Market Update – May returns (including dividends)

May Returns (including dividends): 

S&P 500: 5.3%  

S&P 500 Equal-Weight: 2.7%  

Dow Jones:  2.9%  

Nasdaq: 8.4% 

MSCI EAFE:  3.1%  

MSCI Emerging Markets: 9.7%  

Bonds (US Aggregate):  0.3%  

 Economic & Policy Highlights  

Interest Rates & Fed Outlook  

• The US Federal Reserve did not meet in May 
• Central banks globally warned of rising inflation due to high energy prices  
• The Bank of Australia raised rates for the third time, reaching 4.35% and signalled a pause 
• Kevin Warch was confirmed as the new Fed Chairman  

Trade & Tariffs  

• The US threatened to raise tariffs on EU cars to 25% 
• President Trump and several US CEOs attended a trade summit in China  

Employment & Growth  

• The US National debt is now forecast to hit 100% of GDP in 2026 
• AI spending in the first quarter of 2026 was responsible for 67% of all US economic growth 
• The housing market remained slow, as affordability was pressured by higher interest rates 
• The Chinese economy showed visible signs of slowing 

Consumer spending & sentiment  

• Spirit Airlines went bankrupt, as high fuel prices pressured the company 
• 2/3 of US consumers reported cutting back on spending 
• The University of Michigan sentiment survey hit a record low 

Geopolitical Volatility & Energy  

• Oil fell 16.8% as the US Gov’t announced several times during the month that an agreement to end the war was imminent  
• The UAE left OPEC and will sell oil in other currencies 
• The US and Japan continued to release oil from their strategic reserves 
• Gold fell 1.7%, as worries over higher interest rates pushed the price down 
• The UAE admitted they secretly struck Iran militarily in April 

Summary Impact  

• The US officially ended Operation Epic Fury on May 5 
• Iran announced the Persian Gulf Strait Authority, which will charge a toll to all ships for safe passage  
• Global bond markets continued to price in rising inflation  
• The CIA warned that Iran could withstand a blockade lasting 3 to 4 months, possibly longer 
• Investors stampeded into semiconductor stocks 
• SpaceX filed to do an IPO 

Commentary:  

Global equities moved higher in May, continuing to build on their April gains.  The support of earnings from select technology companies and the continuous promises by the White House that a deal with Iran was imminent, kept markets bid but volatile.  The primary focus of investors continued to be all things AI, while choosing to ignore a deteriorating economic backdrop as second and third order impacts from the war continued to build.  While US markets were enthused with continued AI spending, emerging markets were reaching manic levels.  Markets such as South Korea and Taiwan went parabolic in May as only three companies propelled these markets to record highs. Despite the impressive but incredibly narrow gains, both the South Korean and Taiwanese markets saw record outflows by foreign institutional investors, who sold to local investors (notorious for using margin and leveraged ETFs). Given this market dynamic, we chose to exit our position in Emerging Markets as valuations, euphoric sentiment and fund flows no longer made this holding attractive. 

May witnessed a substantial increase in volatility of treasury yields as markets reacted to each headline about the war in Iran and the building price stressors pushing up inflation.  These inflationary pressures have now changed interest rate expectations from discounting a cut in rates to the likelihood of a rate hike in 2026.  While high oil prices are partly responsible for this change in rate expectations, inflation is also rising due to other factors such as rising prices from Chinese imported goods (something we identified and warned about in one of our earlier monthly letters).  Credit spreads tightened modestly for publicly traded debt, but investors continued to try and pull money from illiquid private credit funds as worries over aggressive pricing and weakening credit grew. 

The geopolitical backdrop will continue to keep volatility elevated and has been exacerbated by the almost daily statements by President Trump promising a quick resolution to the Iranian war.  No peace deal has been achieved yet and it is starting to appear as though the statements are more about propping up the stock market and pressuring oil prices, until hopefully a deal is reached.    

We continue to believe that risks remain elevated on a number of fronts.  The rush to reach a deal with Iran due to US politics, likely will result in a sub-optimal long-term resolution (the JCPOA took years to negotiate).  With the rise in stock prices, overall valuations are once again probing record levels with equity risk premiums now essentially near zero.  The rapid repricing of inflation means the stock market can no longer count on lower rates to justify higher multiples.  Higher interest rates mean the cost of capital rises for AI buildouts and potentially lowers the future returns.  Given the duration of the conflict in Iran and the dramatic draining of the Strategic Petroleum Reserves, a quick resolution to the Iran war will not save the world from sustained higher energy prices over the coming year. Finally, the narrow breadth of the market’s recovery (driven by semi-conductor and AI stocks) leaves fragile technical underpinnings for the broader market.  Given our concerns, we have opted to sell/trim several technology positions in order to lock in profits and control risk levels.