at least the last decade. Less than a fifth of companies were optimistic about their profitability outlook over the next two years, the third-lowest level since at least 2013. (…)

Why Huawei’s New Chipmaking Plan Has Investors Buzzing

(…) Chinese tech giant Huawei Technologies Co. captivated industry watchers and investors on May 25 when its semiconductor chief, He Tingbo, outlined a new approach to chip design — a departure from the decades-long industry focus on shrinking transistors to improve performance.

The company’s vision for improving semiconductor efficiency, which it calls Tau Scaling Law, sparked a rally across China’s chipmaking sector the following day. Investors bet on Huawei’s ability to innovate within the constraints imposed by US trade curbs, pushing shares of its chipmaking partner Semiconductor Manufacturing International Corp. up nearly 6%.

Decades ago, Intel Corp. co-founder Gordon Moore predicted that advancements in semiconductor manufacturing would allow the number of transistors in an integrated circuit to roughly double every couple of years. This observation, which became known as Moore’s Law, held true for decades as smaller transistors on more densely packed circuits boosted performance while consuming less power.

Huawei’s proposed Tau Scaling Law seeks to move away from that model by improving performance not through ever-shrinking transistors, but by shortening the distance that data must travel inside a processor.

The company has called this technology LogicFolding: dividing what would typically be a flat chip layout into slices of computing blocks and stacking them atop each other so information can move more quickly. While the concept isn’t new — chip designers including industry leader Taiwan Semiconductor Manufacturing Co. already use advanced stacking technologies — Huawei is proposing a more aggressive redesign of chip architecture itself.

Such an approach could face significant engineering challenges, including manufacturing complexity, heat dissipation and power delivery. It also remains to be seen whether the technology can be deployed economically and at scale. Nevertheless, Huawei has outlined an ambitious roadmap for LogicFolding and said it plans to introduce the first such chips in smartphones later this year. (…)

Huawei is currently operating near the physical limits of the manufacturing technology available to it. The company is effectively constrained to producing chips at a geometry of 7 nanometers because US-led export restrictions have cut off its access to the extreme ultraviolet lithography systems needed to pattern ever-smaller transistors efficiently and at scale.

If successful, such a breakthrough could allow Huawei to work around these trade restrictions by improving chip performance through design and packaging innovation rather than through technology that it doesn’t have access to.

This could help narrow the technological gap with rivals such as TSMC. Using LogicFolding technology, Huawei says it aims to produce semiconductors with performance comparable to 1.4nm chips by 2031. That would still leave Huawei years behind TSMC, which is targeting similar advances by 2028, but it would represent a substantially narrower gap than what exists today. Huawei and its manufacturing partner SMIC are currently several generations behind the Taiwanese chipmaker.

Adding more layers to a chip stack significantly increases manufacturing complexity and raises the likelihood of defects, potentially reducing the yield of commercially viable chips.

The stacking approach could also create major thermal challenges, as densely layered chips tend to trap more heat and may require more advanced cooling systems. One major advantage of flat chips is the maximal surface area for heat dissipation.

(…) some US policymakers and industry executives — including Nvidia Chief Executive Officer Jensen Huang — have argued that restricting access could ultimately backfire by spurring Chinese rivals to accelerate their own technological development.

Goldman Strategists Lift S&P 500 Target to 8,000 on AI, Earnings

Strategists at Goldman Sachs Group Inc. joined peers at Morgan Stanley and Deutsche Bank AG in seeing a 17% return for the S&P 500 Index this year.

Earnings growth powered by the AI boom will drive further gains in stocks, the Goldman team led by Ben Snider said as they increased their year-end target for the US benchmark to 8,000 points, ditching a previous forecast of 7,600.

“Continued earnings growth should drive continued equity market upside,” the strategists wrote in a note. “The increased return forecast reflects increased estimates for S&P 500 earnings following an exceptionally strong first-quarter reporting season.” (…)

The Goldman strategists also increased their earnings-per-share forecast for companies in the S&P 500 to $340 for 2026, signaling year-on-year growth of 24%. They project a further increase of 13% for 2027.

Beneficiaries of artificial intelligence infrastructure investment should account for roughly half of S&P 500 EPS growth this year, the strategists said. Meanwhile, increases in valuations should be tempered by risks to the outlook, they said.

“The combination of decelerating earnings growth and continued uncertainty around both AI and the macroeconomic outlook should prevent a major increase in valuations,” the strategists wrote. “AI sentiment and interest rates create risks in both directions.”

More from Goldman Sachs:

The conditions that have marked the ends of high-valuation, high-concentration bull markets in the past remain mostly absent today, although some of those conditions appear to be drawing closer.

Two of those dynamics are speculative mania and deteriorating macro fundamentals. Despite the sharp recent market rally, measures of froth including our Speculative Trading Indicator remain well below prior highs.

Likewise, while IPO activity is increasing, recent issuance has been modest.

Fundamentally, earnings strength has been the key differentiator between the recent market run and similar narrow rallies in the past. However, the earnings-driven outperformance of AI infrastructure stocks also raises their hurdle going forward, and the oil shock threatens to create the conditions of disappointing growth and tightening financial conditions that have marked the ends of previous bull markets.

The recent equity market return has been narrow, but both its magnitude and composition have been driven primarily by earnings strength. Since the start of the war on February 27, the S&P 500 has returned 9%, S&P 500 stocks involved in the AI infrastructure build-out have returned 33%, and the equal-weight S&P 500 has returned just 1%. However, the 33% rally of S&P 500 AI infrastructure stocks has occurred alongside a 30% increase in consensus forward earnings for the group.

GS also warns that “recent inflation readings and corporate commentary have signaled the risk to profit margins from input cost pressures. Our top-down macro model for the median S&P 500 company points to limited margin expansion through 2027. However, we expect macroeconomic earnings headwinds will be more than offset by the powerful tailwinds from the AI investment boom.

We expect the beneficiaries of AI infrastructure investment will account for roughly half of S&P 500 EPS growth in 2026 and 2027.”

 

What about the rest?

Hmmm…

Meanwhile:

US Treasuries are experiencing the worst bear market in history: The US Treasury Total Return Index has now been in a drawdown for 69 consecutive months, the longest streak in over 100 years of data.

The previous record stretch that ended in 2019 lasted for ~30 months.

This is also only the 3rd time in history that a drawdown has exceeded 20 months. During the current drawdown, the US Treasury Total Return Index fell as much as -18% from 2020 to 2022. Since then, it has recovered some of its losses, but it is still down -6% since 2020. (@KobeissiLetter)

Iran’s Khamenei Says No Going Back for Middle East Rocked by War

Iran’s Supreme Leader Mojtaba Khamenei said US military bases in the Middle East will no longer be safe after the war, declaring victory and a new regional order even as talks to end the conflict continued.

“The clock cannot be turned back; the nations and lands of the region will no longer be a shield for American bases,” he said in a written statement marking the Islamic Hajj pilgrimage in Saudi Arabia, which he said had an important role in “narrating the victory” of the war against the US-Israeli alliance.

The comments indicate Iran’s view that the conflict has fundamentally changed the balance of power in the oil-rich Persian Gulf, weakening the US and establishing deterrence that will compel Gulf Arab countries to coexist with the Islamic Republic.

Khamenei cited Iranian pilgrims’ participation as a sign of Islamic unity — despite Iran’s strategy of attacking regional countries in retaliation against US-Israeli airstrikes — inviting all Muslim countries to “friendship and cooperation.”

The United Arab Emirates, which bore the brunt of Tehran’s attacks and struck Iran multiple times in response, has joined Saudi Arabia and Qatar in urging US President Donald Trump to negotiate an end to the war, Bloomberg reported last week. (…)

We seem to be moving toward a peace deal brokered by the GCCs, Pakistan and Turkey, creating a regional coalition with Iran with or without the participation of the US.

Why would the GCCs let Trump define their future given that he repeatedly said the US has no need for Middle East oil and does not care about Hormuz, “We’re now totally independent of the Middle East… We don’t need their oil, we don’t need anything they have”. “We don’t need the Strait of Hormuz”.

And on Monday, Trump displayed his total ignorance of the history and complexity of the region:

• Trump can’t sell the Abraham Accords on a Middle East that has lost trust in the US

As the US and Iran try to come to terms on a peace deal to end their months-long war, US President Donald Trump this week has introduced a new demand – that other countries in the Middle East sign on to his Abraham Accords, normalising relations with Israel.

There are reasons for this. The US and Israel are militarily, strategically and economically weaker than they were on the eve of launching “Operation Epic Fury”, their joint military operation against Iran, in late February.

Their carefully built-up alliances with Persian Gulf countries are now being reevaluated, given these ties didn’t prevent Gulf states from being attacked by Iran. And Iran – despite losing many political and military leaders in months of devastating strikes – seems more powerful than ever.

In this context, both Trump and Israeli Prime Minister Benjamin Netanyahu desperately need a symbolic victory they can sell to their respective electorates before the US midterm elections and Knesset elections later this year.

This partially explains why Trump is trying to re-invigorate the Abraham Accords, which he has long touted as one of the biggest foreign policy successes of his first term in office.

In a phone call over the weekend with regional partners, including Saudi Arabia, Qatar, Pakistan, the United Arab Emirates (UAE), Bahrain, Turkey, Egypt and Jordan, he insisted their inclusion in any Iran deal depended on all joining the accords. This means establishing diplomatic ties with Israel. (…)

Since Israel’s devastating retaliatory war on Gaza began, Saudi Arabia has been a prominent advocate of Palestinian statehood. It has publicly refused to sign the accords without firm guarantees of Palestinian self-determination.

The remaining regional powers, such as Pakistan, Qatar and Turkey, must take account of their restive populations, who are overwhelmingly supportive of Palestinian self-determination. (…)

Pakistan, in fact, has already rejected Trump’s demands and Saudi Arabia is likely to follow.

So, while it might make sense to link Iran and Palestine together through a regional peace agreement, the Abraham Accords are simply too toxic in their current form for most countries to entertain. (…)

Saudi Arabia has reportedly floated a regional non-aggression pact (including Iran) along the lines of Europe’s Helsinki Accords that aimed to ease Cold War tensions in Europe.

Perhaps Trump is trying to re-invigorate the Abraham Accords as a way to counter the Saudi move. Undoubtedly, he is also trying to appease Netanyahu. The silence his demand has received, however, may indicate the region is no longer amenable to US persuasion, no matter how big the carrots are.

BTW: ‘Enemy state’: Israel turns sights to Turkey

Tensions between Israel and Turkey are rapidly deteriorating, with senior figures on both sides now openly framing the other as a future regional enemy.

The latest escalation came after Israeli culture minister Miki Zohar warned Turkey should be treated as an “enemy state” following the interception of a Gaza-bound aid flotilla that sailed from the Turkish city of Marmaris earlier this week.

“We must begin to treat Turkey as an enemy state,” Zohar said.

“If Turkey chooses the path of war with us, it will undoubtedly pay a very heavy price. There were Iranians who thought the same thing, and look where they are now.”

The comments reflect a much broader shift that has been building for months as the Gaza conflict, regional instability and the weakening of Iran reshape Middle East alliances.

Last month, Turkish foreign minister Hakan Fidan accused Israel of actively searching for a replacement enemy as tensions with Tehran evolve.

“After Iran, Israel cannot live without an enemy,” Fidan said.

“We see that not only Netanyahu’s administration but also some figures in the opposition … are seeking to declare Turkey the new enemy.”

“This is a new development in Israel … turning into a state strategy.”

Relations between the two regional powers have collapsed since the October 7 Hamas attacks and the subsequent Gaza war. Turkish President Recep Tayyip Erdogan has become one of Israel’s fiercest international critics, repeatedly accusing the Israeli government of genocide and openly supporting Hamas as resistance fighters.

Israeli officials have responded with increasingly personal attacks on Erdogan, with Prime Minister Benjamin Netanyahu accusing the Turkish leader of massacring Kurds, while Turkey’s foreign ministry recently labelled Netanyahu “the Hitler of our time”. (…)