Market Update

Economic & Market Update | May 2026

The big picture

May was not simply a story about stocks moving higher. It was a month where the market had to digest three things at once: a resilient earnings backdrop, a leadership transition at the Federal Reserve, and a geopolitical shock that kept energy prices and inflation risk front and center. That mix is exactly why the rally has felt constructive, but not carefree.

The most important shift was in the rate conversation. Earlier in the cycle, investors were focused on when the Fed would finally begin easing. By late May, that debate had changed. With inflation still elevated, oil prices volatile because of the conflict with Iran, and Kevin Warsh newly installed as Fed Chair, markets began treating the possibility of higher-for-longer policy - and even later-year hike risk - as credible again.

Our read is straightforward: the economic foundation is still sturdy enough to support risk assets, but the bar for policy relief has gone up. Growth is still positive, labor conditions remain steady, corporate earnings have continued to come in better than expected, and the equity rally has broadened. The offset is that inflation, rates, and geopolitics are now joined at the hip. Portfolios should remain invested, but the environment argues for selectivity, quality, income, and diversification rather than aggressive risk-taking across the board.

Rates, the Fed, and the Warsh transition

The Fed left the target range for the federal funds rate at 3.50% to 3.75% on April 29, and the next meeting on June 16-17 is not priced as a likely action meeting. Based on the CME FedWatch tool as of May 27, futures markets assigned a 99.9% probability to no change in June. The more interesting point is further out: by December, the same pricing showed only a 53.9% probability that rates would still be 3.50% to 3.75%, while combined hike outcomes were roughly 46%. That does not mean hikes are inevitable; it means the market has stopped treating cuts as the default outcome.

Kevin Warsh taking over the Fed matters less now because of any immediate policy change and more because of the macro backdrop he inherits. A new Chair is stepping in with inflation stubbornly above target, energy prices still vulnerable to Middle East headlines, a labor market that is cooling (but not breaking), and a bond market that is demanding discipline. His first task as Fed Chair is not to surprise markets. It is to preserve credibility while the data guides the decision as to whether the Fed can eventually ease, must stay patient, or has to lean more hawkish if inflation expectations start to drift.

The 10-year Treasury yield was around 4.5% in late May, which is high enough to compete with equities, raise the hurdle rate for expensive growth stocks, and make fixed income a more meaningful part of portfolio construction.

Inflation, oil, and the Iran conflict

The Iran conflict has become a macro variable, not just a geopolitical headline. Reuters reported that Brent crude pulled back to about $98 per barrel on May 27 after a prior surge tied to renewed U.S. strikes and uncertainty around U.S.-Iran negotiations and the Strait of Hormuz. The market is watching this closely because energy is one of the cleanest transmission channels from geopolitics into inflation, consumer sentiment, bond yields, and ultimately Fed policy. A durable de-escalation would likely remove some inflation pressure; another escalation would keep the Fed on defense and make the bond market more sensitive to every oil price move.

April CPI was up 3.8% from a year earlier, while core CPI was up 2.8%. That is not a runaway inflation picture, but it is still notably elevated relative to the Fed’s 2% target. With oil still headline-sensitive and consumers already feeling higher gasoline costs, the Fed now has a strong incentive to avoid easing too early.

What markets did

Equities remained resilient. Through May 26, the S&P 500 was up 9.8% year to date, the Nasdaq was up 14.7%, the Russell 2000 was up 17.7%, and the Dow was up 5.0%. The rally was supported by better-than-expected earnings and continued optimism around technology and artificial intelligence, but the market is not cheap. FactSet reported a forward 12-month S&P 500 P/E ratio of 21.0x as of its May 8 earnings update.

What this means for portfolios

• Maintain meaningful equity exposure, but keep quality standards high. Favor companies with durable margins, pricing power, strong free cash flow, and balance sheets that can handle a higher-rate environment.
• Use fixed income deliberately. Yields are still useful, but investors should avoid reaching too aggressively for credit risk or duration unless the compensation is clear.
• Stay diversified. The goal is participation without excessive dependence on one macro outcome, especially when markets are pulled between earnings optimism and inflation anxiety.

Bottom Line

The backdrop remains constructive, but no longer simple. Earnings and growth are good enough to justify staying invested, but the combination of Warsh's arrival at the Fed, elevated policy rates, CME FedWatch repricing, and the Iran-driven energy shock argues against complacency. In our view, the right posture is invested but selective, optimistic but disciplined, and diversified enough to withstand a market that may keep rotating between earnings optimism and inflation anxiety.