The Song Remains the Same

The Bureau of Economic Analysis (BEA) released its Personal Income and Outlays report for April on Thursday, detailing consumer spending and income trends. While a month does not a trend make, several important implications emerged from this report. The BEA’s inflation measure, the Personal Consumption Expenditures Index (PCE), has been the Federal Reserve’s preferred inflation gauge over the more commonly cited Consumer Price Index (CPI). The Bureau of Labor Statistics releases CPI data monthly, but the spending weights within the CPI basket remain static for a year, while the PCE’s weights change monthly.  

The Fed informally adopted the PCE in February 2000 under then-Chair Alan Greenspan, noting that it produced “a more consistent series over time.”¹ Under Chair Ben Bernanke, the Fed formally named the PCE its preferred inflation measure in 2012 as part of its commitment to an annual inflation target of 2%, reaffirming that target each subsequent year, most recently in January.² While new Fed Chair Warsh may alter its measurement approach, the Fed’s website continues to reflect that “the PCE index is constructed in a way that accounts for how Americans are spending their money at a given time and more quickly adapts to changes in spending patterns.”³

For this month’s release, the PCE Index rose 3.8%, and excluding food and energy, it rose 3.3%. Of the 16 subcategories tracked by the BEA, only three displayed price decreases (motor vehicles, financial services and clothing), while energy, housing, recreation services and food services all registered at least 11% in annual increases.⁴ These numbers broadly met analyst expectations but remain significantly above the Fed’s stated 2% inflation target.

Additionally, personal income was flat year over year, and last month’s reading was revised slightly lower. Spending trends were slightly higher than analyst forecasts, again due to a bump up in last month’s data. This can be a volatile data series, but higher prices, flat income and higher spending are not buoyant trends.

As of Friday, 97% of the S&P 500 has reported earnings, and the results have been outstanding. Earnings growth for this quarter is up 28%, led by semiconductor companies including Micron, Microchip and Teradyne; diversified technology companies including Meta, Amazon and Alphabet; and even metals, mining and steel companies. The ongoing AI infrastructure build is the dominant factor driving earnings growth.

Despite some blockbuster compounds targeting obesity, diabetes, oncology and immunology, a few of the larger pharmaceutical companies have held back healthcare earnings. Interestingly, energy (which has delivered the best sector performance year-to-date) has displayed tepid earnings growth due to sluggish oil service earnings, but investors may be discounting not only higher oil prices in the immediate term but also a more challenging energy landscape stemming from Middle East tensions. In certain sectors, investors are not waiting for actual earnings or sales growth to materialize (energy sales growth has been a scant 4%) before buying companies geared to potentially strong outcomes shaped by current geopolitics.

Earnings expectations remain a focus for us. As of Friday, consensus earnings estimates peg operating earnings growth at 15.8% for this year and 14.8% for next year.⁵ This follows three straight calendar years of operating earnings growth (earnings fell from 2021 to 2022), so we are already working off a strong base. We see two underlying assumptions within earnings growth expectations: first, that technology spend continues and capital markets allow for ecosystem development; and second, that consumer activity reflects adaptivity despite inflation risks and potential labor market softening. We see these estimates as achievable, but we will be monitoring underlying risks to that more optimistic outlook.  

First, we emphasize that the current negotiations remain extremely headline-driven, with questions around Iran’s decision-making mechanism, the likelihood of nuclear disarmament or inspections, Israel’s stance on negotiations, and the potential timetable for all parties. That said, major energy markets have moved markedly lower from their mid-May peaks, with Brent crude down 18% and West Texas Intermediate crude down 16%. Dated Brent, which represents the cost of North Sea oil, is down 35% since the eve of the first cease fire, yet remains $30 per barrel higher than pre-conflict levels.

Our working thesis remains that the energy price impact will be disproportionate. Equity markets in the UK and continental Europe will likely have more challenged earnings momentum due to already sluggish consumer and labor market dynamics, while potentially higher borrowing costs — should central bankers not adopt Governor Bailey’s perspectives — could further weigh on consumer and business momentum. German and UK natural gas markets have also seen some relief in recent weeks, but reflect prices 50% and 80% higher, respectively, than they were to start the calendar year. While valuations in many of those public equity markets remain unchallenged, valuation is rarely a capital market catalyst. 

From a currency standpoint, we tend to look at broad indices first, most notably the DXY index, which is a conventional index that formerly had more granularity but now is heavily weighted toward the euro and yen, as well as the Trade Weighted Dollar Index, which is more skewed to the Canadian dollar and Mexican peso. These indices have been more listless in price direction, largely flat year-to-date, but both reflecting longer-term dollar strength. Individual currency pairs, like the dollar versus the yen, euro and British pound, also have remained broadly unchanged.

One of the major reasons for this is more uniform central bank policy since the year began, with very few central banks adjusting policy amid the current inflationary backdrop. Central banks are seeking optionality and consistently refer to “second-order” or “second-derivative” inflation risks — acknowledging the first-order energy price increase risks, while waiting to see how companies pass potential price increases to consumers and how embedded consumer inflation expectations become. Outlier currency movement so far this year has centered on more commodity-centric currencies, like the Brazilian real or Norwegian crown, which have appreciated based on their major exports. Despite a relatively calm currency backdrop and some concerns about how energy price increases may disproportionately impact certain markets and economies, we would retain a global perspective across public and private assets.

¹ Pendered, David. “What is PCE? Explaining the Fed’s Preferred Inflation Method.” Federal Reserve Bank of Atlanta, May 20, 2026. Accessed 29 May 2026. 

² Ibid.

³ The U.S. Federal Reserve. “Economy at a Glance- Inflation (PCE).” Accessed 29 May 2026.

⁴ Bureau of Economic Analysis. “Personal Income and Outlays, April 2026.” BEA News Releases, May 28, 2026.  Accessed 29 May 2026.

⁵ Northern Trust Wealth Management Research. Fiscal annual earnings data accessed from Bloomberg Terminal 29 May 29, 2026.

⁶ The Congressional Budget Office. “The Budget and Economic Outlook: 2026 to 2036.” Publication 62105.  Accessed 29 May 2026.

⁷ Penn Wharton Budget Model. “Effective Tariff Rates and Revenues (Updated May 12, 2026).” Accessed 29 May 2026.

⁸ International Monetary Fund Data. “April 2026 World Economic Outlook (WEO).”