May 2026 Market Update

May brought a familiar tension to the markets. The U.S. economy continued to expand, supported by resilient consumer spending and ongoing investment in artificial intelligence infrastructure, while inflation pressures remained stubbornly elevated. Rising energy prices tied to geopolitical conflict in the Middle East added another layer of uncertainty, leaving the Federal Reserve in a difficult position and pushing expectations for rate cuts further into the future.

For investors, the environment can feel somewhat contradictory. Parts of the stock market continue reaching record highs, while elevated interest rates still weigh on bonds, borrowing costs, and household budgets. Understanding both sides of that story is important when evaluating the broader market landscape.

Stocks Continue Higher — But Leadership Remains Narrow

Equity markets moved higher throughout May, with technology and AI-related sectors once again leading the way. Semiconductor companies and large-cap growth stocks drove the majority of market gains, while small-cap stocks, value-oriented sectors, and more defensive areas of the market lagged behind.

Major U.S. indices finished the month higher:

  • The S&P 500 gained 5.15%
  • The Nasdaq 100 surged 10.49%
  • The Dow Jones Industrial Average rose 2.78%

Internationally, Asian markets with strong exposure to technology and AI infrastructure also posted solid performance.

Economic Growth Remains Intact — But Uneven

The broader economy continues to show resilience, although the strength has not been evenly distributed. First-quarter GDP growth was revised down from 2.0% to 1.6% annualized late in May, while unemployment remained relatively stable at 4.3%.

Consumer spending patterns continue to reflect a divide in the economy. Higher-income households have largely maintained spending on travel, dining, and experiences, while many lower-income consumers are feeling increased pressure from higher food and fuel costs.

At the same time, investment tied to artificial intelligence — particularly in data centers, software, and infrastructure — remains a meaningful source of economic momentum, helping offset softer spending in more traditional business sectors.

The Federal Reserve Faces a Challenging Balancing Act

The Federal Reserve remains caught between slowing economic growth and persistent inflation.

Newly appointed Fed Chair Kevin Warsh, sworn in on May 22, inherits a particularly difficult environment. Core PCE inflation — one of the Fed’s preferred inflation measures — rose to 3.3% in April, remaining well above the Fed’s long-term 2% target.

While policymakers would prefer to keep rates steady and allow inflation to gradually cool, stubborn services inflation and volatility in energy prices have complicated that path. Markets are now beginning to price in the possibility that the Fed’s next move could be another rate increase rather than a cut.

Corporate Earnings Continue to Support Markets

One bright spot for investors has been corporate earnings.

With nearly all S&P 500 companies having reported first-quarter results, earnings season was broadly stronger than expected. Approximately 85% of companies exceeded earnings expectations, while 81% surpassed revenue forecasts.

Analysts also increased second-quarter earnings estimates during April and May — an encouraging development, particularly because estimates are more commonly revised downward early in a quarter.

Strong earnings growth has helped support equity valuations, particularly among large technology and growth-oriented companies.

Oil, Interest Rates, and the Dollar Remain Key Drivers

Three factors continue to play an outsized role in shaping markets: interest rates, the U.S. dollar, and oil prices.

With the Fed funds rate currently between 3.50% and 3.75%, cash and short-term fixed-income investments continue offering attractive yields relative to riskier assets.

Meanwhile, a strong U.S. dollar has created challenges for international and emerging markets, reducing returns on overseas holdings for U.S.-based investors.

However, oil prices may be the most important variable moving forward. Crude oil prices surged above $110 per barrel earlier in May amid escalating conflict involving Iran before retreating below $90 on signs of a potential ceasefire. Where energy prices ultimately settle could significantly influence the future direction of inflation.

What This Means for Investors

The economy remains resilient, but it is not immune to pressure. Inflation appears to have settled at a higher level than many initially expected, and the greater risk may not be an immediate recession, but rather a prolonged period of elevated prices and higher interest rates.

Markets also remain somewhat concentrated, with a relatively small group of companies driving much of the recent upside. While strong earnings continue supporting the broader market, rate-sensitive areas are still showing signs of strain.

In environments like this, the fundamentals still matter most:

  • Stay diversified
  • Avoid chasing crowded trades
  • Focus on long-term strategy over short-term headlines

While market conditions continue to evolve, maintaining a disciplined investment approach remains one of the most effective ways to navigate uncertainty.

We are always here to help.

As always, we continue monitoring markets closely and evaluating how changing conditions may impact financial plans and investment strategies. If you have any questions about your portfolio or long-term goals, we are always here to help.

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