AI and Geopolitics Continue to Drive Markets
Photo Credit: Vladislav Klapin, Unsplash
Monthly Market Summary
The S&P 500 Index gained +5.3% in May and set multiple new all-time highs. Technology led all S&P 500 sectors with a +16.0% return, followed by Consumer Discretionary (+2.6%) and Health Care (+2.5%). However, eight of eleven sectors traded lower, led by Energy (-5.6%), Utilities (-5.1%), and Consumer Staples (-3.2%).
Bonds traded higher despite a mid-month surge in Treasury yields. The U.S. Bond Aggregate returned +0.3% but underperformed corporate bonds as credit spreads tightened. Investment-grade and high-yield corporates returned +0.7% and +0.5%, respectively, with both outperforming the broader Bond Aggregate.
International stocks traded higher in May but were mixed. Emerging markets gained 9.7% and outperformed the S&P 500, while developed markets’ 3.2% return lagged both U.S. stocks and emerging markets.
Stocks Set New Highs as Geopolitical Tensions Ease
May was a strong month for equities, with most major indexes setting fresh all-time highs. The S&P 500 and tech-heavy Nasdaq 100 set new highs each week, with the Dow Jones and Russell 2000 also setting new highs throughout the month. Even the equal-weight S&P 500, which gives each company the same weight regardless of market cap, set a new high. While the equal-weighted index’s move signals broadening participation, leadership within the index was narrow. The technology sector gained +16% and was the only sector to outperform the S&P 500 Index. Eight of eleven S&P 500 sectors traded lower, and ten of eleven sectors underperformed the index. The concentration showed up in factor indexes as well, with large-cap growth returning +7.2% versus +2.9% for large-cap value. The performance gap highlights a notable trend this year: AI and tech stocks continue to outperform more traditional, cyclical companies.
Bonds also traded higher, with the U.S. Aggregate Bond Index returning +0.3% and corporate bonds outperforming amid further tightening in credit spreads. The bond market’s gains came despite a mid-month surge in interest rates. The 30-year Treasury yield spiked above 5%, reaching levels last seen in 2007, and the 10-year Treasury set a new 52-week high. The trigger was back-to-back hot inflation reports for consumer and producer prices, with the Middle East conflict and elevated oil prices creating broader price pressures. Following the inflation reports, the market now places more than a 50% probability that the Fed will hike rates at the December 2026 meeting, a significant shift from earlier in the year, when the market assumed a path of rate cuts. With Treasury yields at multi-decade highs and oil prices fueling inflation concerns, the bond market is shifting toward the view that interest rates will remain higher for longer.
This Year’s Two Defining Themes: Geopolitics & Artificial Intelligence
Two themes have defined markets this year. The first is geopolitics. Trade and tariff uncertainty earlier in the year has given way to military conflict in the Middle East, disrupting oil supplies. The Strait of Hormuz, which carries roughly 20% of global oil supply, has been effectively closed since the conflict began in late February, causing global oil inventories to shrink. Oil prices remain elevated after briefly hitting four-year highs earlier this year but have been relatively contained given the extent of the oil supply disruption. There was partial relief in May as U.S.-Iran negotiations progressed and the market began pricing in a potential reopening of the Strait. West Texas Intermediate crude ended the month below $90 per barrel, down 16.5%. However, the path forward remains uncertain, as a successful deal would take months to restore shipping traffic to pre-conflict levels. What happens next in the Middle East will impact energy prices, the inflation outlook, and the broader financial market.
The second theme is the artificial intelligence buildout. Companies have committed hundreds of billions to build the AI industry’s physical backbone, including data centers, computer chips, and power generation. Forecasted 2026 capital spending across the leading tech companies now exceeds $600 billion, with most of the capex directed at AI infrastructure. Spending is driving economic growth and is starting to show up in corporate earnings, with AI-linked revenue growth becoming a significant driver of overall S&P 500 profit growth. The investment is also creating drastic changes. Shortages across parts of the technology supply chains are creating bottlenecks, and companies are experiencing rapid growth as they repurpose products and services for the age of AI. The pace of spending and technological change explains much of the performance gap between the tech sector and more traditional areas of the stock market.
US Market Sector Returns (May in %)
US Market Sector Returns (YTD in %)
Important Disclosures
This material is provided for general and educational purposes only and is not investment advice. Your investments should correspond to your financial needs, goals, and risk tolerance. Please consult an investment professional before making any investment or financial decisions or purchasing any financial, securities, or investment-related service or product, including any investment product or service described in these materials.
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