Monthly Market Commentary

The Recovery Continues. So Does the Complexity

By Abbey Henderson, CFP®, RLP®, CAP®, AEP®

May was the second straight month of gains, and markets made it look easier than it was.

The economic backdrop never simplified. Inflation came in hotter than expected. Consumer confidence slipped. The Federal Reserve held its ground on rates. And yet the major indices climbed again, with several reaching record levels by month-end. Technology, AI, and semiconductor companies did most of the work. Small caps tagged along.

The big story was oil.

After spending most of 2026 as the most persistent driver of headline inflation, energy prices finally reversed. WTI fell more than 14% in May, offering the first credible relief on that front in months. It did not fix everything. Inflation is still running above the Fed’s target. Rates are still elevated. The consumer is feeling the squeeze in ways the spending data does not fully capture.

But relief is not nothing.

For investors who stayed the course through a complicated first quarter, the patience is showing up in the numbers. The S&P 500 is up more than 10% for the year. The Nasdaq is up more than 16%. That is not a bad first five months.

U.S. Equity Market Review

The shape of this rally has not changed much.

For the second month running, the gains were real but concentrated. Technology and communication services led. AI infrastructure spending kept driving earnings and investor appetite. Companies at the center of the semiconductor and cloud buildout continued to outperform.

Source: Morningstar/YCharts

The S&P 500 gained roughly 4.8% for the month, closing at 7,580. The Nasdaq rose more than 7%, closing near 26,973. The Dow added about 3.1%, closing just above 51,000. Those are strong numbers by any historical measure.

Small caps participated, though with less conviction. The Russell 2000 remained sensitive to interest-rate expectations, and its gains were less consistent. Growth outperformed value again, which has been the story all year.

The natural question is whether a rally this concentrated can hold. Narrow leadership in the early stages of a recovery is not unusual. Breadth tends to matter more over time. But the earnings results that drove May’s gains suggest the companies leading this market are earning their position in it.

Internationally, developed markets in Europe and parts of Asia moved higher, helped by improving earnings and more accommodative central bank policy than the U.S. Emerging markets were more uneven, with commodity exporters benefiting from still-elevated year-to-date oil prices while import-dependent economies dealt with renewed inflation pressure. U.S. equities continue to lead globally, and the reason is straightforward: no other major market carries the same weight in technology and communication services.

The Macro Backdrop: Still a Two-Sided Story

May gave a clear illustration of how quickly the mood can shift.

For most of the month, the picture felt encouraging. Oil prices were falling. Earnings had been strong. Economic growth was solid. Then the April inflation report landed mid-month.

Headline CPI came in at 3.8% year over year, with energy, shelter, and services all contributing. It was a reminder that the inflation problem has not been solved, only softened. Markets absorbed the data without a major disruption, but rate-cut expectations moved further out, and the Federal Reserve’s message stayed the same. Rates are staying higher for longer.

The underlying growth picture is more encouraging. The U.S. economy expanded in the first quarter. Consumer spending, investment, and exports all contributed. Technology-related capital investment has been a real offset to the drag from elevated rates in rate-sensitive areas.

The consumer is the most interesting part of this story right now.

People are still spending, and spending in ways that suggest confidence in the labor market. Travel, services, and experiences have been resilient throughout this cycle. But the cost of living has been elevated long enough to erode sentiment in a quiet, cumulative way. When you ask people how they feel about their finances, the answer is worse than what the spending data would suggest.

Housing tells the sharpest version of that story. With mortgage rates still elevated, the market has frozen in many parts of the country. People who would otherwise move are staying put. First-time buyers are mostly on the sidelines. Prices have not collapsed, but the transaction market is slow and getting slower.

Industrial activity showed modest signs of stabilization in May. New orders ticked up in regional surveys. Firms tied to energy, technology, and infrastructure kept investing. Companies facing softer consumer demand or higher financing costs stayed cautious.

Growth is holding. So is the pressure.

Commodities: The Energy Shift

Oil was the story of May, and it finally moved in the right direction.

After spending most of 2026 as the single biggest driver of headline inflation, WTI fell more than 14% in a single month, closing near $88 per barrel. It is still more than 50% above where it started the year. But the direction changed, and for consumers, for inflation watchers, and for anyone hoping the Fed might eventually find room to move, that direction matters.

The reversal came as investors reassessed the near-term risk of supply disruption from Middle East tensions. Some of the geopolitical premium that had built into oil prices came out. That reassessment can reverse just as quickly. The situation in the region is still unsettled, and a supply shock could push prices back toward prior highs in a matter of weeks. Neither outcome can be ruled out.

But for May, the break was real.

Gold finished the month nearly flat at $4,553 per ounce. Safe-haven demand and inflation concerns pulled in one direction; higher real interest rates and a stronger dollar pulled in the other. They mostly canceled each other out.

The energy chapter is not over. But May was the first month this year where it stopped being bad news.

Earnings: The Engine Under the Rally

If there is one reason this market has been able to keep climbing through a complicated backdrop, earnings are it.

The first-quarter season wrapped up during May with results that were hard to argue with. According to FactSet, 81% of S&P 500 companies that reported beat revenue estimates, above the five-year average of 70% and the ten-year average of 67%. Nine of eleven sectors reported year-over-year earnings growth. Seven of those grew by double digits. Technology, communication services, consumer discretionary, and materials led the way. Healthcare and energy were the only two that declined.

That is a strong report card.

The forward picture is equally ambitious. Analysts are projecting roughly 21% earnings growth for the full year, with similar rates expected quarter by quarter through year-end. Valuations reflect those expectations: the S&P 500’s forward price-to-earnings ratio stood at approximately 20.9x at month-end, above both the five-year average of 19.9x and the ten-year average of 18.9x.

Markets are not cheap. They are priced for continued strength, especially in technology and AI-related areas.

So far, the companies at the center of this market have been earning that premium.

That needs to continue.

Bringing It Together

May was another solid month.

But the story has not simplified.

Equities are higher. Earnings are strong. And oil prices, one of the most persistent sources of inflation pressure this year, fell sharply. Those are real positives.

But inflation is still running above target. Rates remain elevated. Consumer sentiment is softening. And the gains continue to be driven by a relatively narrow group of companies.

Markets can advance in that environment.

They often do. The forward-looking nature of markets means that prices tend to move in anticipation of improvement, not in response to it. Waiting for perfect clarity has rarely been a successful investment strategy.

For investors, the discipline right now is the same as it has been all year: stay grounded in a long-term plan, resist the urge to overreact to any single data point, and remember that complexity and opportunity have a way of showing up together.

This environment has been testing that discipline all year.

So far, the patient approach has been rewarded.

Sources

• Market indices and levels: Morningstar, YCharts, S&P Dow Jones Indices, Dow Jones, Nasdaq, Russell Investments, MSCI, The Wall Street Journal market data, MarketWatch, Associated Press, and other public market-data providers.
• Volatility and derivatives: Cboe, CME Group, and related futures and options data providers.
• Economic data: U.S. Bureau of Economic Analysis, U.S. Bureau of Labor Statistics, Federal Reserve, The Conference Board, University of Michigan Surveys of Consumers, and U.S. Census Bureau.
• Global markets and flows: MSCI, iShares, public index providers, and major financial news organizations.
• Housing data: National Association of Realtors, Freddie Mac, and regional realtor associations.
• Commodity data: CME Group, NYMEX/Comex, Energy Information Administration, The Wall Street Journal, and other commodity exchanges and market-data providers.