In Short

• May brought equity gains driven by AI enthusiasm and easing geopolitical tensions, yet just 25% of S&P 500 stocks beat the index, with the top 10 contributors accounting for nearly 75% of year-to-date returns.
• Headline CPI hit 3.8% year-over-year, long-term bond yields climbed to multidecade highs, and a resilient labor market effectively erased any case for summer Fed rate cuts.
• We maintain overweights in global equities and select emerging markets, and see front-end rate opportunities in fixed income.

The Month in Markets

May delivered broad gains across the investment landscape, as AI exuberance took hold once again, and the announcement of a tenuous ceasefire between the U.S. and Iran pointed to potential for a more meaningful deescalation. Global equity markets added to their strong April advance, but for investors seeking evidence of a return to the first quarter’s broadening performance, there was little comfort in May’s numbers. Even as the S&P 500 pushed through a series of record highs, the narrowness of the current rally created both consternation and caution among diversified equity investors. The top 10 contributors to the S&P 500 have delivered almost 75% of its return this year. Only 216 stocks (43%) were up during the month of May, and only 127 stocks (25.4%) beat the index. Momentum indicators were at extreme historical levels as well.

The IPO pipeline is also worth noting. SpaceX, Anthropic and OpenAI are expected to come to market at combined valuations that could approach or exceed $3 trillion. If these companies achieve full index inclusion, U.S. equity benchmarks will structurally shift even further toward higher-growth, higher-multiple companies, which could force passive investors to add even more such names to their exposure. Corporate results were more comforting. S&P 500 companies grew revenues by 11% and earnings per share by 28% in the first quarter; and while there could be continued cannibalization of cash flows to fund AI investments across sectors and industries, economic momentum and the opportunity for productivity enhancement are driving current S&P 500 earnings growth expectations of 14 – 16% for the year.

The bond market told a very different story. Long yields rose sharply during the month, with 30-year nominal and real U.S. yields reaching multidecade highs and the 10-year and two-year both climbing to levels not seen since early 2025. The drivers were modestly higher inflation expectations and rising real rates, along with geopolitical risk. While inflation has been a key issue, changing growth expectations have also played a part. The amount of capital being deployed has raised the stakes; and the global economy will likely grow at a healthier pace than previously anticipated, pointing to the potential for a higher neutral rate. The moves were not limited to the U.S. Yields on 30-year and 10-year Japanese government bonds climbed to levels not seen since the late 1990s.

In the commodity sector, energy prices remain in focus. Supply disruption concerns tied to the ongoing Iran conflict kept prices elevated all month, with gas up more than 5% in April and energy broadly up nearly 18% over the past 12 months. While geopolitical tensions have been most pronounced in this market, it is important to note that a continuation of the conflict in the Middle East, combined with the change in growth expectations, has created a hawkish pall over the markets as we move into the typically more volatile summer months.

Inflation Looms Large

Energy has been the loudest voice in the inflation conversation lately, and the April CPI data made that impossible to ignore. Headline CPI printed at +0.6% month-over-month and +3.8% year-over-year, with energy accounting for roughly 40% of that increase. Airfares followed, climbing on higher jet fuel costs, while shelter costs moved higher, too, pushing core CPI to its highest year-over-year reading since May 2023. That said, not only energy prices are moving higher: Across the inflation basket, five of six major categories posted increases for the month.

Our takeaway, at least through May, is that higher energy costs are not yet feeding into a wide, sustained increase in everyday prices. This was reinforced by the Core PCE reading, which came in a bit lighter than expected at (an unrounded) 0.2% versus a 0.3% forecast, with financial services and insurance doing much to pull down that number. “Supercore” inflation, which tends to be stickier, was favorable as well. Based on inflation data alone, you might expect interest rates to move lower. However, other factors are coming into play. The Federal Reserve held steady during the month, tilting slightly more hawkish given elevated energy prices and a surprisingly resilient labor market. April payrolls came in at 115,000 compared to a consensus of 75,000. With that kind of strength sitting alongside elevated CPI, the case for summer rate cuts essentially evaporated.

What could potentially break the policy impasse? In our view, a clear and sustained deescalation in the Middle East, with a reopening of the Strait of Hormuz, could alleviate some of the inflation concerns. Deterioration in consumer activity, too, could be a factor for the Fed—and there are reasons for concern. Real personal income, once you strip out government transfers, has been negative for three months, and has now turned negative on a year-over-year basis for the second straight month. Wages decelerated, small business owner income was soft, and the savings rate has dropped to around 2.6%—close to the lows we saw before the global financial crisis of 2008. With long-term inflation expectations moving from roughly 2.25% to about 2.5%, continued pressure on the U.S. consumer appears likely. The Fed may be forced to tighten policy to slow inflation, which could, in turn, have meaningfully negative implications for U.S. consumers—a risk the Fed will need to weigh as it enters the Warsh era.

Portfolio Implications

Equities. We maintain an overweight to global equities. We moved to an overweight posture in U.S. equities at the beginning of the second quarter based on our expectations for stronger earnings, which were delivered. While we still see value in the Japan story, centered on structural reform and strong growth, Europe's energy vulnerability and deteriorating growth prospects pushed us to downgrade it to underweight. We maintain overweights in China, India and Brazil, given the underlying structural growth and despite their reliance on energy imports.

Fixed Income. Fears of interest rate hikes in response to higher inflation have created opportunities at the front end of global yield curves, most notably in the U.S., where we think markets have gotten ahead of themselves on tightening—even with the recent hawkish tilt. We are finding opportunities in investment grade credit and non-U.S. developed market bonds and are maintaining overweights in European and Japanese government and corporate debt. In emerging markets, a stronger dollar and energy-driven headwinds prompted us to downgrade our view to at target on sovereign bonds; we could recommend a tactical shift back to an overweight in this asset class in the coming quarters.

Private Markets. Private equity has been moved to an at-target position, given the risk of AI disruption, rising refinancing costs and geopolitical uncertainty. Private credit remains at target as redemptions from retail focused products dominate the narrative but may translate into opportunities for long-term institutional investors to allocate at higher spreads. We remain constructive on commodities, as energy markets have been repriced and the inflection higher in industrial activity point to continued upward pressure on scarce resources—not to mention the diversification benefits.

Index Returns as of May 2026

Source: Bloomberg, Total returns as of May 29th,2026. S&P 500 Index is represented by S&P 500 Total Return Index. Nasdaq Composite NASDAQ-Composite Total Return Index. Dow Jones is represented by Dow Jones Industrial Average TR. Large Cap is represented by Russell 1000 Total Return Index. Mid Cap is represented by Russell Midcap Index Total Return. Small Cap is represented by Russell 2000 Total Return Index. All Cap is represented by Russell 3000 Total Return Index. Large Cap Growth is represented by Russell 1000 Growth Total Return. Large Cap Value is represented by Russell 1000 Value Index Total Return. Small Cap Growth is represented by Russell 2000 Growth Total Return. Small Cap Value is represented by Russell 2000 Value Total Return. ACWI is represented by MSCI ACWI Net Total Return USD Index. ACWI ex US is represented by MSCI ACWI ex USA Net Total Return USD Index. DM Non-U.S. Equities is represented by MSCI Daily TR Gross EAFE USD. EM Equities is represented by MSCI Daily TR Gross EM USD. Cash is represented by ICE BofA US 3-Month Treasury Bill Index. U.S. Aggregate is represented by Bloomberg US Agg Total Return Value Unhedged USD. Munis is represented by Bloomberg Municipal Bond Index Total Return Index Value Unhedged USD. Munis Short Duration is represented by Bloomberg Municipal Bond: Muni Short (1-5) Total Return Unhedged USD. Munis Intermediate Duration is represented by Bloomberg Municipal Bond: Muni Intermediate (5-10) TR Unhedged USD. Investment Grade is represented by Bloomberg US Corporate Total Return Value Unhedged USD. High Yield is represented by Bloomberg US High Yield BB/B 2% Issuer Cap Total Return Index Value Unhedged USD. Short Duration is represented by Bloomberg US Agg 1-3 Year Total Return Value Unhedged USD. Long Duration is represented by Bloomberg US Agg 10+ Year Total Return Value Unhedged USD. Global Aggregate is represented by Bloomberg Global-Aggregate Total Return Index Value Unhedged USD. EMD Corporates is represented by J.P. Morgan Corporate EMBI Diversified Composite Index Level. EMD Sovereigns – USD is represented by J.P. Morgan EMBI Global Diversified Composite. Commodities is represented by Bloomberg Commodity Index Total Return. Commodities ex Energy is represented by Bloomberg Ex-Energy Subindex Total Return. U.S. 10-Year Yield is represented by US Generic Govt 10 Yr.