The US market has been split cleanly in two, with the dividing line running straight through the technology sector. The S&P 500 fell roughly 4.5% in the first quarter before climbing 19.5% since the start of the second quarter. The technology sector was down about 7.5% in the first quarter and up nearly 50% since April 1, 2026, the start of the second quarter. Technology has clearly been the workhorse year to date.
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%).
The tech rally is largely a chip rally. A market leaning this heavily on one pillar of one sector leaves the S&P 500 index hostage to a handful of names, which makes it more fragile than a broad market advance. However, there is strength in small caps with the Russell 2000 up over 18% year to date vs. the S&P 500 up 11.3% year to date.
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 stock traded higher in May but were mixed. Emerging markets gained +9.7% and outperformed the S&P 500 helped by a handful of important technology companies, 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 was narrow within the index. 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 as credit spreads tightened further. The bond market’s gains came despite a surge in interest rates mid-month. 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 a greater than 50% probability of a Fed rate hike at the December 2026 meeting, a significant shift from earlier in the year when the market assumed a rate-cutting path. With Treasury yields at multi-decade highs and oil prices leading to inflation concerns, the bond market is shifting toward interest rates remaining higher for longer. The Investment Office believes inflation expectations are likely to remain fairly anchored due in large part to the absence of housing and wage inflation.
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, which has created an oil supply disruption. 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 $700 billion, with most of the capex directed at AI infrastructure. The spending is driving economic growth and 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.
Fixed Income
Investment grade fixed income asset classes had positive returns even as rates rose across the curve as spreads compressed. Municipals returned +0.2% (+0.5% YTD), the Bloomberg Aggregate Index returned +0.3% (+0.4% YTD) while investment grade corporates returned +0.8% (+0.7% YTD). High yield bond returns returned +0.5% (+1.7% YTD) as spread compressed 11 bps while leveraged loan returns returned +0.5% (+1.2% YTD). Emerging Market debt returned +1.2% (+3.1% YTD) as the U.S. dollar rose 0.9% and spreads compressed 15bps.
Rates
Rates rose across the curve though ended the month well off their intra-month highs. 2-year rates rose 14bps to 4.01%; 10-year rates rose 7bps to 4.44%. The recession-watch 3month-10year spread widened 6bps to +76. The 2year-10year spread compressed 7bps to +43. Rates fell in other developed markets other than in Japan. The spread between high debt burdened Italian and low debt burdened German 10year bonds is 0.71%. US 5-year breakeven inflation expectations fell 16bps to 2.54% (vs. recent high of 2.74% on May 4, 2026); 10-year breakeven inflation expectations fell 9bps to 2.40% (vs. recent high of 2.52 on May 4, 2026); the 10Y real yield rose 15bps to 2.03%.
Currencies/Commodities
The dollar index rose 0.9%. The commodities complex fell 7.6% with energy prices falling 12.5%. Brent prices fell 19.3% to $92/bbl. US natural gas prices rose 18.9% mostly related to warmer weather, while European gas prices fell 0.5%; both remain volatile based on war-related headlines. Gold fell 1.7% to $4,540/oz, silver rose 2.1% to $75/oz. Bitcoin fell 3.8% in May to $73,582.
Weekly Commentary
Chips and Geopolitics: May’s Risk On Cocktail
Stuart Katz
Executive Market Summary: May 2026
The US market has been split cleanly in two, with the dividing line running straight through the technology sector. The S&P 500 fell roughly 4.5% in the first quarter before climbing 19.5% since the start of the second quarter. The technology sector was down about 7.5% in the first quarter and up nearly 50% since April 1, 2026, the start of the second quarter. Technology has clearly been the workhorse year to date.
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%).
The tech rally is largely a chip rally. A market leaning this heavily on one pillar of one sector leaves the S&P 500 index hostage to a handful of names, which makes it more fragile than a broad market advance. However, there is strength in small caps with the Russell 2000 up over 18% year to date vs. the S&P 500 up 11.3% year to date.
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 stock traded higher in May but were mixed. Emerging markets gained +9.7% and outperformed the S&P 500 helped by a handful of important technology companies, 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 was narrow within the index. 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 as credit spreads tightened further. The bond market’s gains came despite a surge in interest rates mid-month. 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 a greater than 50% probability of a Fed rate hike at the December 2026 meeting, a significant shift from earlier in the year when the market assumed a rate-cutting path. With Treasury yields at multi-decade highs and oil prices leading to inflation concerns, the bond market is shifting toward interest rates remaining higher for longer. The Investment Office believes inflation expectations are likely to remain fairly anchored due in large part to the absence of housing and wage inflation.
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, which has created an oil supply disruption. 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 $700 billion, with most of the capex directed at AI infrastructure. The spending is driving economic growth and 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.
Fixed Income
Investment grade fixed income asset classes had positive returns even as rates rose across the curve as spreads compressed. Municipals returned +0.2% (+0.5% YTD), the Bloomberg Aggregate Index returned +0.3% (+0.4% YTD) while investment grade corporates returned +0.8% (+0.7% YTD). High yield bond returns returned +0.5% (+1.7% YTD) as spread compressed 11 bps while leveraged loan returns returned +0.5% (+1.2% YTD). Emerging Market debt returned +1.2% (+3.1% YTD) as the U.S. dollar rose 0.9% and spreads compressed 15bps.
Rates
Rates rose across the curve though ended the month well off their intra-month highs. 2-year rates rose 14bps to 4.01%; 10-year rates rose 7bps to 4.44%. The recession-watch 3month-10year spread widened 6bps to +76. The 2year-10year spread compressed 7bps to +43. Rates fell in other developed markets other than in Japan. The spread between high debt burdened Italian and low debt burdened German 10year bonds is 0.71%. US 5-year breakeven inflation expectations fell 16bps to 2.54% (vs. recent high of 2.74% on May 4, 2026); 10-year breakeven inflation expectations fell 9bps to 2.40% (vs. recent high of 2.52 on May 4, 2026); the 10Y real yield rose 15bps to 2.03%.
Currencies/Commodities
The dollar index rose 0.9%. The commodities complex fell 7.6% with energy prices falling 12.5%. Brent prices fell 19.3% to $92/bbl. US natural gas prices rose 18.9% mostly related to warmer weather, while European gas prices fell 0.5%; both remain volatile based on war-related headlines. Gold fell 1.7% to $4,540/oz, silver rose 2.1% to $75/oz. Bitcoin fell 3.8% in May to $73,582.
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