MEMO: Re: The Best of Times

To: Anyone still reading earnings releases in good faith
From: The Market
Re: Q1 2026 — We need to talk

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Saturday, April 18, 2026

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The banks had a great war.

Goldman Sachs posted its second-highest quarterly revenue in history — $17.23 billion — while a conflict that has kept oil prices 30% above pre-war levels for the better part of two months continued to grind in the background. The equities desk alone pulled in $5.33 billion, a 27% year-on-year jump and an outright record. Equities financing — prime brokerage lending to hedge funds — surged 59%. Institutional clients were not hiding under their desks. They were churning. Goldman made a fortune facilitating the churn.

JPMorgan printed $16.49 billion in net income. Fixed income trading climbed 21%, boosted by "rising activity in commodities, credit, currencies and emerging markets" — which is a polished way of saying that the war made rates, oil, and EM spreads volatile enough to generate a steady toll booth revenue on every nervous reallocation a pension fund or sovereign wealth manager needed to make. Citigroup saw profits jump 42%, with trading described as "supercharged" by tariff volatility. Morgan Stanley had one of its strongest markets quarters on record. Bank of America showed "core banking trends still intact."

Every major Wall Street bank beat estimates. Every one of them warned, in the same breath, that the macro outlook is deteriorating.

This is the part where you stop and appreciate the symmetry.

Jamie Dimon's shareholder letter — the annual document that has become something between a risk disclosure and geopolitical philosophy — described "an increasingly complex set of risks: geopolitical tensions and wars, energy price volatility, trade uncertainty, large global fiscal deficits and elevated asset prices." He said these risks "are significant." He used the word significant the way a doctor uses concerning — technically measured, unmistakably alarming. Then JPMorgan reported a 13% increase in net income and lowered its full-year net interest income guidance by only $1.5 billion, to $103 billion, which was fine, actually, and the stock barely moved.

David Solomon at Goldman called market conditions "more volatile" and said "disciplined risk management must remain core to how we operate" — a sentence that, delivered at the press conference for an all-time record equities quarter, achieves a certain sublime irony. The risk was managed. Magnificently. Lucratively. With $5.33 billion in equities revenue to show for it.

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Meanwhile, the S&P 500 closed at a record high for the third consecutive session this week. The Nasdaq notched its first all-time closing high since October. The Dow cleared 49,700. The VIX is at 17.42 — blissfully low, a reading that suggests the options market is pricing something roughly equivalent to a slow Tuesday in 2019.

The forward P/E on the S&P 500 is 20.9x. That is above the five-year average of 19.9x and well above the ten-year average of 18.9x. Analysts are projecting full-year 2026 S&P earnings growth of 18%. Technology alone is expected to deliver 46% earnings growth, contributing something close to 80% of the market's total profit increase. The consensus for Q2, Q3, and Q4 earnings growth sits at 20%, 22%, and 20%, respectively — a number sequence that implies not just a continuation of this cycle but an acceleration.

KKR, in its April macro update, lowered its 2026 year-end S&P 500 target from 7,600 to 7,300 and cut its EPS growth forecast from 11% to 8%, citing "softer demand and higher operating costs in a $90–100 WTI environment." They see peak WTI potentially hitting $130–150. They also lowered U.S. GDP to 2.0% for 2026 and raised headline CPI to 3.8% — above consensus. The IMF, in its April World Economic Outlook, forecasted global growth at 3.1% and explicitly flagged that tech-heavy equity markets "could be vulnerable to a sharp repricing."

The market's reaction to these projections has been to go up.

There is a coherent explanation for all of this, and it is not irrational exuberance in the pure Greenspan sense. It is more precise than that. Equity markets are discounting mechanisms, and what they are currently discounting is a specific scenario: the war stays contained, the ceasefire holds, Hormuz stays open, oil normalises below $90, and the Warsh-led Fed cuts once in the second half, backstopping duration without reigniting inflation. In that scenario — and it is a reasonable base case — 20.9x forward earnings is defensible. The earnings are real. The banks proved it this week.

The problem is the distribution of outcomes around that base case. It is not symmetric.

Oil 30% above pre-war levels with a ten-day ceasefire and half-resolved peace talks is not a stabilised market — it is a held breath. Iran's negotiators have already walked back from a full deal to something described as a "temporary memorandum to prevent a return to conflict." The nuclear file remains open. The U.S. blockade of the Strait is, depending on which news wire you trust, either still nominally active or informally stood down. France and the UK have both declined to endorse it. The geopolitical scaffolding holding this relief rally together is two diplomatic phone calls and a promise to talk again next weekend.

Meanwhile Goldman's fixed income desk missed by $910 million — nearly a billion dollars below the StreetAccount estimate — because of "significantly lower" revenues in interest rate products, mortgages, and credit. The rates market is not performing. That is the part of the financial system that most directly prices the macro outlook, and it is, by Goldman's own admission, struggling. FICC down 10% year-on-year. The equities desk is partying; the rates desk is sitting in the corner watching the door.

A 20.9x forward multiple on an index where one sector is expected to contribute 80% of the earnings growth, at a moment when the macro base case depends on a ten-day ceasefire holding and an IMF forecast is titled "Global Economy in the Shadow of War" — this is not a bubble. Bubbles are irrational. This is something more uncomfortable: it is rational participants, operating on reasonable assumptions, in a distribution of outcomes where the left tail would be very bad and is being priced as roughly improbable.

The Philly Fed index at 26.7 says manufacturers are optimistic. Industrial production contracting 0.5% says factories are not expanding. Initial claims at 207,000 — 16,000 below consensus — says the labour market is tight. KKR says WTI could hit $150. Goldman made $5.33 billion trading equities in a quarter when the S&P dropped 9% from its January high before recovering. Everyone is right about something different and the data is doing what data does in the late innings: it stops being legible.

The banks had a great war. The market hit record highs. The IMF used the phrase "shadow of war" in the title of its flagship publication.

All three of these things are true. Only one of them is in the price.