Monthly Market Review — May 2026

Equities

Global equities (+5.4%) advanced in May, lifting year-to-date returns to 12.4%, as markets were encouraged by signs of progress toward a negotiated settlement to end the conflict in Iran, strong corporate earnings, and favorable outlooks from hyperscale technology companies that reinforced enthusiasm for AI-related investments. Continued evidence of robust demand for AI infrastructure, particularly across semiconductors, data centers, and related supply chains, sustained the market leadership of technology and other growth-oriented equities, while solid earnings across a broad range of industries helped offset persistent macroeconomic and geopolitical concerns. However, mounting economic headwinds in the form of energy-driven inflation pressures, higher interest-rate expectations, and signs of consumer fragility complicated the path toward policy normalization. In response to the complex and uncertain macroeconomic environment, many global central banks adopted a cautious policy stance and left interest rates unchanged, emphasizing data dependence and a willingness to implement restrictive policy settings should inflation prove persistent. In contrast, the Reserve Bank of Australia (RBA) raised interest rates in response to rising inflationary pressures, while the Bank of Japan (BOJ) remained on its gradual path toward policy normalization. A summit between US President Donald Trump and Chinese President Xi Jinping offered new hope for stability and a positive reset in relations, with new mechanisms to address trade and investment and a commitment to support continued dialogue.

US
US equities (+5.3%) registered their second straight month of sizable gains, lifting year-to-date performance to 11.3%. Despite considerable macroeconomic and policy-rate uncertainties, equity markets were propelled to a series of record highs by robust corporate earnings, higher earnings-growth expectations, massive demand for AI infrastructure, and growing optimism for a de-escalation in the US-Iran conflict. However, the rally was largely concentrated in AI-linked megacap technology and semiconductor stocks, with growth stocks outperforming their value counterparts by a substantial margin. US Federal Reserve (Fed) policymakers maintained a hawkish bias, as the oil price shock drove up inflation at the fastest pace in three years. The Personal Consumption Expenditures Price Index (PCE) rose 3.8% annually in April (3.3% at the core level), up from 3.5% in March, straining household finances and threatening consumer spending. According to FactSet, with 97% of companies in the S&P 500 Index having reported first-quarter results, 85% reported better-than-expected earnings. The blended year-over-year earnings growth rate for the index stood at 28.6%, the highest since the fourth quarter of 2001 and significantly above the estimate of 13.1% at the end of the first quarter.

Economic data released during the month suggested that the economy remained on a solid footing. The labor market was resilient in April; nonfarm payrolls grew by 115,000, well above expectations, following a surprisingly strong gain of 185,000 in March. The unemployment rate was stable at 4.3%, and continuing and initial jobless claims remained at historically low levels despite a steady decline in job openings. Nominal wage growth slowed to 3.6% annually, and real wages fell due to surging inflation. A potent rally in equities, larger-than-normal tax refunds, and a resilient labor market helped to support spending. After a sizable 1.6% gain in March, headline retail sales growth rose 0.5% in April, while consumer spending grew 0.5% following a 1.0% gain in March. However, spending dynamics are vulnerable to surging inflation and greater strains on household finances, with the personal savings rate falling to a four-year low of 2.6%, and consumer debt hitting an all-time high. A nine-month high in mortgage rates and affordability constraints continued to pose headwinds for home sales, construction, and builder sentiment in the spring home-buying season.

The manufacturing sector expanded for the fifth consecutive month and faster than expected in May; the Institute of Supply Management (ISM) Manufacturing Index rose 1.3 points to 54.0 — the highest level in four years— although the gain may reflect front-loading of orders as a result of rising prices and shortages of materials due to the conflict in Iran. In April, the services sector expanded at the slowest pace in five months as the ISM Services Index slipped to a still solid reading of 53.6. Input prices were sharply elevated, and a notable pullback in new-order growth suggested more cautious spending among businesses and consumers. Small business sentiment in April neared a one-year low, reflecting inflationary concerns and economic uncertainties stemming from the Middle East conflict.

Within the S&P 500 Index (+5.3%), three of the 11 sectors posted positive results for the month. Information technology (+16.0%) was the best-performing sector, led by semiconductors & semiconductor equipment (+15.3%). Consumer discretionary (+2.6%) and health care (+2.5%) also delivered positive returns. Energy (-5.6%) was the worst-performing sector, while the utilities (-5.1%) and consumer staples (-3.2%) sectors also lagged.

EUROPE
European equities (+3.2%) rose in May despite a weakening macroeconomic backdrop. Eurozone economic growth slowed to 0.1% in the first quarter of 2026, reflecting pressure from tight energy supplies linked to the Middle East conflict. In its Spring 2026 Economic Forecast, the European Commission cut its eurozone economic growth projection to 0.9% from 1.2% and raised its inflation forecast to 3.0% from 1.9%, warning that the global energy shock was undermining consumer confidence, softening investment demand, and curbing the outlook for household spending and exports. The S&P Global Flash Eurozone Composite Purchasing Managers’ Index (PMI) unexpectedly fell to 47.5 from 48.8 in April, as German output remained in contraction and French business activity declined at the sharpest pace in more than two years. Norway’s central bank unexpectedly raised interest rates due to elevated inflation, and Sweden’s central bank kept rates unchanged amid subdued domestic growth and below-forecast inflation in recent months. Annual eurozone headline inflation rose sharply to 3.2% in May — the highest level since September 2023 — strengthening the case for the European Central Bank to raise interest rates for the first time in nearly three years. According to LSEG, first-quarter earnings for companies in the STOXX 600 Index are forecast to increase 11.7% from a year earlier.

The S&P Global Eurozone Manufacturing PMI eased to 51.6 in May, from 52.2 in April, expanding for the fourth consecutive month but slowing under the strain of soaring prices and supply chain disruptions. Input prices surged to a four-year high, while output prices accelerated to their highest level in three-and-a-half years. The S&P Global Flash Eurozone Composite PMI revealed that services sector activity decreased for a second consecutive month, and at the steepest pace since February 2021. Both input costs and output prices increased at a faster rate. The European Commission’s Economic Sentiment Indicator edged up to 93.5 in May; industry confidence declined slightly, while consumer confidence improved.

Germany’s (+3.7%) first-quarter GDP grew at a faster-than-anticipated quarterly pace of 0.3%, supported by increased private and government consumption and higher exports. However, higher energy prices and inflation are straining the economy, with the German Council of Economic Experts cutting its 2026 economic growth forecast to 0.5%, from 0.9%. The ZEW Indicator of Economic Sentiment improved to -10.2 in May, exceeding market expectations, amid cautious optimism for an end to the Middle East conflict and the potential benefits of the government’s economic stimulus. In the UK (+0.5%), the political landscape became more fragmented after Prime Minister Sir Keir Starmer’s Labour Party suffered a big loss in the local elections, further splintering the traditional two-party political system. The UK economy expanded 0.6% in the first quarter, but in May, the S&P Global Flash UK PMI Composite Output Index contracted for the first time since April 2025 due to a sharp downturn in services. Annual headline inflation fell more than expected to 2.8% in April after the government reduced the cap on household energy bills, although inflation is expected to pick up again in the coming months as energy prices remain elevated.

PACIFIC BASIN
Pacific Basin equities (+4.9%) ended the period higher. In Japan (+6.6%), the minutes from the BOJ’s March meeting leaned hawkish, with some board members signaling room for further rate hikes on the view that monetary policy remains well below neutral. Policymakers also highlighted the risk that elevated oil prices could stoke stagflation, reinforcing a data-dependent path toward normalization and bolstering market expectations for a June rate hike. Still, mixed economic readings complicated the trajectory of tightening. In March, a third straight monthly rise in real wages supported the BOJ’s case for further rate hikes; however, the pace of wage growth slowed more than expected, while a fourth consecutive monthly decline in household spending underscored fragile consumption. Japan’s economy grew faster than expected in the first quarter, with real GDP rising 0.5% from the previous quarter as stronger-than-expected private consumption and net exports helped cushion the early impacts of the war in the Middle East. In April, Japan’s key inflation gauge rose at the slowest pace in four years. Core inflation increased 1.4% from a year earlier, as government subsidies and softer gains in food, services, and durable goods helped restrain price pressures. However, the slowdown primarily reflects base effects from the prior year, and underlying prices still rose at a solid clip. Additionally, higher oil prices and a weak yen are expected to drive up the costs of a broad range of goods.

In Australia (+0.9%), the RBA delivered its third consecutive 25-basis-point (bps) rate hike, lifting the cash rate to 4.35% in an eight-to-one decision, as policymakers sought to curb persistent inflation exacerbated by the energy shock. Governor Michele Bullock signaled the RBA may now pause to assess the outlook, prompting markets to scale back expectations for further tightening. Australia’s first-quarter wage growth eased to 3.3%, while the unemployment rate rose to 4.5% in April — the highest since November 2021. The labor market backdrop suggested that inflation and economic uncertainty is constraining demand, raising market expectations that rate cuts could return to the agenda later this year or in early 2027. Consumer prices rose less than expected in April due to the government’s tax cuts on fuel, though core inflation edged up as higher oil prices filtered through the broader economy, with trimmed mean CPI ticking up to 3.4%.

In Singapore (+4.0%), Prime Minister Lawrence Wong warned that mounting disruption from both the Iran conflict and the rapid adoption of AI could weigh on growth, lift inflation, and disrupt jobs in the near term. Despite this, stronger-than-expected first-quarter GDP growth, robust April retail sales, surging pharma- and electronics-led exports, and a sharp pickup in industrial output reflected resilience in the economy. The Ministry of Trade and Industry maintained its full-year growth forecast at 2% – 4% but warned that downside risks to this outlook have risen significantly. Despite softer-than-expected inflation in April, the Monetary Authority of Singapore remained cautious about the external environment, keeping alive market expectations for potentially tighter policy later this year.

Emerging markets

Emerging markets (EM) equities (+9.7%) surged in May. Asia led the gains, followed by Europe, the Middle East, and Africa (EMEA), while Latin America declined.

In Asia (+12.2%), China’s (-3.1%) economy lost momentum as broadly softer April economic data rekindled calls for stimulus. Retail sales growth slowed to 0.2% year over year — one of the lowest readings for over three years — reflecting persistently subdued domestic demand and elevated energy costs. Industrial output growth decelerated much more than expected to 4.1% year over year from 5.7% in March. Urban fixed-asset investment contracted 1.6% in the first four months of 2026 amid continued weakness in the property sector, where investment flows fell 13.7% during that period. New-home prices declined at their slowest monthly pace in a year, offering tentative signs of stabilization, although results remained uneven across cities. After two straight months of expansion, China’s official manufacturing PMI slipped to a neutral level of 50.0 in May due to a contraction in new export orders and a further increase in input costs. A pronounced 14.1% year-over-year rebound in exports in April was supported by a recovery in shipments to the US, which helped to partially offset lackluster domestic activity. Taiwan’s (+15.2%) government statistics agency upwardly revised first-quarter economic growth to 14.55% and raised its 2026 GDP growth forecast to 9.64% — the highest since 2010 — thanks to booming demand for AI-related technologies. The agency also upgraded its 2026 export growth forecast to 39.77%, the highest in five decades. South Korea’s (+37.5%) exports grew 53.2% year over year in May to a record high of US$87.75 billion, driven by a global boom in AI investment that pushed chip sales to new highs. The S&P Global South Korea Manufacturing PMI advanced to 54.8 in May from 53.6 in April, marking the fastest rate of expansion in more than five years. India’s (-0.5%) consumer price inflation in April rose for the sixth straight month to 3.48%, even as the government held gas prices steady to shield consumers from the impact of rising oil prices.

In EMEA (+0.4%), Saudi Arabia’s (-0.5%) crude oil exports dropped to a record low of 4.97 million barrels per day in March, reflecting the severe impact of ongoing disruptions in the Strait of Hormuz on global energy markets. In response to rising energy costs and broadening inflation, South Africa’s (-0.6%) central bank significantly raised its inflation forecasts to 4.4% for 2026 and 3.7% for 2027. It also increased its policy rate for the first time in three years, raising its main lending rate by 25 bps to 7.00%.

In Latin America (-3.7%), Brazil’s (-7.9%) economy accelerated at a faster-than-anticipated quarterly pace of 1.1% in the first quarter, and annual inflation advanced to 4.64% in the first half of May, creating doubt about the sustainability of the central bank’s monetary easing cycle. The S&P Global Brazil Manufacturing PMI slid back into contractionary territory (49.1) in May as manufacturers ceased stockpiling as new orders declined for the fourteenth consecutive month. Mexico’s (+2.7%) central bank cut its benchmark rate by 25 bps, to 6.50%, but signaled the end of its more than two-year easing cycle. The decision reflected efforts to balance persistently above-target inflation and a slowing economy, with the bank subsequently cutting its 2026 economic growth forecast from 1.6% to 1.1%.

FIXED INCOME
Geopolitical tensions remained elevated, with UK political uncertainty resurfacing. However, improving prospects for a US-Iran settlement provided support to market sentiment. Global economic data reflected the effects of higher energy prices, while most fixed income sectors posted positive excess returns. Most major central banks left policy rates unchanged as energy-related inflation risks persisted. However, the RBA and Norges Bank each raised policy rates by 25 bps in response to domestic inflation pressure. According to Bloomberg, the US Aggregate Index returned 0.31%, outperforming duration-equivalent Treasuries by 0.17%. The Global Aggregate Index returned 0.62% in US-dollar hedged terms, outperforming duration-equivalent government bonds by 0.16%. Meanwhile, the TIPS Index delivered a total return of 0.21%, as the 10-year breakeven inflation rate declined 9 bps to 2.40%.

Global sovereign bond markets experienced elevated volatility as investors assessed the potential growth and inflation implications of the Middle East conflict. Yields moved up sharply early in the month following stronger-than-expected inflation data but retraced as progress in US–Iran negotiations improved risk sentiment. US Treasury yields ended the month higher, with the yield curve flattening as markets reduced expectations for near-term rate cuts and increasingly priced in the possibility of policy tightening later in the year. In Europe, sovereign yields initially rose on energy-driven inflation concerns before reversing course. German bunds rallied as geopolitical risks eased and rate expectations moderated. UK gilts outperformed toward month end, supported by softer inflation data and signs of labor market weakness that heightened concerns about slowing domestic growth. Japan diverged from other developed markets, with Japanese government bonds selling off as persistent inflation pressures reinforced expectations for a more meaningful normalization of BOJ policy. EM sovereign debt generally performed well, with yields moving lower across many markets. Elevated real yields, credible policy frameworks, and improving macroeconomic fundamentals supported performance, particularly in South Africa, Mexico, and parts of Central and Eastern Europe. These markets also benefited from attractive carry and relative insulation from the policy uncertainty affecting developed market rates.

Corporate credit markets delivered positive returns globally. US investment-grade bonds outperformed duration-matched Treasuries, led by the financials, industrials, and utilities sectors. High-yield bonds also posted positive returns, with B rated issuers generating the strongest performance, followed by BB and CCC rated bonds. At the sector level, technology, packaging, and metals & mining were among the strongest performers, while cable, satellite, consumer products, and wireless sectors lagged. Global investment-grade credit outperformed duration-equivalent government bonds as credit spreads tightened. Financials, industrials, and utilities were the leading sectors across major markets, while US dollar-, euro-, and sterling-denominated corporate bonds all generated positive returns and outperformed comparable government securities. Within EM, external debt outperformed local-currency debt. Tightening credit spreads supported external debt returns, offsetting the headwind from higher US Treasury yields. In local markets, currency appreciation contributed positively to performance, although rising local yields weighed on overall returns.

Currencies

The US dollar delivered mixed performance, strengthening against most G7 currencies as higher US Treasury yields reinforced expectations that interest rates would remain elevated for longer. However, the dollar weakened against several higher-beta, commodity-linked currencies. In several developed markets, expectations for further policy tightening were scaled back, putting downward pressure on local currencies relative to the US dollar. Japan remained a notable laggard. Although foreign exchange intervention provided temporary support, negative real interest rates and rising global yields continued to weigh on the Japanese yen. By contrast, commodity and higher-beta currencies proved more resilient. The New Zealand dollar was a standout performer, supported by a more hawkish outlook from the Reserve Bank of New Zealand.

Commodities

Commodities (-7.6%) declined in May, with losses driven by energy, agriculture & livestock, and precious metals. Industrial metals was the only sector with positive returns during the period.

Energy (-12.5%) declined as crude oil and refined products retraced prior gains. Gas oil (-14.9%), crude oil (-13.7%), gasoline (-11.9%), and heating oil (-10.1%) fell as markets priced in a potential US-Iran agreement, reducing the geopolitical risk premium tied to shipping disruptions in the Strait of Hormuz. The decline was amplified by softer demand expectations and headline-driven selling, despite ongoing supply constraints. Natural gas (+10.4%) rose on expectations of stronger summer demand, as warmer weather increased gas fired power consumption. Despite generally ample inventories, the rally was reinforced by tighter short-term supply, growing LNG export demand, and a modest geopolitical risk premium.

Industrial metals (+5.1%) were bolstered by supply-side disruptions and solid structural demand. Aluminum (+6.4%) advanced as the Gulf conflict disrupted smelter output and shipping through the Strait of Hormuz, tightening the supply from a region that accounts for roughly 7% – 9% of global production and increasing costs for energy-intensive downstream industries such as solar manufacturing. Copper (+5.4%) rose due to supply disruptions and tight inventories, alongside healthy demand from electrification, AI infrastructure, and China. Zinc (+5.1%) faced supply headwinds, including mine disruptions, smelter outages, and declining inventories. The rally was reinforced by higher energy costs and geopolitical risks, while modest industrial demand, particularly from China, provided additional support despite weakness in construction. Lead (+3.2%) prices were aided by steady demand for lead acid batteries. In contrast, nickel (-2.1%) lagged on persistent global oversupply, as robust Indonesian production and rising inventories kept the market in surplus.

Precious metals ( 0.8%) declined modestly. Silver (+2.8%) was bolstered by resilient industrial demand and ongoing physical tightness, while gold (-1.3%) declined as elevated energy prices lifted inflation expectations and bond yields, increasing the opportunity cost of holding non-yielding assets.

Agriculture & livestock (-4.4%) ended lower. Cocoa (+10.2%) rallied after renewed weather-related risks in West Africa reduced supply expectations. Corn (-5.6%) was pressured by improving US weather conditions and early projections from the US Department of Agriculture that pointed to ample supplies for the upcoming crop year. Feeder cattle (-6.5%) and lean hogs (-6.6%) fell as concerns over consumer spending amid high beef and energy costs weighed on demand expectations. Coffee (-6.7%) was dragged down by expectations for a robust Brazilian harvest and rising global supply, shifting the market toward a surplus. Cotton (-7.1%) declined on weak export demand and increasing inventories, which pointed to softer market conditions, while improved crop outlooks and post-rally profit-taking increased pressure on prices.