Record Highs and Repricing
May extended the rally that began in April, with U.S. equities pushing further into record territory even as the Treasury market endured one of its sharpest yield episodes in years. The S&P 500 returned 5.3% for the month, climbing above 7,500 for the first time and extending its winning streak to nine consecutive weeks. The Nasdaq-100 added 10.6% and the Dow 2.9%, with all three indices closing May at all-time highs and the VIX finishing the month at 15.32. By month-end, however, the rally’s calm tone obscured a meaningful undercurrent: oil and Treasury yields surged sharply mid-month on renewed Strait of Hormuz fears before retracing on ceasefire optimism. The 30-year yield briefly touched 5.18% – its highest level since July 2007 – and Kevin Warsh was sworn in as Federal Reserve Chair. Equities continued to price a benign resolution to the energy shock while the rates market priced a meaningfully higher-for-longer regime.
“Geopolitics remained the main source of market friction in May. The Strait of Hormuz remained largely disrupted throughout the month, keeping crude prices elevated and highly sensitive to each new headline on ceasefire talks or indications of reopening the route.”
Equity leadership remained concentrated in the technology complex, but the underlying earnings story has broadened the case beyond multiple expansion alone. Following the first-quarter reporting cycle, consensus 2026 S&P 500 EPS growth was revised up to roughly 22.6%, materially higher than the 17.0% pace expected at the end of March,1 with hyperscaler results continuing to demonstrate strong AI-related demand and early evidence that AI infrastructure investments are supporting revenue growth. International returns were more divergent: emerging markets gained 9.71%, as measured by the MSCI Emerging Markets Index, supported by continued strength across the AI supply chain in Taiwan and South Korea. European markets returned 2.79%, as measured by the MSCI Europe Index, as higher energy prices weighed more heavily on the region’s economic outlook. Activity in the IPO calendar also picked up, with recent filings from SpaceX and Anthropic helping revive investor interest in the long-awaited private-to-public pipeline, while OpenAI continues to be a closely watched potential future candidate.
Geopolitics remained the main source of market friction in May. The Strait of Hormuz remained largely disrupted throughout the month, keeping crude prices elevated and highly sensitive to each new headline on ceasefire talks or indications of reopening the route. Brent and WTI finished the month in the low-90s per barrel, reflecting the market’s ongoing risk premium. The Xi–Trump summit was an important diplomatic checkpoint, but the market’s focus remained on whether any external pressure could help accelerate de-escalation. That energy shock drove one of the month’s sharpest market moves.
The 10-year Treasury yield rose dramatically in mid-May, and the 30-year yield briefly touched its highest level in nearly two decades before retracing as ceasefire optimism returned. Although the long end of the yield curve largely reversed its move by month-end, the front end held onto most of its rise, leaving the curve meaningfully flatter on the month. Credit held up relatively well, with the Bloomberg U.S. Aggregate posting a modest gain and investment-grade corporate bonds outperforming Treasuries.
The Federal Reserve transition added a second layer of regime change. Kevin Warsh was sworn in as Chair in May, succeeding Jerome Powell, who has indicated he will remain on the Board of Governors for a period of time. Markets generally view Warsh as historically hawkish on monetary policy, though he has signaled a preference for “trimmed mean” inflation measures, which currently read materially softer than the core and headline series and offer a more constructive view of disinflation progress. The key question is how that framing will interact with a Committee that remains divided over the appropriate policy path. Expectations for near-term rate cuts have been pushed further out, and the June FOMC meeting – along with the updated Summary of Economic Projections – should provide the first meaningful indication of how Warsh intends to approach inflation, interest rates, and policy communication in the new regime.
Beneath the index-level strength, the macro picture has softened at the margins. Inflation readings remained elevated in April, first-quarter GDP was revised lower, and labor force participation eased further, suggesting that the economy is absorbing the recent energy shock with a lag. The divergence across inflation gauges complicates the read: the Dallas Fed’s trimmed mean PCE eased to 2.3% in April even as headline PCE held near 3.8%, a gap that largely reflects energy and tariff-affected goods sitting in the tail of the price distribution that the trimmed mean mechanically excludes; meaning the measure Warsh favors is, by construction, looking past the very pressures driving the broader inflation print. Equity markets have largely looked through those data, but the bond market has not, with rates repricing to reflect slower disinflation progress and a less benign inflation backdrop. The path to a constructive 2026 is still open, but it is narrower and depends on energy stabilizing, earnings staying strong, and the new Fed Chair navigating the transition effectively .
Signal Update
The economic backdrop — CIGNX
0%20%40%60%80%100%1980198819962004201220202024Our CIGNX Economic Indicator has a reading of 42.9, an increase from last month’s revised reading of 41.7. The reading suggests unfavorable economic activity and is below our baseline threshold of 50.0. The indicator remains above our secondary baseline reading of 40.0 for a third consecutive month, which indicates the economy appears to be continuing a trend towards recovery. However, our overall economic outlook is unfavorable.
| 2026 | JAN | FEB | MAR | APR | MAY | JUN | JUL | AUG | SEP | OCT | NOV | DEC |
|---|---|---|---|---|---|---|---|---|---|---|---|---|
| CIGNX (Revised) | 37.4 | 38.8 | 47.6 | 41.7 | 42.9 | — | — | — | — | — | — | — |
| CIGNX Trendline | 37.4 | 37.6 | 37.9 | 38.2 | 38.4 | — | — | — | — | — | — | — |
The market trend — Alpha & Omega
02,0004,0006,0008,00020002004200820122016202020242026Our short-term signal (Alpha) and our intermediate-term signal (Omega) both remained Positive in May, indicating the near-term and intermediate-term outlooks both appear to remain favorable. Accordingly, we have adjusted each of our Dynamic and Tactical portfolios into a “Bullish” positioning with increased exposure to equities. Our overall market sentiment is Bullish.
| 2026 | JAN | FEB | MAR | APR | MAY | JUN | JUL | AUG | SEP | OCT | NOV | DEC |
|---|---|---|---|---|---|---|---|---|---|---|---|---|
| ALPHA | Sell | Sell | Sell | Buy | Buy | — | — | — | — | — | — | — |
| OMEGA | Buy | Buy | Sell | Buy | Buy | — | — | — | — | — | — | — |
Two positive signals give a Bullish outlook and Risk-On positioning; mixed signals give Caution; two negative signals give Bearish and . The economic indicator describes the backdrop and does not by itself change positioning.
Market segment review
| Segment | Index | Month | Year to date |
|---|---|---|---|
| U.S. Stocks | S&P 500 Index | 5.26% | 11.27% |
| U.S. Stocks | S&P 400 Index | 2.45% | 13.27% |
| U.S. Stocks | S&P 600 Index | 1.04% | 15.48% |
| U.S. Bonds | U.S. Bond Index | 0.31% | 0.38% |
| Alternative Assets | S&P GSCI Index | -7.61% | 37.66% |
| U.S. Real Estate | S&P 1500 Real Estate | -0.64% | 10.22% |
U.S. Large Cap Stocks
U.S. large-cap equities continued their advance in May, with the S&P 500 gaining 5.26% for the month and bringing its year-to-date return to 11.27%. The rally was supported by easing concerns around trade policy and another solid month of corporate earnings results, particularly among technology and communication services companies. Investor sentiment remained constructive as markets increasingly embraced continued enthusiasm surrounding artificial intelligence and accelerating capital investment trends helped support equity valuations despite ongoing questions regarding monetary policy and the path of long-term interest rates.
U.S. Mid Cap Stocks
U.S. mid-cap equities posted a solid gain in May, with the S&P MidCap 400 advancing 2.45% for the month and bringing its year-to-date return to 13.27%. While the segment trailed large-caps as leadership concentrated in mega-cap technology and AI-leveraged names, mid-caps still participated meaningfully in the broader rally, supported by improving earnings sentiment and a market backdrop that remained constructive despite mid-month rate volatility.
U.S. Small Cap Stocks
U.S. small-cap equity returns were more modest in May compared to large- and mid-caps, with the S&P SmallCap 600 returning 1.04% for the month. However, small-caps lead US equity market performance year-to-date with total returns of 15.48%. The narrow, AI-driven leadership that defined the broader rally offered limited support to the smaller end of the cap spectrum, where company-level fundamentals are more closely tied to domestic activity and financing conditions. The mid-month spike in Treasury yields weighed particularly on small caps, given their greater exposure to floating-rate debt and refinancing pressure.
U.S. Bonds
The 10-year Treasury yield rose dramatically in mid-May, and the 30-year yield briefly touched its highest level in nearly two decades before retracing as ceasefire optimism returned. Although the long end of the yield curve largely reversed its move by month-end, the front end held onto most of its rise, leaving the curve meaningfully flatter on the month. Credit held up relatively well, with the Bloomberg U.S. Aggregate posting a modest gain and investment-grade corporate bonds outperforming Treasuries.
Alternative Assets
gave back a portion of their year-to-date gains in May, with the S&P GSCI Index declining 7.61% for the month, yet still leads all major asset classes at 37.66% year-to-date. The pullback was driven primarily by energy, with the GSCI Crude sub-index falling 13.7% as Brent settled near $92 per barrel on renewed ceasefire optimism and easing Strait of Hormuz tail risk by month-end. Gold also weakened, declining 2.8% as the geopolitical risk premium that had supported safe-haven demand partially unwound. Despite the reversal, the year-to-date return continues to reflect a meaningfully elevated commodity backdrop.
U.S. Real Estate
Real estate experienced a slight decline in May, with the S&P 1500 Real Estate Index declining 0.64% for the month, while remaining up 10.22% year-to-date. The sector felt the mid-month surge in Treasury yields acutely, as REIT valuations carry meaningful duration sensitivity, and even the late-month retracement was insufficient to fully recover the move. The segment also did not benefit from the narrow AI-led leadership that defined large-cap performance, leaving it without the offsetting tailwind that drove the broader equity rally. Despite the modest monthly drag, real estate’s year-to-date return continues to reflect a resilience in the sector.
Disclosures
The information presented herein is based on data derived from various underlying data sources. The figures presented, while deemed accurate, are not guaranteed. A Smarter Way to Invest makes no representation or warranties as to the accuracy of the information presented, the underlying source data, or the source data providers. The content of this letter is provided for informational purposes only and is not advice or a recommendation for the purchase or sale of any security. Carefully consider your investment objectives, risk factors, and charges and expenses before investing. There are risks involved with investing, including possible loss of principal. This information reflects the views of the Smarter Way To Invest Portfolio Management Team on the date made and may change without notice. We will not be responsible for any investment decisions, damages or other losses resulting from or related to the use of the information we provide. When applicable, we have provided references where information was acquired for use in this newsletter.