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Welcome to Prof G Markets. I'm Ed Elson. It is April 1st. Let's check in on yesterday's market vitals. The first quarter wrapped up with a bang as the major indices staged a dramatic rally on a potential end to the war. More on that in a second. Meanwhile, the dollar dropped, Treasury yields fell, and finally Brent crude declined but remained above $100 per barrel.
Okay, what else is happening? Wall Street was on track for its worst quarter in four years until a rally Tuesday softened the blow. The S&P 500 was down as much as 9% from its January peak. That was its worst quarterly performance since 2022. But Tuesday, it surged nearly 3%. Meanwhile, the Nasdaq was down as much as 13% from its peak and entered correction territory. That was at least until its blistering rally of nearly 4% on Tuesday. That recovery came after Trump told aides he is open to ending the war even if the Strait of Hormuz remains closed. Then Iranian President Pezeshkian said Tehran has the, quote, necessary will to end the conflict in exchange for security guarantees. And with that, Wall Street got the quarter-ending rally it was waiting for. So here to help us unpack the market's performance so far this year, we are joined by Kevin Gordon, head of macro research and strategy for the Schwab Center for Financial Research. So Kevin, I was going to have you on here to break down the sell-off and then this kind of insane series of events here. We got another flip in the story of Iran. Trump says maybe this is going to end and then Iran says maybe it's going to come to an end too and then the market rallies. Let's just start with your reactions to what we saw on Tuesday.
Well, I think the key word is maybe. And I think today is sort of, or you know, the end of the final day of the quarter is emblematic of the whiplash environment that we've been in. And that's really how we've been characterizing this market. It's not impossible to trade, but when you're really kind of starving for accurate information, you know, out of both sides in terms of what is the condition of the Strait of Hormuz, how is it, you know, what does the traffic look like? What is the potential for that to get back online? What is the knock-on effect going to be for the global economy? All of these, you know, unanswered questions. I think that just makes markets, you know, a little bit more aggressive and volatile when you get any snippet of good news, but also to the downside. You know, we've had our fair share, especially at the end of last week. You know, that was sort of a clear example of kind of all the negative news compounding. So I think that today's move, you know, doesn't really surprise me. I think that one thing to sort of look at in terms of the strength or the durability of the move, I wouldn't put a whole lot of stock into it because if you look at the kind of underlying breadth and subsurface moves of the S&P 500, at least advancing volume wasn't that strong. It was actually a little bit, last I checked right before I joined you. So I'll have to check for the official closing stats, but last I checked, it was actually stronger last Monday than it was today in terms of advancers relative to decliners. I mean, when you look at what was lifting the index significantly, it was actually tech and communication services. So yes, you still had a majority of members in the S&P that were advancing, but it was a lot of that mega-cap strength reasserting itself because those have actually gotten hit. Those are some of the hardest-hit markets so far this year, even if you back it out actually over the past six months. So a little bit was sort of this reversion into those names. But also just sort of this classic momentum trade going in reverse where energy had been the leader today. It got, you know, hit the hardest. Similar with, you know, with tech and communication services, they had been struggling a lot and then they had found, you know, the sort of the strongest move and the strongest bid today. So I wouldn't put a whole lot of weight into just one day, but especially because some of the background conditions, whether it is the breadth underneath the market or whether it is actually the fact that oil prices continued to move higher today, I think that in and of itself is a little bit of a reason to sort of step back and not extrapolate the move that we saw for US stocks.
Do you think that, because I mean my initial reaction when I saw what happened today, I'm so confused as to why investors appear to be either buying or selling in huge numbers based on what Trump says, but that seems to keep on happening. He says, okay, this war is going to end soon and then markets go up and then he says actually it's probably not and then markets go down. Is it your belief that what is happening, what happened in the markets wasn't necessarily a response to what happened in Iran because it was mostly a rally in the tech sector, or are the two still quite related?
Yeah, I mean, well, when you look at the contribution to the index's gains today from tech, I kind of lump tech and communication services in with each other because they have kind of become that, you know, big tech, that tech-like, you know, trade, lowercase t. They're clearly different sectors and they have very different makeups in terms of their, you know, their membership profile. So it is important to make the distinction, but if you combine those two, you're talking about, you know, around 40% of the S&P 500's market cap. So if they're advancing and doing well, pretty hard for the, you know, for the headline index to struggle. Vice versa, you know, a lot of what we were experiencing year to date. Right before the war, those sectors were struggling. They were sort of taking a step back from their leadership positions, and that was kind of giving the illusion that the headline S&P wasn't doing as well. But underneath the surface, you had actually seen a lot more improvement in the average stock doing quite well. The equal-weighted S&P 500, if you want to think of that as the proxy for the average stock, that had been doing well. So yes, I do think most of the move today was kind of just that snapback and that reversion for, you know, a part of the market that didn't necessarily get a lot of love or hasn't gotten a lot of love for the past six months. And I would add to it, you know, not only was the sort of the subsurface breadth not as good as I had mentioned earlier, but the flow data actually into a sector like tech was not very strong today. So there wasn't this sort of high conviction on the part of traders, especially in the retail crowd. I was looking specifically at that cohort. There wasn't a lot of high conviction in terms of that move really bringing them back in. Certainly nothing akin to what you had seen in April of last year when we were going through those, what we were calling these, you know, rip-your-face-off rallies after you had gotten the series of delays for imports for China.
What do you make of this quarter as a whole? It feels like there have been two major market-moving events. I guess the first one was AI is killing software and I mean some of the drawdowns we've seen even in the companies that are technically AI companies like Microsoft, even Nvidia's gotten pretty crushed recently. That seems to be one story which surprised people for various different reasons and then also Iran and what that has done to oil supply and what that may do to the economy. I guess I'd be interested to hear your reflections on Q1. I mean, I don't think these are two things that people necessarily predicted, but how does it change your outlook for the year and what are your reflections on what has been kind of an insane quarter?
It has been an insane, I mean, insanely long quarter. I feel like it's been a year because, you know, this dates back even to Venezuela and Greenland. I mean, that was in the same quarter. So it's, you know, it's hard to imagine that so much has gone. You know, I've been joking that we're still in January. And so it just, you know, it just feels drawn out. But I think that, you know, for Iran in particular, yes, I think it will change the calculus of how we think about the trajectory of the economy moving forward. What's difficult is, you know, there's just so many unknowns in terms of what is the, you know, what is the strategy of the US and I think that matters in the sense of trying to figure out and sort of game out a scenario analysis for where oil ultimately ends up because I think that, you know, going up to $120, I'm just sort of, you know, using rounded numbers out of the air, but $120 a barrel for oil, if you get up to that, that doesn't really tell me much. I want to know what is sort of the floor after that and where do you ultimately kind of plateau out and find a sustained floor because if it is around 100, that's a meaningful shock up from 60 which was the recent low that probably keeps gasoline prices, you know, at least a little bit above $4 and gasoline prices take longer to come down than oil does. So I'm thinking about it from the mindset of the consumer. To me, this is much more of a sort of direct-to-consumer shock versus something like Liberation Day last year, which was more of a direct-to-business shock because those are the ones that sort of faced it first in terms of the import fees and the hike in rates that they had to pay. The consumer, as we've sort of learned, didn't face too much of that tariff burden throughout last year. There were bits and pieces and certainly in the goods market. There was some pass-through. We've actually started to see some pass-through earlier this year. But I think of this as more of that direct-to-consumer shock. And if you think about, you know, the two things that the average consumer in America, I would say probably the world, but in America in particular, you know, thinks about as the most important gauges of economic health, it's grocery prices and it's gasoline prices. So to the extent that this starts to cause a little bit of a shift in how they spend their money, that I think will ultimately lead us to sort of change how we think about the trajectory of the economy. I will say though, there needs to be, I think, an important distinction and so far this has played out in the economic data that we've gotten. There does need to be a distinction between what is a consumption shock and what is a labor shock because if you do hit the consumer spending power or you hit the sort of consumption basket, that's one thing, but if you start to take away consumer spending power via lower income, you know, through layoffs, that's a very different story. So far that hasn't been the case. Initial jobless claims, you know, which we get every Thursday morning at 8:30 Eastern, those have actually rolled over. They haven't picked up much. We haven't really gotten any, you know, sort of company notices of mass layoffs across industries. So as long as that's the case, I think that it will keep the economy sort of on track to grow. But I think it's, you know, it's probably relatively easy to say that we're going to have to take down, you know, growth estimates for this year just based on that consumer aspect alone.
Well, while you're on that point, we just had this news that Oracle is laying off thousands of employees. It kind of just came out of the blue. They just sent an email and thousands of employees were dismissed. And again, it is one of those stories of this was an AI story. And we have seen more of these. We've seen it with Pinterest, we saw it with Amazon, we saw it with Block. Block was another big one. Are those AI layoff stories significant enough to you to pose real problems in the labor market going forward? Like is that just more of a this happens to a handful of tech companies and, you know, it might be very shocking for that industry itself but not necessarily going to have a massive implication for the larger economy. Where do you land on these AI layoffs in terms of their impact going forward?
I lean that way just because in just sort of simple math terms, I mean the information sector, it's hard because the BLS, you know, they don't have tech specifically carved out as a name of an industry, but information is essentially that's the name that we can sort of associate with tech. That's pretty low single digits in terms of the percentage share of overall payroll. So number one, that's a pretty small sort of impact directly at least for overall payrolls. But number two, that share has actually been rolling over for almost a couple of years now. So we've started to actually, we've continued to see, we started to see it a couple of years ago, but we've continued to see this move away from, you know, tech dominance in terms of that share of employment growing because it had been growing for a while, but now that's actually started to reverse slower and it's been in favor of areas like health and education. I mean, you know, private health services. So we've seen that handoff. In that time frame, of course, the economy has continued to grow. The labor market has continued to grow. Not in a strong way, not as strong as we've been used to, but we've still continued to see economic growth. So I think that it keeps that, you know, a little bit more idiosyncratic. But at the same time, it is emblematic, I think, of what's happening to the broader tech industry. And I think it actually brings up an interesting point about tech for this sort of next earnings season. What I found interesting so far year to date is that tech earnings revisions within the S&P 500, that sector has actually seen the most aggressive upward revisions. So analysts have continued to get more optimistic on what EPS is going to look like for this year. I'm going to be very sort of hawk-eye focused on in the next earnings season whether that is driven by sort of this profit margin protection of, you know, laying more people off or whether they're actually continuing to see strong organic, you know, revenue and strong demand. I think those are, you know, two very different things and that to me will determine a lot of the sort of the fate of where tech goes for the rest of the year.
And it's striking because it's gotten so crushed this quarter. I mean, it's just one of those sectors where they keep on posting great earnings, keep on beating estimates by and large, and then they still get punished either way. Just as we wrap up here, it seems as though as it stands, end of Q1 2026, I don't know if you agree with this, but it seems as though this might be one of the most uncertain times in market history. It seems as though investors are incredibly unanchored from what is actually happening on the ground because they're asking so many questions about what the future might look like and they're not really willing or very interested in looking at the previous backward-looking data because everyone's view is kind of like, well, the future is completely uncertain. We don't know what's going to happen in Iran. We don't know what's going to happen to the price of oil. We don't know what AI is going to do to the job market, what it's going to do to software, to tech, etc. So it's kind of like a free-for-all is the way I feel right now. I'd be interested to hear if you agree, like do you agree that this is the most uncertain time we've seen at least in the past, I don't know, 10 years?
You know, I would, the word I would use, the U-word I would use is actually unstable. And unstable and uncertain are, to me, different. That was actually a key theme that we had coming into 2026. Not that we in any way predicted, you know, the war that we're in right now, but, you know, instability is a little bit more, it's definitely less comfortable in terms of you can see these things that are shifting. You just don't necessarily know how to respond as an investor. So not that we think you need to respond to all of these events. I would actually argue against that and say that, you know, you should be lengthening time horizons and really reassessing what your risk tolerance and your emotional risk tolerance is in these environments. But I think to your point, you know, something I've been thinking about lately and going through all of these things that are happening right now, it's sort of a monster mashup of prior crises or it's sort of the ghost of prior crises, you know, past that are coming to haunt us all at once because you have the AI story. A lot of people, you know, liken it to the late '90s with the internet bubble. You have an energy crisis going on right now that people liken to 1990 or the mid to late 1970s. But then you also have this, you know, tariff regime that we're still in which hearkens back to '17 and '18 or, you know, even last year. So it's all of this sort of happening at once and mashed up and I think that's what's causing a lot of the, you know, the stress and the anxiety around how can the market continue to do well or not sell off as much as we'd expect with all of this going on. But to me, it gets back to, I guess, a framework that I've been using for these moments, which is what is the front-page risk, what is the bottom-line risk. We've gone through a lot of front-page risks and faced a lot of that this year, whether it was Venezuela, whether it was Greenland, whether it was everything with the Fed. But the bottom-line risk wasn't as acute or as sharp because it wasn't filtering down to how is this going to affect S&P 500 earnings because at the end of the day, it's probably what the market, you know, that is what the market cares about the most. This more recent conflict, you know, I think is kind of narrowing the gap between those two. So that's kind of what I'm on watch for is to see how much of this direct-to-consumer hit really manifests and how much of it grows. And that's where I could see this translating from, you know, just the front-page stuff to an actual bottom-line risk.
All right, Kevin Gordon, head of macro research and strategy for the Schwab Center for Financial Research. Kevin, always love having you. Thank you for joining us.
