Market Perspectives-May 2026

MARKETS ARE PRICING RESOLUTION

• Markets reached record highs during May as investors increasingly discounted a tentative ceasefire between the United States and Iran, helping propel the Nasdaq 100 up more than 20%, the Russell 2000 up nearly 18%, and the S&P 500 up more than 10% year-to-date.
• Oil prices retreated from conflict-driven highs as ceasefire discussions progressed, yet Gulf Coast crack spreads remained elevated near $49 per barrel in early May, diesel refining margins remained more than 160% above year-ago levels, and inventories across portions of the refined-products market remained historically tight.
• Corporate earnings continue to support equity valuations, with approximately 85% of S&P 500 companies exceeding first-quarter earnings expectations and aggregate earnings growth projected near 12%, one of the strongest reporting seasons in several years.
• Artificial intelligence has evolved from a technology story into an infrastructure story, driving investment across semiconductors, power generation, electrical equipment, data center construction, cooling systems, and industrial automation.
• The economy continues to expand, though growth remains increasingly uneven. Personal spending increased 0.5% in March while the personal savings rate remained just 2.6%, highlighting the growing divergence between consumer economic impacts.

Markets Are Looking Beyond the Conflict

Financial markets spent much of May looking beyond current events and toward what investors increasingly believe will be a more stable environment in the second half of the year. Equities advanced to new highs, volatility declined, oil prices retreated from their peak levels, and market leadership broadened beyond a handful of mega-cap technology companies.

The optimism reflected a growing confidence that several of the largest risks confronting investors earlier this year may gradually moderate. Markets are now increasingly discounting an eventual easing of tensions in the Middle East, stabilization in energy prices, continued earnings growth, and sustained investment in artificial intelligence infrastructure. Collectively, these developments have helped support one of the strongest advances in risk assets since the beginning of the current bull market.

The economy, however, continues to tell a more nuanced story. Growth remains positive. First-quarter GDP increased at an annual rate of 1.6% in Q1 2026, down 0.4 percentage points from the advance estimate, with growth driven by exports, investment, consumer spending, and government spending. Manufacturing activity has returned to expansion territory. Productivity growth has improved. Corporate earnings continue to exceed expectations. Yet consumers remain under pressure from elevated living costs, labor markets are showing signs of slower hiring, and inflation remains above the Federal Reserve’s long-term target.

The defining characteristic of today’s environment is not recession or boom, but divergence. Financial markets are increasingly pricing a future characterized by lower geopolitical risk, moderating inflation, and continued earnings growth. Businesses and households, meanwhile, continue adjusting to the realities of higher energy costs, elevated interest rates, and an increasingly uneven expansion.

One of the most remarkable developments during May was the market’s ability to advance despite a steady stream of geopolitical headlines. Earlier this year, concerns surrounding Iran, disruptions to shipping through the Strait of Hormuz, higher oil prices, and renewed inflation pressures dominated investor sentiment. Yet by month-end, markets appeared increasingly willing to look through those risks. A tentative extension of ceasefire negotiations between the United States and Iran helped reinforce this view, while expectations for a gradual reopening of energy trade routes contributed to lower crude oil prices.

That does not mean the underlying challenges have disappeared. Energy markets remain tight. Inflation remains elevated. Supply chains continue adjusting to changing trade patterns. Businesses continue managing higher costs and labor shortages. Yet investors increasingly view these issues as manageable rather than existential.

This distinction helps explain why equities continue advancing even as economic headlines often appear mixed. The current bull market is now more than 1,300 calendar days old and has generated gains exceeding 100%, placing it among the longest and strongest advances of the modern era. Despite that performance, investor sentiment remains surprisingly cautious, reflecting a market that continues climbing a wall of worry rather than one characterized by broad speculation.

The Oil Shock Test

If May had a primary macroeconomic catalyst, it was oil. Crude prices surged following disruptions tied to the conflict with Iran and concerns surrounding shipping through the Strait of Hormuz. At one point, Brent crude briefly traded near $119 per barrel before retreating as diplomatic efforts progressed and markets began anticipating an eventual easing of tensions.

While financial markets quickly adjusted to the prospect of lower oil prices, physical energy markets continue to reflect meaningful stress.

U.S. Gulf Coast crude exports exceeded 5 million barrels per day for six consecutive weeks, reaching some of the highest levels on record. Demand from Asia rebounded sharply, with South Korea and Japan among the largest buyers of U.S. crude. At the same time, domestic inventories continued tightening as strong export demand pulled barrels from storage.

Inventories remain particularly tight in diesel markets. U.S. diesel inventories are near their lowest levels for this time of year in more than two decades, reflecting years of limited refining capacity growth combined with strong global demand. These elevated margins provide refiners with a powerful incentive to maximize production, yet many facilities are already operating near practical capacity.

Even if tensions continue to ease and oil prices move lower, restoring inventories, refining balances, shipping flows, and supply chains takes considerably longer. The economic effects of an energy shock often persist long after the headlines disappear. Prices are not likely to drop towards normalcy immediately after any declared truce.

For investors, this suggests that energy-related inflation pressures may moderate but are unlikely to disappear immediately. The adjustment process has begun, but it remains incomplete.

Inflation and the Federal Reserve

Inflation moderated considerably from the peaks experienced during the post-pandemic period, but developments during May reinforced that the path back to the Federal Reserve’s 2% target remains uneven. Energy prices, supply-chain disruptions, tariffs, and ongoing geopolitical uncertainty all contributed to a more complicated inflation backdrop than investors expected at the beginning of the year.

Headline inflation accelerated to 3.8% year-over-year during April, while core inflation remained near 3%. Energy was once again a significant contributor. According to Macrotrends, gasoline prices increased from a national average of $3.03 / gallon in May 2025 to $4.35 this past May, an increase of more than 43% from year-ago levels. Housing inflation also remained elevated, as shelter costs are expected to remain well above pre-pandemic averages once May’s data is released.

Additional evidence emerged from business surveys. The ISM Manufacturing Prices Paid Index stood at 82.1, down from 84.6 in April but was well above the 12-month average of 66.93. The ISM Services Prices Index rose to 70.7, highlighting that inflationary pressures remain present across both goods-producing and service-oriented sectors.

These data present an important contradiction. Markets have celebrated softer monthly inflation readings and the prospect of lower oil prices. Beneath the surface, however, businesses continue reporting higher input costs, slower supplier deliveries, and persistent pricing pressures. Inflation is no longer accelerating broadly across the economy, but neither has it fully retreated.

The Federal Reserve remains caught between these competing signals. At its May meeting, the Federal Open Market Committee voted 8-4 to leave the federal funds rate unchanged at 3.50% to 3.75%. The decision was widely anticipated, but the meeting carried additional significance given that it was the last meeting chaired by Jerome Powell, whose tenure concluded as leadership transitioned to Kevin Warsh.

Powell’s tenure will likely be remembered for two very different periods. The first was the aggressive response to the pandemic, which helped stabilize financial markets and support economic activity during one of the most severe disruptions in modern history. The second was the inflation surge that followed, during which critics argued the Federal Reserve waited too long to remove accommodation while describing inflation as transitory.

Recent comments from Federal Reserve officials reinforced that inflation message. Policymakers generally acknowledged that growth has moderated and labor markets have softened modestly. At the same time, they continue expressing concern that higher oil prices, supply-chain disruptions, and persistent service-sector inflation could slow the disinflation process.

As a result, markets have dramatically repriced expectations for monetary policy. Earlier this year, investors anticipated multiple rate cuts during 2026. Those expectations have largely disappeared. In some cases, market participants have even begun discussing the possibility that the next policy move could be a rate increase if inflation pressures persist.

The implication for investors is straightforward. The Federal Reserve is no longer acting as a tailwind for financial markets. Equity performance increasingly depends on earnings growth, productivity improvements, and capital investment rather than expectations for easier monetary policy. Markets can continue advancing in that environment, but corporate fundamentals must do the heavy lifting that monetary policy once provided.

Consumer, Labor Markets, and the Emerging K-Shaped Economy

The American consumer continues to spend, but the quality of that spending has changed meaningfully over the past year.

Personal spending increased by 0.5% in April versus the 1.0% growth the prior month, while personal income remained flat compared with a 0.5% growth rate in March. This shift in April likely reflects a potential slowdown in economic momentum.

A closer examination, however, reveals a more pointed picture. The personal savings rate fell in April to 2.6%, down from 5.8% a year earlier. Households continue drawing on current income to support spending, leaving less room to absorb future economic shocks. At the same time, higher prices for essentials such as energy, food, housing, and insurance continue consuming a larger share of household budgets.

Retail sales data tell a similar story. Headline sales increased 1.7% during March, but gasoline accounted for a disproportionate share of that gain. Excluding categories heavily influenced by energy prices, spending remained positive but considerably less robust. Online sales continued growing at a healthy pace while restaurant spending remained relatively subdued, suggesting consumers are becoming increasingly selective in where and how they spend.

This is not a collapsing consumer but a bifurcated one. Higher-income households continue benefiting from strong labor markets, rising asset values, and elevated home equity. Lower- and middle-income households face a much different reality. The Federal Reserve Bank of New York recently highlighted a significant increase in food insecurity, particularly among households most exposed to the cumulative effects of inflation. Rising living costs and reduced pandemic-era support programs have contributed to growing financial strain among many families despite an economy that continues expanding overall.

Labor-market data reinforce this mixed picture. The unemployment rate remained unchanged at 4.3% in April, while total nonfarm payrolls increased by 115,000 jobs. Hiring remained concentrated in health care, transportation and warehousing, retail trade, and social assistance, while federal government employment continued to decline and several cyclical sectors showed little employment growth. Wage gains remained positive, with average hourly earnings increasing 3.6% from a year earlier, helping support household spending despite ongoing inflation pressures.

Beneath the headline numbers, however, signs of moderation continue to emerge. The number of individuals working part-time for economic reasons increased by 445,000 to 4.9 million, suggesting some employers are reducing hours rather than adding workers. Labor-force participation remained subdued at 61.8%, while the number of unemployed workers who had been jobless for less than five weeks rose by 358,000 during the month. At the same time, both manufacturing and service-sector employment components remained below the expansion threshold, indicating that many businesses remain cautious about hiring despite generally healthy levels of economic activity.

This distinction is important. The labor market is not signaling widespread layoffs or recessionary conditions. Instead, it appears to be transitioning from a period of labor scarcity toward one of greater balance. Businesses continue investing in technology, productivity enhancements, and capital projects, but they are becoming increasingly selective when adding labor. The result is an economy in which hiring remains positive, yet employment growth is no longer the primary driver of expansion.

That dynamic helps explain one of the most important characteristics of today’s economy: growth continues, but the benefits of that growth are distributed increasingly unevenly. The result is a K-shaped economy in which portions of the population continue experiencing significant financial pressure while other segments benefit from rising asset prices, strong corporate profits, and continued investment opportunities.

Manufacturing, Services, and Productivity

One of the more encouraging developments during the spring has been the improvement in business activity. While consumer spending and labor markets have shown signs of moderation, manufacturing activity, productivity growth, and business investment have generally moved in a more favorable direction.

The manufacturing sector has quietly become one of the stronger areas of the economy. The ISM Manufacturing PMI rose to 54.0 in May, its highest reading since May 2022 and the fifth consecutive month of expansion. New Orders climbed to 56.8, Production increased to 54.3, and Backlog of Orders improved to 52.2, suggesting demand continues to build despite concerns surrounding inflation, tariffs, and geopolitical uncertainty. Particularly encouraging was the broad nature of the expansion, with all six of the largest manufacturing industries reporting growth, led by Computer & Electronic Products, Machinery, Transportation Equipment, Petroleum & Coal Products, Chemical Products, and Food, Beverage & Tobacco Products.

The composition of the report is equally important. Customer inventories remained firmly in “too low” territory at 42.7, while export orders returned to expansion and imports accelerated. Historically, low customer inventories combined with rising new orders often signal the potential for additional production activity in the months ahead. At the same time, supplier deliveries remained elevated at 60.6, indicating that supply chains continue operating under pressure as demand improves.

Not all the news was positive. The Manufacturing Employment Index improved to 48.6 but remained below the expansion threshold for the 32nd consecutive month. Comments from survey respondents repeatedly referenced concerns surrounding the Iran conflict, diesel costs, supply-chain uncertainty, and ongoing pricing volatility. The manufacturing sector is expanding, but it continues to do so with a cautious approach toward hiring.

The service sector continues to expand as well, at a more measured pace. The ISM Services PMI registered 53.6 in April, marking the twenty-second consecutive month of expansion. Business Activity improved to 55.9, while the New Orders Index remained positive at 53.5. Employment improved modestly to 48.0 but remained in contraction territory for a second consecutive month, suggesting many service-oriented businesses remain focused on efficiency and productivity rather than aggressive workforce expansion.

A notable theme across both manufacturing and services is the persistence of cost pressures. The Manufacturing Prices Index remained elevated at 82.1, while the Services Prices Index held at 70.7, its highest level since late 2022. Diesel fuel, gasoline, transportation costs, electronic components, metals, and other industrial inputs continued appearing prominently in respondents’ comments. Even if oil prices moderate, many businesses expect inflationary pressures to linger as higher costs continue moving through supply chains. Several respondents specifically noted that normalization could take 12 to 18 months after geopolitical tensions subside.

This divergence between activity and employment appears throughout the economy. Companies continue investing, producing, and expanding. They simply are not adding workers at the same pace they once did. That distinction helps explain one of the most important economic developments of the current cycle: improving productivity.

According to the Bureau of Labor Statistics, nonfarm business productivity increased 2.9% from a year earlier during the first quarter, while manufacturing productivity rose 3.6%. Since the fourth quarter of 2019, productivity growth has averaged approximately 2.1% annually, well above the pace experienced during much of the previous expansion. Productivity gains of this magnitude help support economic growth, improve corporate profitability, and partially offset inflationary pressures without requiring a corresponding increase in labor.

The broader conclusion is that the economy is becoming increasingly investment-driven rather than labor-driven. Capital spending, technology adoption, automation, and productivity improvements are assuming a larger role in supporting growth. That transition provides a natural bridge to what has become the market’s most important investment theme: artificial intelligence and the infrastructure required to support it.

The AI Capital Spending Cycle

Investors often describe artificial intelligence as a technology story. Increasingly, it looks more like an infrastructure story. The first phase of the AI cycle was largely concentrated in software, cloud computing, and semiconductor design. The second phase is proving much broader. Today, AI investment is driving demand across data centers, memory chips, networking equipment, electrical systems, cooling infrastructure, power generation, industrial automation, and construction.

This distinction is important because it helps explain why market leadership has broadened beyond a handful of well-known technology companies. Semiconductors remain at the center of the story. The Philadelphia Semiconductor Index recently surpassed 10,000 in April 2026 for the first time in history after one of the strongest rallies ever recorded by the index. By the last trading day in May, the index was just shy of 13,000.  Every component of the index outperformed the S&P 500 over a recent multi-month period.

Memory manufacturers have become some of the most dramatic beneficiaries, with several companies surpassing $1 trillion market capitalizations during the spring, driven by extraordinary demand for high-bandwidth memory and advanced data center applications. One example is Micron Technology (MU), whose market value rose to $1 trillion on May 26, up from $70 billion just 12months earlier.

The infrastructure side of the story may be even more compelling. Companies such as Vertiv, Quanta Services, Comfort Systems, GE Vernova, Generac, and other industrial firms have emerged as significant beneficiaries of the AI buildout. Their businesses are tied directly to the physical requirements of artificial intelligence: power generation, electrical transmission, cooling systems, construction, and energy infrastructure.

Dell Technologies recently provided one of the clearest examples of this shift. AI-related server revenue substantially exceeded expectations, and management increased future forecasts as demand continued accelerating. Remarkably, Dell’s AI server business has grown large enough to rival portions of its traditional personal-computer operations, illustrating how rapidly enterprise AI spending is evolving.

What makes this cycle particularly unique is that it extends well beyond Silicon Valley. Artificial intelligence increasingly touches utilities, industrials, energy producers, engineering firms, construction companies, semiconductor manufacturers, and software developers. The investment opportunity set has expanded considerably from where it stood only two years ago.

History provides useful perspective. Bespoke recently compared the Nasdaq’s performance following the launch of ChatGPT in late 2022 with the Nasdaq’s performance following Netscape in the mid-1990s. The similarities are striking. In both cases, investors initially underestimated the scale and duration of the technology adoption cycle.

That does not guarantee today’s AI boom follows the same path. It does suggest that transformational technologies often appear overextended long before their economic impact is fully realized. Valuations undoubtedly deserve monitoring. Periods of consolidation would be entirely normal following such gains.

Yet the fundamental driver remains intact as businesses continue increasing capital expenditures, and data center construction continues accelerating. Power demand forecasts continue to rise, and corporate earnings tied to AI infrastructure continue improving. The market may ultimately experience periods of volatility. The underlying investment cycle, however, appears far from complete.

Earnings Continue to Carry the Market

Despite persistent concerns surrounding inflation, geopolitics, and Federal Reserve policy, the primary driver of equity performance during 2026 has remained remarkably simple: corporate earnings.

First-quarter earnings season delivered one of the strongest reporting periods in several years. Approximately 85% of S&P 500 companies exceeded analyst expectations, well above historical averages. Aggregate earnings growth is currently projected to be near 12%, while revenues increased more than 10%. Profit margins remain near record levels, highlighting the ability of many companies to navigate higher labor costs, elevated interest rates, and lingering inflation pressures.

Perhaps more important than the earnings results themselves has been the direction of earnings revisions. Historically, analysts tend to reduce estimates as reporting periods approach. This year, several sectors experienced the opposite dynamic. Forward earnings estimates for both 2026 and 2027 moved higher throughout the spring, reflecting stronger-than-expected demand, resilient profit margins, and continued capital investment. Morgan Stanley recently noted that 2027 S&P 500 earnings estimates have increased substantially since year-end, helping justify higher market valuations despite elevated interest rates.

The composition of earnings growth remains important. Technology companies continue generating the strongest growth rates, largely driven by artificial intelligence spending and digital infrastructure investment. However, earnings leadership has broadened considerably beyond mega-cap technology firms. Industrials, financials, select consumer discretionary companies, and portions of the energy and utility sectors have also reported improving results.

This broadening is significant because it suggests the market is no longer relying exclusively on a handful of companies to support overall earnings growth. While artificial intelligence remains the dominant investment theme, its economic impact is increasingly spreading throughout the broader economy.

The durability of earnings growth ultimately explains much of the market’s resilience. Investors have spent much of the past year debating inflation, interest rates, tariffs, oil prices, and geopolitical risks. Meanwhile, corporate America has continued growing profits. If earnings continue to expand, equity markets retain a fundamental source of support even in the absence of Federal Reserve rate cuts.

Market Leadership, Breadth, and Rotation

One of the most common criticisms of the current bull market has been that leadership remains excessively concentrated. While that observation was largely accurate earlier in the cycle, market participation broadened meaningfully during the spring.

Technology remains the undisputed leader. The sector gained approximately 20% during the year-to-date period and generated one of its strongest two-month advances on record during April and May. Artificial intelligence, semiconductors, software, and data center infrastructure continue driving substantial investor interest.

Yet the rally is no longer confined to technology. The Russell 2000 advanced nearly 18% year-to-date, nearly matching the performance of the Nasdaq 100. Equal-weight versions of major indexes reached new highs, suggesting participation has expanded beyond the largest capitalization companies.

This improvement in breadth is encouraging because durable bull markets typically require participation from multiple sectors rather than dependence upon a single industry group.

That said, not all breadth measures have fully confirmed the recent advance. Approximately 55% of stocks currently trade above their 50-day moving averages, a meaningful improvement from earlier in the year but not yet indicative of universally strong participation. Likewise, cumulative advance-decline measures have improved but remain somewhat less robust than headline index levels might suggest.

The message from breadth indicators is therefore balanced rather than extreme. Market participation has broadened considerably, and leadership remains stronger than participation. That distinction helps explain why investors continue debating whether current valuations are justified despite improving economic and earnings trends.

For now, the answer appears to lie in earnings growth. Broader participation is supporting market stability, while artificial intelligence and technology-related investment continue providing leadership.

Fixed Income and the Yield Curve

While equities attracted most of the attention during May, developments within fixed-income markets offer valuable insight into investor expectations for growth, inflation, and monetary policy. Treasury yields remain elevated relative to levels investors became accustomed to during the decade following the Global Financial Crisis. The 10-year Treasury yield traded largely within a range of approximately 4.25% to 4.50% during the month, reflecting both resilient economic growth and lingering inflation concerns. Importantly, yields remained elevated even as equity markets advanced.

Historically, rising stock prices are often associated with declining bond yields as investors anticipate monetary easing. The current environment is different. Equity markets are advancing despite yields remaining relatively high because earnings growth and capital investment continue offsetting the headwind created by higher financing costs.

Bond markets appear to be communicating two important messages. First, recession risks remain relatively low. Economic growth has slowed from the extraordinary pace experienced during portions of the post-pandemic expansion, but activity remains positive across most major sectors.

Second, inflation risks have not disappeared. Energy prices, supply-chain adjustments, tariffs, and service-sector inflation continue preventing investors from fully embracing a lower-rate environment.

The result is a fixed-income market that increasingly aligns with our broader thesis. Markets expect normalization, but not immediately. Growth remains positive. Inflation remains above target. Monetary policy remains restrictive.

Investment Implications

The current environment presents investors with a somewhat unusual combination of opportunities and risks.

On one hand, earnings growth remains healthy, productivity is improving, manufacturing activity has stabilized, and artificial intelligence continues driving one of the largest capital-spending cycles in decades. Those factors provide meaningful support for equities and risk assets. On the other hand, inflation remains elevated, the Federal Reserve remains cautious, consumer conditions remain uneven, and geopolitical risks have not fully disappeared.

For investors, this argues for selectivity rather than broad optimism or excessive caution. The strongest opportunities continue appearing in areas benefiting directly from long-term capital investment themes. Artificial intelligence infrastructure, semiconductor equipment, power generation, electrical infrastructure, industrial automation, engineering services, and data center construction remain among the most compelling secular growth opportunities.

Companies possessing pricing power also deserve attention. In an environment where inflation remains above historical norms, businesses capable of protecting margins through pricing flexibility maintain a meaningful competitive advantage.

Investors should remain attentive to areas more vulnerable to slowing consumer activity or persistent financing pressures. Lower-income consumer spending, highly leveraged business models, and sectors dependent upon aggressive Federal Reserve easing may continue facing challenges if inflation remains stubborn. Portfolio construction should therefore emphasize quality, earnings visibility, balance-sheet strength, and participation in durable growth themes rather than speculative positioning.

Closing Outlook

The defining characteristic of today’s market is not optimism or pessimism. It is divergence.

Financial markets are increasingly discounting a future characterized by lower geopolitical risk, moderating inflation, continued earnings growth, and sustained investment in artificial intelligence infrastructure. The economy, meanwhile, continues adjusting to the realities of elevated energy costs, restrictive monetary policy, and uneven consumer conditions.

Financial markets are inherently forward-looking. Businesses and households operate in real time. Investors are increasingly confident that the disruptions associated with higher energy prices, supply-chain challenges, and geopolitical uncertainty will eventually moderate. Economic data suggest that process has begun, but it remains incomplete. Inflation remains above target. Consumers remain uneven. Labor markets continue slowing rather than accelerating.

Corporate earnings continue improving. Productivity is accelerating. Manufacturing activity has stabilized. Capital investment remains strong. Artificial intelligence is evolving from a technology story into an infrastructure story with implications that extend throughout the economy.

Markets are pricing resolution as the economy continues managing adjustment. The months ahead will determine how quickly those two realities converge.

 

Not Investment Advice or an Offer -This information is intended to assist investors. The information does not constitute investment advice or an offer to invest or to provide management services. It is not our intention to state, indicate, or imply in any manner that current or past results are indicative of future results or expectations. As with all investments, there are associated risks and you could lose money investing.