Global Equity Rally Continues: Technology stocks led global equity markets higher in May on surging demand for artificial intelligence (AI) and its supporting infrastructure. The S&P 500 gained 5.3%, closing out the month at a record high of 7,580. Year-to-date, the S&P’s return reached 11.2%. Internationally, the MSCI EAFE Index (developed markets) and the MSCI Emerging Markets Index (EM) advanced 3.1% and 9.7%, respectively, which brought their year-to-date returns to 9.4% and 25.6%. The unusually strong EM performance reflected its comparatively heavy exposure to the top-performing semiconductor sector.

Blowout S&P Earnings: As of May 29, 96% of S&P 500 companies had reported their Q1 2026 earnings per share (EPS) results, with nearly 84% ahead of analysts’ expectations. Analysts tracked by I/B/E/S estimate S&P 500 first-quarter year-over-year EPS growth was close to 30%. This is more than double expectations at the start of the reporting period. Sectors contributing most heavily to S&P growth included technology (56.4%) and communication services (50.9%).

Inflation on the Rise: In mid-May, the Bureau of Labor Statistics reported that April’s Consumer Price Index (CPI), measured year over year, jumped to 3.8% from 3.3% in March. The increase was largely due to the direct and indirect impacts of higher oil prices. Core CPI, which excludes food and energy, increased to 2.8% from 2.6%. Both April CPI measures were 0.1% above their respective Bloomberg median forecasts. Of greater concern was the April Producer Price Index (PPI), which increased 6.0%, with the core measure up 5.2%. These increased from 4.3% and 4.0%, respectively, in March and were well ahead of Bloomberg median forecasts of 4.8% and 4.3%. To the extent producers can pass cost increases along to consumers, the PPI tends to lead the future direction of the CPI.

Higher Interest Rates: Interest rates rose at most points along the U.S. Treasury yield curve in May as markets digested higher inflation data. Two-year and 10-year U.S. Treasury note yields increased to 4.00% and 4.44%, respectively, from 3.87% and 4.37% at the end of April. The Bloomberg Aggregate Bond Index and the Bloomberg U.S. Municipal Bond Index gained 0.3% and 0.4% for the month, respectively, bringing their year-to-date returns to 0.4% and 1.3%.

Fed’s Focus Shifts to Inflation: Minutes from April’s Federal Open Market Committee (FOMC) meeting highlighted member concerns about inflation risks stemming from ongoing tensions in the Middle East. A majority of the Committee’s members suggested that a tightening of monetary policy might be needed to bring inflation back toward the Fed’s 2% target. Inflation, as measured by the Fed’s preferred gauge—the Personal Consumption Expenditures Core Price Index (PCE)—has trended higher over the past year after reaching a post-pandemic low of 2.6% last April. On May 28, the Commerce Department reported that April 2026 Core PCE rose to 3.3% from 3.2% in March.

Volatile Oil Prices: Since shipping traffic through the Strait of Hormuz was disrupted in March by U.S.-Iran hostilities, oil prices have been highly volatile, trading in a range between roughly $85 and $115 per barrel. Despite few tangible signs of progress in U.S.-Iran peace negotiations, oil prices fell nearly 17% in May, with West Texas Intermediate July futures trading at $87.36 per barrel on May 29. December 2026 WTI futures were trading at $78.19. The drop in prices was largely in reaction to numerous comments from the Trump Administration beginning on May 23, suggesting that an extended ceasefire and memorandum of understanding with Iran was imminent. As of May 31, the two countries appeared to remain deadlocked in their negotiations.

Economic Activity Holds Steady: The S&P Global Flash (preliminary) Global Composite Purchasing Managers’ Index (PMI) held steady at 51.7 in May, unchanged from its final April reading. The PMI tracks business activity across both the services and manufacturing sectors, with readings above 50 indicating expansion.

Labor Market Holding Firm: In early May, the Bureau of Labor Statistics (BLS) reported nonfarm payrolls increased by 115,000 in April, well above the Bloomberg median forecast of 65,000. In addition, March payrolls were revised to 185,000 from 178,000 as previously reported. The unemployment rate in April held steady at 4.3%, while average hourly earnings increased 3.6% year over year, up from 3.4% in March.

Unemployment Claims Remained Low: Initial weekly jobless benefit claims for the first three weeks of May averaged 212,000 compared with 208,000 for the full month of April. Continuing claims for the week ending May 16 were 1.786 million compared with 1.766 million at the end of April. Both measures remained below their respective 12-month averages of 221,000 and 1.891 million.

Consumer Sentiment Slides: Although the overall economy appears to be faring well despite Middle East disruptions, consumers are in a grim mood. The University of Michigan’s Consumer Sentiment Index fell for a third consecutive month to a record low of 44.8 in May. The index has averaged 81.5 since the turn of the century but has been trending lower from its most recent peak of 79 reached in early 2024. Just prior to the Iran conflict, the index was at 56.6. The recent drop in the index reflects ongoing cost-of-living pressures, which continue to weigh heavily on consumer confidence. Nevertheless, consumer spending has remained firm, reflecting relatively stable labor market conditions, low levels of unemployment, and record-high household net worth.

Uncertainties surrounding the U.S.-Iran conflict present an ongoing risk to the markets. However, the stock market’s solid fundamental underpinnings are providing a powerful offset. Aside from rising inflation, overall economic and labor market conditions remain favorable. Corporate earnings forecasts have improved considerably over the last several months. As of May 29, analysts tracked by I/B/E/S estimate S&P 500 earnings per share growth for 2026 at 25%, up from 19% in early April and just 15.6% at the start of the year. The S&P 500’s current forward price-to- earnings (PE) ratio of about 22 is well above its 25-year average of just over 17. However, its premium valuation is supported by unusually strong earnings growth driven by the AI boom, which shows no signs of slowing. Despite equity markets setting record highs, investor sentiment is not excessive as it usually is at market peaks. As of May 28, the American Association of Individual Investors’ bullish sentiment indicator suggested that just 35.6% of investors expect the stock market will go higher over the next six months. This is below its long-term average of 37.7% and well below its all-time high of 75% reached in January 2000 near the peak of the internet bubble.

Employment Update: On Friday, the Bureau of Labor Statistics will report May nonfarm payrolls, unemployment, and wage growth. Bloomberg median forecasts are 89,000, 4.3%, and 3.4%, respectively, pointing to expectations for continued labor-market stability.

Roger Khlopin, CFA
Chief Investment Officer

Aaron Nghiem, CFA, CIMA
Senior Portfolio Manager