Markets built on April's rebound in May, with major indices reaching fresh all-time highs. The S&P 500 rose 5.3%, its ninth straight weekly advance. While every major geographic region posted gains, leadership narrowed beneath the surface: technology drove a disproportionate share of returns, and most sectors declined during the month.
U.S. large caps gained 5.3%, while mid- and small-caps added 2.5% and 1.0%. Growth led domestic styles, jumping 7.2% on renewed AI enthusiasm versus 2.9% for value, though growth still trails year-to-date (8.8%) behind value (13.9%) and small caps (15.5%). Overseas, foreign developed stocks rose 3.2% and emerging markets surged 9.7%, extending a 25.7% year-to-date gain. Global stocks as a whole rose 5.2%, up 12.4% for the year.
The rally rested on earnings: According to FactSet, roughly 85% of S&P 500 companies beat first-quarter expectations, the highest percentage in 5 years, led by technology and energy. Enthusiasm around artificial intelligence reaccelerated, with the four largest U.S. hyperscalers on track to spend approximately $700 billion on AI data-center infrastructure in 2026, based on their latest quarterly results. The flip side is concentration: eight of 11 sectors declined in May even as the index set records. Technology led by a wide margin, rising 20% for a second straight month and finishing more than 16% ahead of Health Care in second place, while energy lagged again, down 5.6%. Narrow leadership can persist, but it reinforces the importance of valuation discipline and diversification.
May also brought a change atop the Federal Reserve, as Jerome Powell's eight-year tenure ended and Kevin Warsh was sworn in mid-month. He inherits a tricky backdrop: Inflation rose to 3.8%, its highest in three years. As prices firm and the labor market holds up, hopes for near-term rate cuts have faded. As of late May, the CME FedWatch Tool indicates markets anticipate the Federal Reserve will hold interest rates steady in June, while increasingly pricing in potential rate hikes later in the year over cuts. Treasury yields drifted higher, the 10-year ending at 4.45% and the 2-year at 3.98%, while mortgage rates rose to 6.53%.
Energy offered some inflation relief, but not at the pump. A fragile U.S.-Iran ceasefire framework eased the supply fears behind March's selloff, and WTI crude fell to $97.63 from $108.64, though gasoline stayed high. The labor market held steady: unemployment was unchanged at 4.3% for a second consecutive month, and the U.S. added 115,000 jobs, well above the 55,000 expected, even as labor force participation slipped 0.1 point to 61.8%.
May was a month to appreciate (record highs, strong earnings, and broad regional gains) but also one for measured caution, with leadership narrowing, inflation firming, and Fed policy less certain under new leadership. It's a good time to celebrate progress while taking an honest look at risk. As always, diversification across regions, sectors, and asset classes remains warranted for whatever the second half of 2026 brings.