May's Market Resilience - What Investors Should Know

Despite continued geopolitical tensions and stubborn inflation points, the month of May demonstrated the market's continued resilience. As the calendar turns to June, our focus this week provides key summary insights from the month of May - representing another strong month for equities.

May Was Another Strong Month for Stocks

U.S. stocks continued to move higher in May, with the S&P 500 gaining 5.26%, the NASDAQ rising 8.43%, and the Russell 2000 advancing 4.37%. The rally was powered largely by the AI productivity narrative and strong earnings expectations, with the Information Technology sector surging 15.99% for the month. Leadership remained concentrated in growth-oriented areas rather than broad-based across the market. In fact, Energy and Utilities both declined more than 5%, highlighting the continued divergence between AI-related winners and more defensive sectors. The S&P 500 now sits nearly 25% above its April lows, demonstrating how quickly investor sentiment can shift when earnings and economic fundamentals remain supportive.

Emerging Markets Were Really a Semiconductor Story

International markets also posted solid gains, with developed international stocks (EAFE) rising 3.18% and emerging markets advancing 9.73%. However, much of the emerging market strength was concentrated in South Korea and Taiwan, where semiconductor manufacturers benefited from continued AI-driven demand. Investors often view emerging markets as a diversified source of growth, but recent performance suggests returns have been driven less by geography and more by exposure to the global technology and chip supply chain. Understanding these underlying drivers can help investors better evaluate where returns are truly coming from.

Fiscal Risk is Starting to Appear in Bond Markets

The bond market experienced renewed volatility during May. The 30-year Treasury yield briefly climbed above 5.2% before ending the month near 4.97%, while the benchmark 10-year Treasury yield finished at 4.44%. Historically, rising yields often reflect stronger economic growth expectations. This time, however, investors appear increasingly focused on the nation's growing fiscal deficits and debt burden. With federal deficits expected to remain above 6% of GDP and debt-to-GDP levels continuing to rise, long-term borrowing costs may face upward pressure even if economic growth moderates.

The Fed has Less Room to Move

Interest rate expectations shifted noticeably during May. Markets have largely removed expectations for meaningful rate cuts in 2026 and have even begun discussing the possibility of an additional rate increase should inflation pressures persist. Higher energy costs, elevated long-term interest rates, and ongoing fiscal concerns have complicated the Federal Reserve's outlook. For investors, the key takeaway is that monetary policy may no longer provide the same cushion for markets that it did in previous economic slowdowns. If inflation remains stubbornly above the Fed's target, policymakers may be forced to keep rates higher for longer.

AI Is Becoming a Power and Infrastructure Story

Artificial intelligence is rapidly evolving from a software and semiconductor story into a broader infrastructure story. Hyperscaler capital expenditures are projected to exceed $480 billion in 2026, up from roughly $120 billion in 2021. At the same time, data centers are expected to consume a significantly larger share of U.S. electricity production over the coming decade. As AI adoption expands, constraints such as power generation, transmission infrastructure, cooling systems, water availability, permitting, and advanced chip production are becoming increasingly important. This suggests that investment opportunities may extend well beyond technology companies into the infrastructure needed to support AI at scale.

Markets are Looking Through the Hormuz Oil Shock

Geopolitical tensions involving Iran and the Strait of Hormuz continued to create volatility in oil markets throughout May. Earlier in the conflict, rising oil prices weighed heavily on investor sentiment as markets worried about inflation and potential disruptions to global growth. As the month progressed, however, equities largely recovered despite continued swings in crude oil prices. This divergence suggests investors increasingly view the energy shock as a manageable risk rather than a threat capable of derailing the broader economic expansion. While oil remains sensitive to geopolitical headlines, equity markets appear more focused on earnings growth and economic resilience.