May 2026 Market Recap: Strong Markets, Persistent Risks, and the Continued Rise of AI

May delivered another strong month for equities, but the path higher was anything but straightforward.

Investors spent the month balancing three competing forces: persistent inflation, continued geopolitical uncertainty in the Middle East, and corporate earnings that remained surprisingly resilient. Despite several periods of heightened volatility, risk assets ultimately prevailed, with the S&P 500 gaining approximately 5.3% for the month (per Bloomberg) while fixed income posted a modestly positive return.

The result was a market that continued to reward growth and risk-taking but also offered an important reminder that the investment environment remains highly sensitive to changes in inflation, interest rates, geopolitics, and earnings expectations.

Geopolitics Continued to Drive the Market Narrative

Markets entered May with renewed optimism that the conflict involving the United States, Iran, and Israel could move toward a resolution. The prospect of an agreement, along with the reopening of the Strait of Hormuz, helped support equities early in the month.

That optimism faded temporarily as renewed threats of military action raised concerns that the conflict could persist longer than expected. With oil prices already contributing to inflationary pressure, the possibility of further escalation quickly became both a geopolitical and economic concern.

Sentiment improved again toward month-end as reports suggested negotiations had made meaningful progress. Oil prices declined, inflation concerns eased, and investors once again became more comfortable adding risk.

The market’s reaction throughout the month highlighted an important dynamic: investors are increasingly willing to look through geopolitical uncertainty when they believe its economic consequences (particularly higher energy prices and inflation) will prove temporary.

Inflation Complicated the Outlook for Interest Rates

While geopolitics created volatility, inflation may have been the more important issue for markets.

April Consumer Price Index (“CPI”) figures, released before market open on 5/12/26 by the U.S. Bureau of Labor Statistics, came in slightly above expectations, while April’s Producer Price Index (“PPI”) figures, reported before market open on 5/13/26 by the U.S. Bureau of Labor Statistics, also exceeded forecasts. The combination reinforced concerns that inflationary pressure was broadening beyond energy and could remain more persistent than investors had hoped.

That forced markets to reconsider the path of monetary policy.

Earlier expectations for interest-rate cuts faded, and investors began to consider whether additional tightening could become necessary if inflation remained elevated. At the same time, economic data began to show some signs of slowing, including weaker-than-expected first-quarter GDP growth as reported by the U.S. Bureau of Economic Analysis on 5/28/26.

That combination creates one of the central questions facing investors today:

Can economic growth slow enough to reduce inflation without deteriorating enough to threaten corporate earnings?

So far, markets appear to believe the answer is yes. But that balance remains fragile.

AI Remained the Market’s Most Powerful Growth Engine

If inflation and geopolitics represented the major risks in May, artificial intelligence remained the market’s clearest source of growth.

Strong earnings from NVIDIA reinforced expectations for continued investment in AI infrastructure and semiconductor demand. Yet the market’s relatively muted reaction to the results was also revealing: investors are no longer satisfied with strong growth alone. Increasingly, companies must demonstrate that extraordinary growth rates can be sustained.

That dynamic may become one of the defining features of the next stage of the AI investment cycle.

The broader AI infrastructure theme remained powerful. On 5/28/27, Dell Technologies reported significant growth in its AI server business and raised its forward guidance, providing another example of how AI-related investment is spreading beyond the largest semiconductor companies and across the technology ecosystem.

For investors, we believe this creates both opportunity and risk.

The long-term AI infrastructure buildout continues to support significant earnings growth. At the same time, elevated expectations mean that strong fundamentals may not always translate immediately into higher stock prices. Increasingly, the question is not simply whether AI-related companies are growing but whether they can grow faster than the market already expects.

A Market Increasingly Defined by Divergence

May also reinforced that this is not a market where every asset is benefiting equally.

Growth-oriented and AI-related investments continued to benefit from strong earnings trends, while small-cap companies responded positively to improving risk sentiment. Meanwhile, parts of the consumer economy showed greater signs of pressure.

On 5/21/26, Walmart released results that illustrated at divide. Although revenue exceeded expectations, higher costs pressured margins and management issued softer forward guidance amid concerns about slowing consumer spending.

The contrast is becoming increasingly important.

On one side of the economy, AI infrastructure investment is producing extraordinary levels of growth. On the other, consumers and more economically sensitive businesses continue to navigate persistent inflation and higher interest rates.

That is why understanding a portfolio solely through traditional asset-class labels is becoming increasingly difficult.

Two portfolios with similar equity allocations can behave very differently depending on their exposure to AI, interest rates, inflation, energy prices, economic growth, and geopolitical risk.

What Investors Should Watch Next

As markets move into the summer, several questions are likely to determine whether the rally can continue:

• Can inflation moderate without a meaningful deterioration in economic growth?

• Will geopolitical tensions continue to ease, and will oil prices remain contained?

• Can AI-related earnings growth continue to exceed increasingly demanding expectations?

• Will market leadership broaden beyond the largest technology companies?

• Can small-cap companies continue to benefit if economic growth slows?

The answers will not affect every portfolio equally. And that may be the most important takeaway from May.

In a market shaped simultaneously by inflation, geopolitics, artificial intelligence, interest rates, and shifting economic growth expectations, understanding what a portfolio owns is no longer enough. Investors also need to understand why it behaves the way it does.

Disclosure

The S&P 500 (Standard & Poor's 500) is a stock market index tracking the performance of roughly 500 leading U.S. publicly traded companies, representing about 80% of the total U.S. market capitalization.

The Bloomberg US Aggregate Bond Index (often called "the Agg") is a broad-based, market-capitalization-weighted benchmark measuring the performance of the US dollar-denominated, investment-grade, fixed-rate taxable bond market.

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