Economic Cycle
May saw a continued divergence between the economy and markets, as growth showed signs of moderation while markets pushed ever higher. Economic data released during the month suggested the economy entered the second quarter with less momentum than previously believed, as first quarter GDP growth was revised lower and consumer spending growth slowed from earlier estimates.
Despite softer data, labor market conditions remained resilient, providing likely support for consumer spending from here, while easing energy prices as a result of easing geopolitical tensions helped alleviate some of the inflation concerns that emerged earlier in the spring. As a result, markets continued to process the mixed signals of an economy exhibiting slower but resilient growth.
Equity Markets
Equity markets extended their advance in May, with the S&P 500 recording a series of new all-time highs throughout the month. In many respects, market leadership and return concentration looked remarkably similar to April, with growth-oriented sectors and large-cap technology companies continuing to drive the majority of gains. Information Technology significantly outperformed every other sector, supported by strong earnings results and continued enthusiasm surrounding artificial intelligence.
Emerging markets also benefited from their exposure to technology and semiconductor supply chains, while mid-cap and small-cap stocks lagged the broader market. Easing geopolitical tensions, meanwhile, had the two-fold effect of Energy sector weakness (on account of falling oil prices) but improved investor optimism helping to support risk appetite more broadly.
Fixed Income Markets
Fixed income markets generated positive returns in May as Treasury yields ended the month only slightly higher across much of the curve. Markets continue to expect the Federal Reserve may need to keep policy tighter for longer on account of inflation concerns, but the move higher in rates was limited as oil prices retreated from earlier highs and inflation concerns surrounding the conflict with Iran began to fade.
Credit markets remained resilient, with tight spreads reflecting healthy corporate fundamentals and continued demand for income-producing assets. Investment-grade corporates modestly outperformed high yield bonds as investors showed a preference for higher-quality issuers amid elevated uncertainty, while municipal bonds also delivered positive returns, supported by attractive tax-exempt yields and continued demand.
Our Perspective
May largely reinforced the market trends that have defined much of 2026. Investors continued to reward companies and industries most closely tied to artificial intelligence and technology spending, while areas of the market more sensitive to the broader economy delivered comparatively muted returns. Strong earnings growth, particularly among large technology companies, has provided support for equities’ continued march upwards despite lingering concerns surrounding inflation, interest rates, and the pace of economic activity.
While the concentrated market leadership driving stock returns bears watching, we continue to maintain a generally constructive outlook on equities. Corporate fundamentals remain strong, though increasingly divergent performance across sectors and market capitalizations reinforces the importance of diversification and valuation discipline.
Within fixed income, elevated yields continue to provide attractive income opportunities across many higher-quality segments of the market. While tight credit spreads warrant selectivity, we believe bonds remain positioned to play an important role in portfolio construction as growth gradually moderates and policy uncertainty persists.
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Indicator Sources: Bureau of Economic Analysis (BEA) — Q1 Real GDP estimate & Core PCE (bea.gov / fred.stlouisfed.org) | Department of Labor (DOL) Jobless Claims (fred.stlouisfed.org) | Census Bureau Retail Sales (census.gov) | University of Michigan Surveys of Consumers (sca.isr.umich.edu) | ICE BofA High Yield Option-Adjusted Spread (OAS) (fred.stlouisfed.org)
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