Market Commentary

Market & Economics Commentary — May 2026

Financial markets continue to navigate a difficult balance between resilient economic growth and reaccelerating inflation pressures. Equity markets entered May with strong momentum, driven primarily by enthusiasm surrounding artificial intelligence, technology earnings, and still-solid corporate profitability. However, the recent rise in Treasury yields and renewed concerns over inflation have introduced greater volatility across both equity and fixed-income markets. 

The dominant macroeconomic theme remains “higher for longer” interest rates. While investors began the year expecting multiple Federal Reserve rate cuts, recent inflation data and elevated energy prices have shifted expectations materially. Several Fed officials have emphasized that inflation remains above target and that policymakers are prepared to maintain restrictive policy if necessary. Markets are now increasingly debating whether the next Fed move could even be another rate hike rather than a cut. 

Inflation risks have intensified due to geopolitical instability and supply-side disruptions. Rising oil prices and shipping constraints tied to tensions in the Middle East are feeding concerns that energy-driven inflation could spill into broader consumer prices. Bond markets have responded aggressively, with long-term Treasury yields climbing to multi-year highs as investors demand additional compensation for inflation uncertainty and growing fiscal deficits. 

Despite these pressures, the U.S. economy continues to show resilience. Labor markets remain relatively stable, consumer spending has moderated but not collapsed, and corporate earnings have generally exceeded expectations. April employment data still reflected positive payroll growth, reinforcing the view that the economy is slowing gradually rather than entering recession. This resilience has helped support equity valuations, particularly among large-cap technology companies benefiting from structural AI investment trends. 

However, market leadership has become increasingly narrow. Investors are rewarding companies with durable earnings growth and pricing power while becoming more cautious toward interest-rate-sensitive sectors such as real estate, small caps, and highly leveraged businesses. Credit markets have also started to reflect a more selective environment as borrowing costs remain elevated. 

Conclusion: We are definitely not in a "set it and forget it" market environment. Simply buying and holding an index fund is likely a poor strategy currently. Publicly traded stocks (in the US) are now at their 2nd-highest valuation ever, only exceeded by the peak of the dot-com bubble in the year 2000. The top ten stocks in the S&P 500 now represent almost 40% of the value of that index. The other 490 stocks are the other 60%.10 years ago that percentage was about 18%. At the peak in 2000, it was 27%. It is quite possible that attractive returns going forward will be more elusive. Not that such returns are unachievable. It will just require more research, diligence, and the inclusion of non-US companies and alternative investments in the mix.