Stocks Rallied to New Highs and
Most Bond Sectors Advanced
HIGHLIGHTS:
- Stocks: The equity rally continued in May with major stock indices closing the month at new all-time highs. Large-cap growth led the recent rally.
- Bonds: Rates rose in May with the 10-year U.S. Treasury yield hitting its highest level since early 2025. Despite rates moving higher, bonds still made gains for the month.
- U.S. Economy: While recent inflation data has risen with the sharp increase in oil prices, broader economic activity continues to show a growing economy.
- Federal Reserve: Despite all the drama surrounding the Fed in recent years, Kevin Warsh was confirmed as the new Fed chair in May. The market is not expecting any action on rates by the Fed for the balance of 2026.
Equity Markets
Stocks continued to rally in May following strong results in April but returns varied considerably by style. While the conflict with Iran is clearly not over, the market continued to respond positively to news that negotiations were taking place. See Table 1 for May and YTD returns.
Table 1 | Equity Markets
| Index | May 2026 | YTD |
|---|---|---|
| S&P 500 | 5.26% | 11.27% |
| S&P 500 Equal Weight | 2.68% | 9.53% |
| DJIA | 2.94% | 6.86% |
| Russell 3000 | 5.07% | 11.20% |
| NASDAQ Comp. | 8.43% | 16.33% |
| Russell 2000 | 4.37% | 18.15% |
| MSCI ACWI ex U.S. | 5.03% | 14.36% |
| MSCI Emerging Mkts Net | 9.69% | 25.61% |
Source: Morningstar. For illustrative purposes only. Indexes are unmanaged and have been provided for comparison purposes only. No fees or expenses are reflected. You cannot invest directly in an index. Past performance is not indicative of future results.
Large-cap growth stocks roared back in recent months after stumbling in the first quarter of 2026. As stocks were having a typical sell-off at the outset of the conflict with Iran, equity fundamentals were improving. Stock prices were falling but earnings expectations were generally rising, so valuations were improving. We saw valuations on several large-cap growth companies decline to levels that we had not seen in some time. Once we moved into April and the hostilities with Iran shifted to a ceasefire and peace negotiations, the market rallied. In particular, large-cap growth recovered as the AI trade resumed with the Nasdaq Composite up over 19% in the last three months through May.
Small caps and emerging markets are the leaders year to date. Small caps had a better start to the year, and some emerging markets (particularly in Asia) have close ties to technology and the AI trade. Shorter-term volatility could mount as the Iran conflict drags on. June has started with news that peace negotiations have stalled, but that news can change at a moment’s notice. Furthermore, typical historical headwinds of midterm elections looming in the fall and a new Fed chair could escalate volatility in the months ahead. However, the market has clearly looked past the conflict and these other potential headwinds as improving earnings growth overwhelmed any negative news to this point. Earnings and earnings estimates are at all-time highs and stocks have followed suit.
The U.S. economy and capital markets have been incredibly resilient in recent years, and the beginning of 2026 has been no exception. With fundamentals still intact, driven largely by strong expected earnings growth, we still believe opportunities exist in stocks. At the same time, we recognize the rally from April 2025 lows has been strong, and some volatility could develop in the months ahead with a new Fed chair and midterm elections coming.
Fixed Income
Credit spreads tightened in May and neared multi-year lows during the month. At the same time, rates continued to drift higher, especially during the first few weeks of May. The 10-year U.S. Treasury closed May 19 at 4.67%, the highest level since early January 2025. The 30-year closed at 5.18% that same day, the highest level in almost 20 years. By month’s end, rates had retreated from those elevated levels and the 10-year ended at 4.45% after finishing April at 4.40%. Bond indices were generally higher in May, and most are in positive territory for the year. See Table 2 for bond index returns for May and YTD.
Table 2 | Fixed Income Markets
| Index | May 2026 | YTD |
|---|---|---|
| Bloomberg U.S. Agg | 0.31% | 0.38% |
| Bloomberg U.S. Credit | 0.67% | 0.65% |
| Bloomberg U.S. High Yld | 0.49% | 1.68% |
| Bloomberg Muni | 0.37% | 1.34% |
| Bloomberg 30-year U.S. TSY | 0.55% | -0.43% |
| Bloomberg U.S. TSY | 0.11% | -0.00% |
During a month when equities rallied strongly, credit and high-yield bonds outpaced Treasuries. High yield is the strongest index year to date. Despite rates generally trending higher, Treasuries also turned in positive results. Munis have continued to show solid gains. Overall, we believe the 10-year U.S. Treasury will be range bound this year between 3.5% and 4.5%. We acknowledge that it traded above that level at times in May, but it settled the month below the 4.50% mark.
We maintain our longstanding position favoring credit versus pure rate exposure in this interest rate environment. The story has been much more about the general move higher in interest rates so far this year (not changes in credit spreads), particularly after the conflict with Iran began. We believe the role bonds play in a portfolio, to provide stable cash flow and to help offset the volatility of stocks in the long run, has not changed. With uncertainty ahead, we believe having an active bond management approach makes sense. Furthermore, rates remain elevated and provide attractive opportunities for bond investors.
Economic Data Highlights and Outlook
Inflation has spiked recently following the sharp increase in oil prices due to the conflict with Iran. The key question will be whether this spike is temporary or whether price increases will linger even after the resolution of the conflict in Iran.
The Producer Price Index (PPI) for April rose 1.4%. The annual reading jumped to 6.0%, with both of those readings well above expectations. The core PPI was expected to rise 0.3%, but it rose 1.0%. The annual increase of core PPI was 5.2% versus 4.3% estimates, as input costs for producers increased sharply in April on both a headline and core basis. The Consumer Price Index (CPI) continued to move higher as energy prices (particularly gasoline) rose. April CPI rose as expected by 0.6% pushing the annual increase to 3.8%. Core CPI, which excludes food and energy, increased 0.4% for the month and 2.8% for the year with both readings 0.1% above their respective expectations.
The headline Personal Consumption Expenditures (PCE) price index rose 0.4% in April, which was better (lower) than expectations of 0.5%. The annual increase of 3.8% came in as expected but is 0.9% higher than where this reading stood just two months ago at 2.9%. The core PCE price index (the preferred measure of the Fed) was also 0.1% better (lower) than expected with a monthly increase of 0.2%. The 3.3% annual gain was as expected but it has moved higher in recent months, as well. There are worries that sustained higher oil prices could be problematic for prices, and we will monitor inflation closely moving forward. We acknowledge that higher energy prices might stall progress made on inflation and likely leave the Fed on hold longer than anticipated. Chart 1 below shows the recent increase in headline inflation readings, which are impacted directly by higher energy prices.
Chart 1
The labor market was solid again for April. Payrolls increased by 115,000, much stronger than the 65,000 estimate, and March payrolls were revised modestly higher. The unemployment rate remained at 4.3%, as expected. Average hourly earnings increased by 3.6% in April on an annual basis, but this is below headline consumer inflation readings and might become a topic of focus with “real” wages now declining. Layoff levels have not changed much in recent years, and job openings have been rather flat in recent months after declining steadily for the last few years. Although the “no hire/no fire” labor market is still an apt description for the current job market environment, job data has leaned a bit stronger in recent months, which will be worth monitoring. Chart 2 below shows layoffs, the unemployment rate and job openings over the last five years with some recent moderation in movement in the unemployment rate and job openings.
Chart 2
The Institute for Supply Management (ISM) Manufacturing Index remained positive in April for the fourth consecutive month. The ISM Manufacturing Index showed expansion with a reading of 52.7 compared to estimates of 53.2. The reading for May showed a solid increase to 54.0, the best reading of 2026, beating expectations of 53.0 and extending the streak to five consecutive months in expansion territory. The ISM Non-Manufacturing Index, which covers the much larger service industries in the U.S. economy, continued to reflect expansion. This reading came in at 53.6 for April, a modest miss of the expected 53.7 level and lower than the prior month. Non-Manufacturing has expanded 22 of the last 24 months. Recall for the ISM indices, readings above 50 represent expansion and below 50 reflect contraction.
Consumer spending held up in April as well. Retail sales (ex auto and gas) increased by 0.5%, beating estimates of 0.3%. March sales also were revised up by 0.1%. Consumer sentiment readings have been weak for some time, but we have not seen that translate into a meaningful drop in consumer spending. The preliminary University of Michigan Consumer Sentiment reading for May dropped to 48.2, but the story was the final reading later in May, which dropped to 44.8. This Michigan sentiment survey has been around since 1952, and the final May number was its lowest reading ever recorded. It is hard to fathom this level of consumer pessimism with the stock market at an all-time high and considering other events over the last 70+ years. However, elevated gasoline prices often impact sentiment readings directly, and they are clearly doing so right now. Consumers continue to spend, and we will watch whether the low sentiment levels lead to a change in spending behavior by U.S. consumers. Chart 3 below shows the relationship between gasoline and sentiment. (The Michigan sentiment number is delayed through FRED, so it is a month behind in the chart below.)
Chart 3
The second reading of Q1 GDP was revised lower to 1.6% annualized growth from the initial estimate and expectation of 2.0%. The personal consumption component dropped from the first to the second reading, which partly drove the decline in GDP. The GDPNow forecast from the Atlanta Fed for estimated Q2 2026 GDP growth shows an expected acceleration to a 3.8% annualized growth rate (as of May 28, 2026).
Kevin Warsh was confirmed as the new head of the Federal Reserve in May. His first FOMC meeting will take place in June. Former Fed Chair Jerome Powell has indicated that he will remain on the Fed board for the time being, which is unusual as typically the former chair resigns once his or her term as chair is completed. His term as Fed chair ended in mid-May, but his term as a Fed governor runs until January 2028. This could create some friction at the Fed as Warsh takes over the leadership position. The market has now priced out any Fed action through the end of the year with the next expected move a rate hike in the first half of 2027 (per the CME FedWatch tool as of May 29, 2026), but that is some time away and many things would have to transpire to see the Fed begin a rate tightening cycle in our opinion.
Clearly, there is still significant uncertainty with the Iran conflict and the impact it will have on the broader global economy and capital markets. Progress towards peace has been volatile to say the least, but hopefully a resolution can be found soon. After struggling early in the conflict, stocks have made a remarkable recovery to achieve new all-time highs. Markets seem to be looking past the conflict and are focused on earnings growth. Bargain hunters emerged capitalizing on stock price declines amid strong earnings growth. The economy remains resilient but faces challenges. Inflation has moved higher with oil prices elevated, but it is yet to be seen if increases will be temporary or more sustained. Undoubtedly, rising gas prices have hurt many Americans, and we will monitor the impact this might have on spending. The job market continues to look stable, which is often the key factor behind household consumption. The Fed is likely in a wait-and-see mode, even with Warsh taking over as chair, and the market is not expecting any moves by the Fed until 2027. As always, we encourage investors to stay focused on long-term goals and not let short-term market swings derail them.
Economic Data
| Event | Period | Estimate | Actual | Prior | Revised |
|---|---|---|---|---|---|
| ISM Manufacturing | Apr | 53.2 | 52.7 | 52.7 | — |
| ISM Services Index | Apr | 53.7 | 53.6 | 54 | — |
| Change in Nonfarm Payrolls | Apr | 65k | 115k | 178k | 185k |
| Unemployment Rate | Apr | 4.30% | 4.30% | 4.30% | — |
| Average Hourly Earnings YoY | Apr | 3.80% | 3.60% | 3.50% | 3.40% |
| JOLTS Job Openings | Mar | 6850k | 6866k | 6882k | 6922k |
| PPI Final Demand MoM | Apr | 0.50% | 1.40% | 0.50% | 0.70% |
| PPI Final Demand YoY | Apr | 4.80% | 6.00% | 4.00% | 4.30% |
| PPI Ex Food and Energy MoM | Apr | 0.30% | 1.00% | 0.10% | 0.20% |
| PPI Ex Food and Energy YoY | Apr | 4.30% | 5.20% | 3.80% | 4.00% |
| CPI MoM | Apr | 0.60% | 0.60% | 0.90% | — |
| CPI YoY | Apr | 3.70% | 3.80% | 3.30% | — |
| CPI Ex Food and Energy MoM | Apr | 0.30% | 0.40% | 0.20% | — |
| CPI Ex Food and Energy YoY | Apr | 2.70% | 2.80% | 2.60% | — |
| Retail Sales Ex Auto and Gas | Apr | 0.30% | 0.50% | 0.60% | 0.70% |
| Industrial Production MoM | Apr | 0.30% | 0.70% | -0.50% | -0.30% |
| Building Permits | Apr P | 1384k | 1442k | 1363k | __ |
| Housing Starts | Apr | 1410k | 1465k | 1502k | 1507k |
| New Home Sales | Apr | 660k | 622k | 682k | 663k |
| Existing Home Sales | Apr | 4.05m | 4.02m | 3.98m | 4.01m |
| Leading Index | Apr | — | 0.10% | -0.60% | — |
| Durable Goods Orders | Apr P | 4.00% | 7.90% | 0.80% | 1.30% |
| GDP Annualized QoQ | 1Q S | 2.00% | 1.60% | 2.00% | — |
| U. of Mich. Sentiment | May P | 49.5 | 48.2 | 49.8 | — |
| Personal Income | Apr | 0.40% | 0.00% | 0.60% | 0.50% |
| Personal Spending | Apr | 0.50% | 0.50% | 0.90% | 1.00% |
| S&P Cotality CS 20-City YoY NSA | Mar | 0.90% | 0.83% | 0.90% | 0.92% |
Source: Bloomberg; P=Preliminary, T=Third Reading
For illustrative purposes only. Past performance is not indicative of future results. Neither past actual, projections, nor other forward looking statements regarding future financial performance of markets are only projections and actual events or results may differ materially.
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