Market Commentary: May 2026
Equity markets touched fresh all-time highs early in the period before pulling back sharply, as blowout corporate earnings collided with the hottest inflation readings in years and a still-unresolved energy crisis in the Middle East. The S&P 500 and Nasdaq Composite both reached record closes on May 14 before selling off the following day, leaving the major indexes roughly flat for the week. The push and pull reflected a market caught between two powerful forces: the strongest quarterly earnings growth in over four years and a worsening inflation picture driven by the Iran conflict's grip on global oil supply.
First-quarter earnings provided a bright spot. With 89% of S&P 500 companies reporting, blended earnings growth reached 27.7%, the highest rate since the fourth quarter of 2021 and the sixth consecutive quarter of double-digit gains1. An unusually high 84% of companies beat estimates, and the aggregate upside of 18.2% far exceeded the five-year average of 7.3%1. Technology continued to lead, with the semiconductor sector surging 65% year to date on insatiable demand for artificial intelligence infrastructure. But even strong results struggled to sustain momentum against the inflation backdrop, and the late-week selloff erased midweek gains.
A punishing one-two of inflation data defined the week of May 12. The Consumer Price Index (CPI) for April showed prices rising 0.6% month over month and 3.8% over the prior year, the highest annual rate since May 20232. Core CPI, which excludes food and energy, climbed 0.4% for the month and 2.8% year over year2. The following day, the Producer Price Index (PPI) surprised to the upside at 1.4% month over month and 6.0% year over year, far above the 0.5% consensus forecast3. Energy costs drove both reports: gas prices jumped 15.6% at the producer level, a direct consequence of the Strait of Hormuz remaining effectively closed3. The 10-year Treasury yield spiked to 4.55%, its highest level in a year. Against this backdrop, the Federal Reserve's leadership transition took effect on May 15, with Kevin Warsh succeeding Jerome Powell as chair.
The bottom line: The near-term outlook hinges on whether oil-driven inflation proves persistent or peaks as diplomatic efforts around the Strait of Hormuz continue. Warsh's first Fed meeting on June 16-17 will include updated economic projections and will be closely watched for any shift in tone on rates, which have been held at 3.50-3.75% for three consecutive meetings. Brent crude near $109 per barrel and a Fed in transition leave markets exposed to signs that price pressures are becoming more persistent.
Sources:
1. FactSet, https://insight.factset.com/sp-500-earnings-season-update-may-8-2026
2. Bureau of Labor Statistics, https://www.bls.gov/news.release/cpi.nr0.htm
3. Bureau of Labor Statistics, https://www.bls.gov/news.release/ppi.nr0.htm
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