Current State of the U.S. Economy & the Dominant Driver Behind Strong Earnings Expectations

Ian Venzon, AVP at Pence Capital Management explores the economic implications of recent developments in Iran and offers his expectations for the U.S. markets.  

• Escalating geopolitical tensions involving Iran have contributed to upward pressure on global oil prices. Despite this, the US economy has become less sensitive to oil shocks over time.
• Consumer spending on gasoline has steadily declined, which is muting traditional fuel demand despite periods of price volatility.
• The dominant driver behind strong earnings expectations and overall equity market resilience remains artificial intelligence, with major players viewing this as the strategic arms race.

Transcript

SPEAKER_00 0:00

Welcome to the Access to Alpha podcast series from Advisors Asset Management, where we provide exclusive market insights and timely commentary from our portfolio managers and strategic partners. AAM has been committed to delivering innovative, research-driven solutions that help investors navigate complex markets and build more resilient portfolios. We invite you to hear these insights now.

SPEAKER_01 0:26

Hi, this is Ian Benson, Assistant Vice President with Pentz Capital Management. I'm pleased to join you on the AAM Access to Alpha podcast today, April 8th. Markets have experienced a sharp rise in volatility and geopolitical risk in 2026. U.S. strikes in Iran and the temporary halt of traffic through the Strait of Hormuz drove oil prices up nearly 100% year to date before yesterday's two-week ceasefire agreement between the US and Iran. While the agreement is a step in the right direction and the pullback in oil prices is encouraging for growth and inflation, the wide range of interpretations among the parties involved makes us hesitant to declare an all-clear at this stage. That said, we continue to see several reasons to view the path for markets favorably. We believe equities ultimately finish the year meaningfully higher, supported by strong earnings fundamentals, ongoing U.S. fiscal support, and the continued economic impact of artificial intelligence showing up through higher earnings, increased investment, and improvements in labor productivity. From a macro perspective, it's important to frame the oil shot correctly. While disruptions in the Strait of Hormulas are significant globally, just 3% of crude flowing through the strait is destined for the United States. Although oil is globally priced and higher prices have translated into higher gas prices domestically, the US economy's ability to source energy at home materially reduces the risk of physical supply disruptions, a luxury not shared by many international markets. More broadly, the U.S. economy has become far less sensitive to oil shocks over time. Gasoline now represents less than 2% of household spending, down from 4% in 2008 and 5% in 1980. Electric vehicles and more efficient engines have helped curb demand, but another meaningful factor is the rise of work from home. Today, roughly one quarter of paid workdays are remote, compared to just 7% in 2019. This combination of lower energy sensitivity and the fiscal boost from last year's tax bill leads us to favor US focused investments over international exposure at this point in the cycle. Turning to markets, one of the most important and underappreciated developments is that earnings expectations have continued to rise throughout this period of geopolitical stress. In fact, earnings growth estimates for every quarter of 2026 are higher today than they were before the conflict began. As a result, the combination of higher earnings and lower prices has pushed SP 500 forward valuations back toward levels last seen in April 2025 following the Liberation Day tariffs off. Fundamentally, equities have become more attractively priced, not less. The dominant driver behind this resilience remains artificial intelligence, and we see little reason for Middle East developments to derail that theme. AI-related capital expenditures are expected to reach roughly$650 billion in 2026, a 64% increase from last year, as major players increasingly view AI as a strategic arms race. That level of investment equates to about 2.1% of US GDP, comparable to the annual share of GDP spent building the Transcontinental Railroad in the 1850s. Adoption has followed quickly. Today, one in two US businesses has a paid AI subscription less than five years after the release of Chat GPT. The bottom line for us is that periods like this, while unsettling, reinforce the importance of taking a long-term perspective. Time in the market remains far more important than timing the market. In 2025, the SP 500 returned nearly 18%, but missing the single best day of the year cut that return by more than half. We believe today's environment continues to offer compelling opportunities, and that the combination of strong earnings growth, rapid technological innovation, and a resilient U.S.

SPEAKER_00 4:31

economy will prove a powerful foundation for investors in 2026.com.