May 2026
CIO Perspectives: War, Fundamentals, and the Fed
- After a turbulent start to the year marked by a 4.4% quarterly decline and a 9% peak-to-trough drawdown, the S&P 500 has fully recovered to all-time highs, propelled by resilient consumer spending and strengthening corporate earnings growth.
- However, persistent energy disruptions stemming from the Middle East conflict continue to pose meaningful risks, with the potential to suppress consumer spending, tighten financial conditions, compress corporate margins, and ultimately weaken the labor market if prolonged.
- As long as inflation expectations remain anchored—market-based measures holding near 2.2%—the Federal Reserve can afford to be patient on energy price spillovers and shift its focus toward labor market conditions, potentially opening the door to further easing later this year.
- As energy market volatility, consumer resilience, labor market stability, and inflation expectations remain in flux amid shifting geopolitical forces, staying anchored in economic fundamentals is essential to navigating the uncertainty ahead.
The Iran-U.S. ceasefire has helped calm markets, giving investors room to refocus on economic fundamentals. For now at least, those fundamentals remain on solid footing. The S&P 500 has climbed back to all-time-high levels following a rough start to the year, recovering from a 4.4% decline in Q1 and a 9% peak-to-trough drop between January and March. That rebound has been driven by resilient consumer spending and strengthening corporate earnings growth.
Nevertheless, risks remain. Persistent energy disruptions—a lingering consequence of the Middle East conflict—could weigh on consumer spending. They could also tighten financial conditions, compress corporate profit margins, and if sustained, soften the labor market.
In this edition of CIO Perspectives, we take stock of what is keeping the economy on track, examine the risks worth watching, and explore how the Federal Reserve (Fed)—itself in flux—may approach monetary policy during this period of geopolitical uncertainty.
Authors
Niladri ‘Neel’ Mukherjee
TIAA Wealth Management Chief Investment Officer
Alberto Favalli-Ragusini
TIAA Wealth Management Director, Investment Strategy
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