Potential Risks That Could Challenge the Strong Market Narrative
LPL Research
Last Updated: May 20, 2026
Today’s blog is written by Chris Fasciano, chief market strategist at Commonwealth. He represents Commonwealth in various media appearances, advisor speaking events, and Commonwealth conferences. He also oversees and mentors a dynamic team of investment research analysts who specialize in equity and fixed income markets. Prior to this role, Chris spent 10 years as one of the firm’s portfolio managers, involved with asset allocation and fund selection. With a deep background in small- and mid-cap stock research, Chris is uniquely positioned to analyze the latest economic data and offer valuable insights on navigating today’s volatile markets. Chris Fasciano is a guest writer and is not affiliated with LPL Financial.
One of my guiding investment philosophies is that headlines drive markets in the short term but over the long term it is fundamentals that drive markets. That has played out multiple times over the last year. There have been significant sell-offs due to tariff policy and the war in the Middle East. Yet the market rebounded not long after these declines based on an underlying strength in corporate earnings.
Rising markets make everyone feel better, but they also come with higher expectations. Today, the key question is not whether fundamentals are strong but whether the market’s consensus view is too optimistic. Currently, market participants seem to be assuming that the impact from the war will be reversed once an agreement between the U.S. and Iran is reached. Jobs creation will remain positive; inflation will moderate; the economy will continue to grow and earnings will remain strong.
Part of any good investment process is monitoring potential risks to the consensus narrative. Let’s do that now.
It Is All About Earnings
It is easy to see why investors have responded positively to earnings. S&P 500 first quarter earnings are up around 27% versus expectations at the end of March for 13.2% growth. Perhaps more importantly, second quarter earnings estimates have moved higher as well.
Estimates Moving Higher
Source: LPL Research, FactSet 05/15/26
Disclosures: Indexes are unmanaged and cannot be invested in directly. Past performance is no guarantee of future results. Estimates may not develop as predicted and are subject to change.
The “Estimates Moving Higher” chart illustrates where full year 2026 numbers have moved as a result. Since February 27, the day before the war in the Middle East began, 2026 earnings estimates have increased 6.5%. Despite all the headlines over the last few months, the surge in oil prices, and the rise in gas prices, analysts have become more optimistic about the health of corporate America. Current estimates indicate full year earnings growth of 23%!
But if earnings have been driving the market higher and expectations for future growth have increased, then the potential for disappointment has also increased. One of the most important pillars supporting this optimistic outlook is the artificial intelligence (AI) narrative.
The Artificial Intelligence Story
The buildout of AI infrastructure has both been a driver of U.S. economic growth and stock market returns. The best-performing stocks have been the large cap growth stocks most exposed to AI. They have had the best earnings growth profile, and that has led to investors continuing to invest in their stocks.
Early in the Spending Boom
Source: LPL Research, Bloomberg, J.P. Morgan Asset Management 05-15-26
Disclosures: Data 2026, 2027, and 2028 reflect consensus estimates. Capex shown is company total. Past performance is no guarantee of future results. Estimates may not develop as predicted and are subject to change. Any companies referenced are being presented as a proxy, not as a recommendation. Hyperscalers are the large cloud computing companies that own and operate data centers with horizontally linked servers that, along with cool and data storage capabilities, enable them to house and operate AI workloads.
The “Early in the Spending Boom” chart indicates that AI infrastructure capital outlays are beginning to ramp up. This trend will unfold over years and decades. As a result, the theme is likely to remain an important part of the market narrative. But once again, given the optimism surrounding the consensus view for the power of AI’s future, any changes on the margin to capital spending could lead to ripple-effect disappointments for both the economy and market. Simply pushing spending plans out a quarter or two, supply chain issues, or even higher borrowing costs, could unnerve investors and pressure AI related stocks. NVIDIA’s earnings report and conference call after the market closes this evening will be the next key data point in this story.
At the same time, macroeconomic pressures are also beginning to challenge optimistic narratives.
Inflation Is Starting To Run Hot
For the most part, the stock market has ignored rising oil prices as the ceasefire and ongoing negotiations seemed to indicate a potential end to the war in the Middle East. However, the Strait of Hormuz has now been closed for 11 weeks, removing key oil supplies for the global economy. Gas at the pump continues to move higher across the country.
Both the Consumer Price Index (CPI) and the Producer Price Index (PPI) came in higher than anticipated in the month of April. Consumer prices rose at an annual rate of 3.8%. Even more concerning was the increase in producer prices, which rose 6%. Supply chain concerns are beginning to show up in the data.
Inflation Is Beginning To Accelerate
Source: LPL Research, Bureau of Labor Statistics (BLS), FactSet, J.P. Morgan Asset Management 05/15/26
Disclosures: Past performance is no guarantee of future results. Contributions mirror the BLS methodology on page 7 of the CPI report. Values may not sum to headline CPI figures due to rounding and underlying calculations. Headline and core PCE deflator inflation shows are based on seasonally adjusted data due to data availability. Official October 2025 data unavailable due to government shutdown and data shown are J.P. Morgan Asset Management estimates.
The “Inflation Is Beginning To Accelerate” chart examines the key components that are driving consumer price inflation. We are still a long way from inflation reaching the levels seen in 2022 when the Fed reacted by raising interest rates aggressively. However, the drivers of the current increase in inflation are the same as they were back then — energy, food at home, and core goods. That isn’t surprising since the current concern is higher energy prices and supply chain constraints, which were the issues when Russia invaded Ukraine. Higher inflation in those areas could be a drag on other parts of the consumer budget. Given that consumer spending makes up 70% of U.S. economic growth, a headwind for the economy could impact profitability for companies.
Driven by concerns about accelerating inflation and where it might be headed, the yield on the 10-year Treasury bond rose substantially and now is over 4.6%. The 10-year yield is a key benchmark for mortgage rates, which also impacts the spending power of the consumer.
Moderate inflation is manageable, but higher or unpredictable inflation can lead to downward pressure on markets. No matter how well companies are doing, higher interest rates tend to lead to lower valuations for stocks. And if inflation continues to rise, rates are likely to follow. As a result, just the uncertainty about inflation alone can increase volatility even if the longer-term outlook remains anchored.
But it is important to remember that inflation doesn’t impact all companies, sectors, and stocks in the same way. While some companies will be hurt by higher inflation and interest rates, others will benefit.
Portfolio Diversification Remains Key
When markets are priced for optimism, it doesn’t take bad news, only less good news, to trigger volatility. Risk management is a key part of any investment process. Knowing what investor expectations are priced into the market and understanding what could prove them to be either optimistic or pessimistic is a worthwhile exercise to go through.
Timing markets is hard, if not impossible, so wholesale changes to portfolios based on assumptions about the future don’t make sense. As we have learned time after time, assumptions can change very quickly. But there are certainly ways to mitigate risk while preserving the opportunity to participate in further upside.
It is possible that none of the potential risks to the consensus narrative materialize, but with stocks near all-time highs, now is a good time to revisit long-term goals and determine whether your current portfolio accomplishes these goals. If not, some changes may be warranted given the strong moves in numerous asset classes that have occurred over the last year. But if investors do only one thing year in and year out, it should be to rebalance portfolios. Bringing portfolios back in line with diversified allocations should help navigate any uncertainty on the horizon.
Important Disclosures
This material is for general information only and is not intended to provide specific advice or recommendations for any individual. There is no assurance that the views or strategies discussed are suitable for all investors. To determine which investment(s) may be appropriate for you, please consult your financial professional prior to investing.
Investing involves risks including possible loss of principal. No investment strategy or risk management technique can guarantee return or eliminate risk.
Indexes are unmanaged and cannot be invested into directly. Index performance is not indicative of the performance of any investment and does not reflect fees, expenses, or sales charges. All performance referenced is historical and is no guarantee of future results.
This material was prepared by LPL Financial, LLC. All information is believed to be from reliable sources; however LPL Financial makes no representation as to its completeness or accuracy.
Unless otherwise stated LPL Financial and the third party persons and firms mentioned are not affiliates of each other and make no representation with respect to each other. Any company names noted herein are for educational purposes only and not an indication of trading intent or a solicitation of their products or services.
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