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The S&P 500 reached new record highs after nine consecutive weekly gains, returning 5.3% in May and 11.3% year-to-date.
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Strong earnings fueled market gains, with 75% of reporting S&P companies beating expectations and technology firms driving nearly all of May’s advance.
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AI spending expectations have risen dramatically, boosting demand across manufacturing, construction, materials, energy, and labor markets.
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Prospects for near-term Federal Reserve cuts have diminished as inflation remains elevated and employment data stays relatively strong.
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Corporate earnings have stayed strong as momentum and speculative stocks dominate returns, with energy demand and government spending continuing to rise.
By the end of May, the S&P 500 Index had racked up its ninth straight week of advances, setting new all-time highs. The monthly return was 5.3%, bringing the year-to-date result to 11.3%. The typical American was likely more in tune with new highs at the gas pump or on steaks than the S&P, but stocks were not operating outside the bounds of fundamentals. The key driver was earnings, and they were bountiful. Through late May, 75% of reporting S&P companies beat first quarter expectations, led by technology and energy stocks. As in trailing periods, earnings growth was particularly eye-popping among makers of central processing units (CPUs) and memory chips. In May, technology firms were responsible for almost all of the market’s advance. Assessments of AI data center spending have increased since the start of the year, not by $1 or $2 billion, but by more than $100 billion. The top-five mega-cap developers are now expected to commit $723 billion in 2026.
One emerging development is the spreading impact of all this AI spending, which is acting like a private sector fiscal stimulus. It’s seen in industrial companies that make heavy equipment to build and operate data centers, and in the materials and energy being used to build and power them. It shows in the solid employment numbers as each of the hundreds of new data centers employs thousands of construction and trade workers.
Despite persistent inflation, consumer spending remained strong–in line with low unemployment and the wealth effect of several years of strong market returns. If we can get past the conflict with Iran and the associated spike in gas prices, we are optimistic about the economic outlook. The likelihood of Federal Reserve cuts, which were once an anticipated market boost, is waning behind strong employment and rising inflation. Even the confirmation of Trump-endorsed Kevin Warsh as new Fed Chair is unlikely to overcome the economic realities and a Federal Open Market Committee that will include the past chair, Jerome Powell. We are looking into 2027 for any possible cuts.
As long as corporate earnings remain robust, current market trends can continue. But the concentration in momentum (investors favoring recent market winners) and speculative stocks gives us pause. Certainly, the geopolitical situation could worsen, as could inflation. Americans looking for quick relief at the pumps will likely need considerable patience, as even under the best circumstances, the restoration of Gulf oil will take time. In the meantime, the demand side will likely expand behind growing international and domestic needs. Hundreds of AI data centers are under construction, with each consuming as much energy as a mid-sized city. These data centers are commonly paired with fossil fuel-based generators, even if only for backup. While the current administration began with ambitious plans to cut government spending (think DOGE), in reality, government spending, particularly from the War Department, is showing concerning expansion. This means more government debt issuance and a market that is already leery of inflation demanding higher yields. We feel this is a good time to celebrate stock market gains, take a hard look at risk, and ensure that portfolios are suitably balanced.