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New Fed Chair. Rising Rate Hike Odds.

Jerome Powell is gone. Kevin Warsh was sworn in last Friday. And somehow the S&P 500 just closed out its eighth straight week of gains, sitting near 7,450 with a forward P/E above 20x.

That combination deserves a second look.

The April CPI came in at 3.8% year over year, up from 3.3% in March and 2.4% back in January. Energy costs are running 17.9% higher annually, gasoline is up 28.4%, and for the first time since April 2023, real average hourly wages just went negative. The Iran war started Feb. 28 and the oil shock is still feeding through. Brent crude spiked to $118 a barrel by end of April. It’s sitting above $107 as of mid-May. Core CPI also accelerated, rising 2.8% annually and 0.4% month over month, both above expectations.

The Fed held at 3.50%-3.75% in April, but the vote was 8-4. That 8-4 split was the most dissents on a single FOMC decision since October 1992. Three of those four dissenters wanted to drop the easing bias entirely, not cut. The April minutes noted that a majority of officials flagged that “some policy firming would likely become appropriate” if inflation stays persistently above 2%.

Here’s where it gets interesting. CME FedWatch currently puts the probability of a June hike at just 0.6%. Near zero. But by April 2027, futures are pricing roughly a 40% chance of a 25 basis point hike and a 22% chance of 50 basis points. That is not a market priced for calm.

Warsh himself is a complicated read. His prior stint as a Fed governor from 2006 to 2011 showed a consistent hawk, but his confirmation hearing last month was noticeably more measured. Invesco’s post-hearing read called his tone “broadly dovish, pragmatic, and respectful of institutional independence.” Former Cleveland Fed President Loretta Mester put it plainly: “I just don’t think right now he can make those arguments in a credible way, because we have an inflation problem.”

Slight tangent, but it matters: earnings are actually holding up well. Q1 2026 saw 84% of S&P 500 companies beat EPS estimates, the highest beat rate since Q2 2021. Analysts are projecting 21.3% earnings growth for full-year 2026. That is genuinely strong. The bull case is not imaginary.

But the macro tail risk is real. Sectors most exposed in a rate hike scenario are utilities, REITs, and long-duration tech. The sectors holding up: energy, semiconductors, and defense. That rotation is already visible in May performance.

Three things worth watching closely right now: Core PCE data, 5-year breakeven inflation rates, and Warsh’s first public communications as chair. His June 16-17 FOMC meeting is the first under his leadership. What he says, and what he doesn’t, will matter more than almost any other data point between now and summer.

Position sizing and hedging the tail are where the work is right now. The earnings story is constructive. The macro risk is asymmetric to the downside. Those two things can both be true at the same time, and right now, they are.

For informational and educational purposes only. Not investment advice. Trading involves risk, including loss of principal.