MONTH-IN-REVIEW: MAY 2026
QUICK TAKES
Equities Rallied. U.S. stocks continued their rally in May, with the S&P 500 rising ~5.3% and Nasdaq 100 ~10.6%, continuing their streak of record highs as solid earnings and continued AI risk-on sentiment propelled markets forward.
Inflation & Interest Rates. Treasury yields surged across the curve mid-May as hot inflation reports and the lack of progress towards a U.S.-Iran peace deal sent inflation expectations higher. The 30Y Treasury yields reached 5.19%, the first time since July 2007, before retreating on renewed optimism for an end to the war.
The Consumer Cracks. According to the University of Michigan’s Surveys of Consumers, consumer sentiment fell to a record-low 44.8 in May in its third straight monthly decline. 57% of consumers said that high prices were eroding their personal finances, with long-run inflation expectations reaching 3.9%.
Beijing Summit Underwhelms. The first U.S. presidential visit to China since 2017 showed progress towards “strategic stability,” with China agreeing to purchase 200 Boeing jets and $17B in agricultural products annually, but the talks yielded no material breakthroughs on Taiwan or tariffs.
ASSET CLASS PERFORMANCE
U.S. large cap stocks outperformed small caps as April’s rally continued throughout May. Global equities continued their winning streak with Emerging Markets rising nearly 9.7%. Fixed income struggled over the course of the month as a global bond selloff and rising yields pressured returns across the curve.
MARKETS & MACROECONOMICS
Stocks extend their rally against a tumultuous economic backdrop. Throughout the month of May, two conflicting forces continued to define the U.S. economy: mounting economic worries were contrasted with a rallying stock market and AI optimism. On the economic front, concerns of a sticky inflationary environment persisted. Inflation continued to reaccelerate from the Iran War, with April’s CPI rising 0.6% MoM and 3.8% YoY, reaching the highest level since May 2023. Energy contributed to over 40% of the gain as gas prices climb higher, reaching a national average of $4.39 by the end of May. The PCE inflation readout reaffirmed the reacceleration story, with headline PCE reaching 3.8% and core PCE 3.3%, the highest core reading since November 2023.
However, on a monthly basis, PCE cooled to 0.2% MoM from 0.3%, raising hopes for easing inflationary pressures from the Iran War. These pressures had a material impact on consumer sentiment in May, with the University of Michigan’s Consumer Sentiment Index notching a second-consecutive record low, dropping 5 points from April to 44.8 as consumers across all income, education, and political demographics wrestled with higher gas prices and a rising cost of living eroding their perception of their current financial health. On the labor front, a recently cool labor market showed signs of revival as Nonfarm payrolls notched their thirdstraight monthly gain in May, adding 172K monthly jobs, nearly twice consensus estimates. Hiring was led by a 70K gain in Leisure and Hospitality, but gains were relatively broad-based. Treasury yields surged mid-month as persistent inflation, geopolitical unease, and a ballooning U.S. deficit caused a global bond selloff. Nonetheless, equity markets extended their rally from March lows. Renewed AI optimism, driven primarily by strong Q1 earnings and AI capex forecasts, caused a “melt up” in markets throughout May. While the index returned 5.3%, breadth was a mirage. 8 of the 11 sectors comprising the S&P 500 declined in May, with tech and AI hardware driving nearly the entirety of the market’s positive return. After being confirmed by the Senate in May in a 54-45 vote, Kevin Warsh is officially the successor to Jerome Powell, with his first FOMC meeting on June 17, where he will have to balance dovish pressures from the Trump administration with sticky inflation. Additionally, a stabilizing labor market supports a hawkish stance, with markets now pricing a rate hike by year-end.
BOTTOM LINE
A soaring market diverges from an economic picture that’s pressured by the Iran War.
WHAT’S AHEAD
Revisiting the AI Capex Pillar. The continued rally in equity markets in May was not broad-based; instead, it was heavily concentrated in the Magnificent Seven and supporting AI related names that contributed to the majority of the gain. Currently, the Mag 7 makes up nearly 35% of the S&P 500’s market capitalization, and in 2025, accounted for roughly 42% of the index’s total return of ~18%. With market breadth that narrow, the fate of U.S. equity markets rests in the hands of just a few stocks, all tied to the same theme: artificial intelligence. That same theme continues to help prop up the economy. Hyperscalers continue to accelerate their spending on AI infrastructure, with analysts now expecting the four largest hyperscalers to spend somewhere in the ballpark of $725B on capital expenditures in 2026, an increase of over 75% year-over-year. To put that figure into perspective, the forecasted outlays would exceed Singapore’s 2025 GDP by over $120B. These capital expenditures directly underwrite the explosive growth in stocks like Nvidia, Broadcom, and Micron. That outsized spending shows up in GDP too, though not to the effect that headlines may suggest. Investment in information processing equipment and software contributed to 1.36 of Q1 2026’s 1.6 percentage points of annualized growth (second revision). However, much of the AI hardware is imported from overseas, offsetting the contribution via imports, which are subtracted from GDP’s calculation. On a net basis, AI hardware’s contribution to GDP is much smaller, arguably negligible. So, although AI spending may not directly drive GDP growth, the effects are felt throughout both the stock market as well as the broader economy. While hyperscaler capex has compounded at a 40% CAGR since 2022, the rate of growth in spending cannot continue in perpetuity. At this point, the key risk doesn’t appear to be a crash in AI spending, but rather a deceleration in growth that bleeds the momentum from the AI trade, bringing other economic concerns to the forefront. Issues like sticky inflation, a consumer already drawing down savings to get by, and an ongoing Middle East war all loom in the background, overshadowed by incredible AI-related growth. A historically narrow market coupled with a slowdown in spending that cracks the AI narrative would leave markets with a host of problems and no secondary growth engine to sustain the rally.
The current AI capex boom that continues to drive the market narrative is underpinned by a shaky economic picture. With a narrow market and consumer sentiment at historic lows, a crack in the AI trade could spell significant trouble for the multi-year market rally.
CONTINUED
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Source: Bloomberg. Asset‐class performance is presented by using market returns from an exchange‐traded fund (ETF) proxy that best represents its respective broad asset class. Returns shown are net of fund fees for and do not necessarily represent performance of specific mutual funds and/or exchange-traded funds recommended by the Prime Capital Investment Advisors. The performance of those funds June be substantially different than the performance of the broad asset classes and to proxy ETFs represented here. U.S. Bonds (iShares Core U.S. Aggregate Bond ETF); High‐Yield Bond (iShares iBoxx $ High Yield Corporate Bond ETF); Intl Bonds (SPDR® Bloomberg Barclays International Corporate Bond ETF); Large Growth (iShares Russell 1000 Growth ETF); Large Value (iShares Russell 1000 Value ETF); Mid Growth (iShares Russell Mid-Cap Growth ETF); Mid Value (iShares Russell Mid-Cap Value ETF); Small Growth (iShares Russell 2000 Growth ETF); Small Value (iShares Russell 2000 Value ETF); Intl Equity (iShares MSCI EAFE ETF); Emg Markets (iShares MSCI Emerging Markets ETF); and Real Estate (iShares U.S. Real Estate ETF). The return displayed as “Allocation” is a weighted average of the ETF proxies shown as represented by: 30% U.S. Bonds, 5% International Bonds, 5% High Yield Bonds, 10% Large Growth, 10% Large Value, 4% Mid Growth, 4% Mid Value, 2% Small Growth, 2% Small Value, 18% International Stock, 7% Emerging Markets, 3% Real Estate.