May Update
Headlines & Highlights
- Iran peace inching closer: The United States and Iran appear to be making slow but noticeable progress in ending the Iran War that started in late February. Key issues in the talks have been fairly consistent: Iran wants sovereignty over the Strait of Hormuz and billions of dollars of their assets held overseas unfrozen, and the U.S. wants Iran to stop efforts to build a nuclear weapon. While talks continue, the ceasefire put in place in early April is holding despite occasional brief flareups in hostilities. President Trump said on June 1 that Israel would stop attacks on Lebanon, which has also been a sticking point in the peace discussions.
- Faster inflation, slower growth: The federal Bureau of Economic Analysis reported that the Federal Reserve’s preferred inflation gauge in April climbed at the fastest rate in nearly three years. The personal consumption expenditures (PCE) index was 3.8% above its level a year earlier – the highest monthly increase since September 2023. Core PCE, which excludes food and energy, rose 3.3%. In addition, the Bureau of Labor Statistics said that economic growth in the first quarter of 2026 was a bit slower than originally reported. The agency revised the GDP growth rate downward from 2.0% to 1.6%, primarily due to a lower-than-expected estimate of inventory investment.
- Tech propels global stocks: Powered by the technology sector and strong earnings growth across sectors, U.S. large-cap stocks extended their recovery from the recent bottom seen in the first month of the Iran War. The benchmark ETF for large caps picked up 5.3% and pushed its year-to-date return to 11.3%. Tech was also a driving force for U.S. small caps, lifting them to a series of fresh records in May en route to a 4.5% gain (18.2% overall in 2026). Overseas, the same tech trends were seen in emerging markets, with the benchmark ETF for that asset class increasing 7.2% in May (25.4% YTD). Bonds were largely flat for the month while real estate investment trusts dipped on fears of higher interest rates.
Select Market Returns
Our Views
- Crude oil prices remain volatile, with sharp ups and downs resulting from short-term, headline-driven sentiment shifts in the Iran War peace talks. At more than three months, the war has gone on longer than we and others expected (though the April 8 ceasefire has limited active hostilities). Markets have mostly discounted the longer-term impacts of the conflict, but rising inflation increases economic risks.
- The upswing in inflation – whether measured by the Consumer Price Index or the Fed’s preferred PCE Index – has tilted investor expectations toward at least one interest-rate hike in 2026. We believe the prevailing outlook may be too pessimistic: The likelier course of action is that the Fed stands pat until inflationary pressures stabilize.
- The bond market has faced considerable headwinds from the inflation situation – the yield on the 10-year Treasury note peaked in mid-May at about 4.7%, its highest level in more than a year (yields rise when bond prices fall). Yields have since eased off, which could be an indication that the peace progress in Iran has improved investors’ expectations on inflation.
- The Atlanta Fed is currently projecting that the U.S. economy will grow at a 3% annualized rate in the second quarter of 2026, with more than half of that growth coming from its forecast of solid consumer spending. This growth estimate is subject to revision, but our takeaway is that the job market and broader economy continue to be on steady footing.
- After a springtime swoon, the AI story is again the leading stock-market driver – shares of the “Magnificent 7” group of large AI companies are up more than 25% since the start of April. We see the continued buildout of AI data centers and computing capability as a powerful economic growth contributor that will persist for some time to come.
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