Executive Summary

• The SOX Index records best 2-month gain since inception (June 1996)
• Broad U.S. equity benchmarks reach new record highs
• Stock breadth weaker among large caps
• Rates continue higher amid bear flattening
• UST 30-year yield reaches new cycle highs
• S&P 500 members delivered broad-based, robust EPS and revenue beat rates

U.S. equities surged meaningfully higher in May, with the large-, mid-, and small-cap flagship benchmarks all reaching new all-time highs.  For the second consecutive month, the Nasdaq 100 (+10.6%) and Nasdaq Composite (+8.9%) indices outperformed, driven by outsized strength from the Technology sector.  The S&P 500 (+5.3%) finished May with a streak of nine consecutive weekly gains, which has happened only four other times in 40 years.  The Dow crossed the 51,000 milestone for the first time.  The Russell Microcap Index (+6.6%) is this year’s strongest performer, with a YTD total return of 22.1%, while the small-cap Russell 2000 (+4.4% in May) is not far behind, with a YTD total return of 18.3%. 

The robust U.S. equity performance was primarily driven by exceptionally strong corporate earnings, with results materially exceeding expectations and reinforcing confidence in forward growth. Earnings growth for the S&P 500 tracked in the high-20% range YoY, more than doubling pre-season estimates, while earnings revisions continued to trend higher throughout the month.  This strength was closely tied to sustained investment in artificial intelligence and digital infrastructure, which remained the dominant thematic driver across Technology and Communication Services. Robust capital spending on data centers, semiconductors, and cloud platforms supported both top-line growth and margin expansion, anchoring market leadership in growth-oriented sectors.  As a result, equities were propelled higher largely by realized profit growth rather than multiple expansion, underscoring the fundamental nature of the rally.

At the macro level, markets were further supported by a combination of resilient economic data and easing geopolitical pressures, even as policy uncertainty persisted. Solid labor markets, steady consumer demand, and improving manufacturing activity reinforced expectations for continued economic expansion, helping investors look through concerns around inflation and rising rates.  At the same time, incremental progress in Middle East tensions and a pullback in oil prices contributed to a more constructive risk backdrop.  Despite rising Treasury yields and shifting Federal Reserve expectations, volatility was minimal as markets largely absorbed these headwinds, given the strength of earnings and growth visibility.  Overall, May’s performance reflected a market environment in which earnings strength, AI-driven investment, and improving macro sentiment collectively outweighed geopolitical uncertainty, supporting continued upward momentum in U.S. equities. 

Large-Cap Sectors 

S&P 500 sector performance in May was highly concentrated with eight of eleven sectors finishing in the red. Technology (+16.0%) was the overwhelming leader while masking broader softness across most other sectors. The strength in Technology was driven by continued momentum in AI-related spending, semiconductors, and digital infrastructure, with the semiconductor industry in particular experiencing a historic surge. The SOX index gained +22.1% in May following a +38.4% surge in April, for a combined two-month return of +69.1%, marking its strongest 2-month performance since inception in 1996. Outside of Technology, gains were modest, with Consumer Discretionary (+2.6%) and Health Care (+2.5%) benefiting from resilient consumer activity and defensive rotation at points during the month. 

In contrast, the majority of sectors posted flat to negative returns, due in part to pressure from higher-for-longer rate expectations and uneven macro signals. Energy (-5.6%) was the weakest performer, giving back prior gains on easing geopolitical risk and softer oil prices. Utilities (-5.1%) and Consumer Staples (-3.2%) also lagged as rising yields weighed on rate-sensitive and defensive areas. Cyclical sectors such as Industrials (-0.8%) and Materials (-0.7%) were modestly negative despite still-healthy year-to-date performance.  Financials (-1.2%) were down for the 4th time in five months while reaching a two-year low on a relative strength basis versus the S&P 500 Equal Weight Index (chart below).  From a sector performance perspective, May reflected narrow AI-driven leadership and broad-based sector divergence, with performance increasingly concentrated in areas most directly tied to secular growth themes. 

The narrowing breadth among the S&P 500’s large-cap sectors can be measured by its Advance-Decline Line (ADL), which first peaked in February before making a marginal new high in mid-April. However, as the large-cap index surged to new highs over the ensuing five weeks, the ADL breadth measure (lower panel) made a noticeably lower high.  

Small-Cap Sectors
 

The Russell 2000 sector performance in May reflected a noticeably broader and more balanced advance relative to large caps, with 8 of 11 sectors posting gains, in sharp contrast to the S&P 500, where the majority of sectors declined. Leadership still came from Technology (+21.4%), which outpaced even its large-cap counterpart as small-cap companies benefited from the same AI-driven tailwinds and semiconductor strength. Beyond Technology, performance broadened across cyclical and domestically oriented sectors, with Health Care (+3.9%), Industrials (+3.3%), REITs (+1.8%), and Materials (+1.6%) all contributing to the upside. This pattern suggests that improving sentiment around economic growth and capital spending extended more evenly into smaller-cap names, particularly those leveraged to U.S. demand and industrial activity.

Importantly, the rest of the sector distribution reinforces the rotation and breadth story within small caps. Even more rate-sensitive or economically tied sectors such as Financials (+0.5%), Utilities (+0.3%), and Consumer Discretionary (+0.8%) managed modest gains, signaling a more constructive backdrop despite lingering interest rate pressures. Only a few areas lagged, led by Communication Services (-5.2%), Consumer Staples (-4.6%), and Energy (-1.9%), the latter reflecting similar commodity-related headwinds seen in large caps. Overall, the Russell 2000 in May was characterized by broader participation beyond a single dominant theme, with gains distributed across both growth and cyclical segments.

Rates, Commodities, and the Dollar

U.S. interest rates were higher in May for the 4th time in 5 months in 2026.  The uptrend in rates through May 2026 was driven by a confluence of inflation pressures, shifting Federal Reserve expectations, resilient economic growth, and global macro forces, which combined forced a repricing of the bond market. The most immediate catalyst was hotter‑than‑expected inflation data, with CPI running near 3.8% year over year and core inflation around 2.8%, reinforcing the view that inflation was proving stickier and more broad-based, particularly with elevated energy prices tied to Middle East tensions and supply disruptions. 

While rates were higher across the curve in both May and throughout 2026, the rise has been more pronounced in the belly of the curve, resulting in a flattening of the 10s/2s Treasury spread.  

Following a 3-year uptrend spanning its cycle low in March 2023 (regional bank crisis) to its recent high in February 2026, the UST 10s/2s spread is at a key technical inflection point.  It has been range-bound between 43 bps and 65 bps for the better part of the last 15 months.  In mid-March, it broke its rising 3-year uptrend and is currently testing 18-month lows.  

Possibly most noteworthy is the UST 30-year yield, which made a marginal new cycle high in May when peaking at 5.2% and eclipsing the prior cycle high of 4.18% reached in October 2023.  The long yield has since retraced back to 5%, which was a prior resistance level throughout all of 2025 into Q1 2026.  Prior resistance is now acting as support.  The concern would be a resumption of the prior uptrend and a breakout to new cycle highs, which could carry upside momentum and risk pulling the entire rate curve higher.  

Brent crude oil fell sharply (-19.3%) on improving expectations around a potential Iran ceasefire and easing Middle East tensions. This pullback also reflected a market recalibrating from earlier supply fears, with traders unwinding hedges and positioning as the outlook for global supply became incrementally more balanced.

Precious metals showed tentative signs of stabilization following a significant drawdown earlier in the year. Gold declined modestly (-1.7%), while silver posted a slight gain (+2.1%), suggesting a potential bottoming process after steep declines from February highs. The divergence between gold and silver also points to mixed drivers, with silver benefiting from both industrial demand expectations and broader risk sentiment, while gold remained pressured by higher real yields. Meanwhile, Bitcoin’s modest decline (-3.7%) coincided with sizable outflows from U.S. spot bitcoin ETFs.  According to Bloomberg, in late May U.S. spot bitcoin ETFs recorded nine consecutive trading days of net outflows, marking the longest withdrawal streak since the products listed in January 2024.  Over the nine-session run, investors pulled roughly $2.8 billion from the funds. 

Corporate Earnings 

The Q1 2026 earnings season for the S&P 500 stands out for both the magnitude and consistency of positive surprises. With 97% of companies reporting, 85% exceeded EPS estimates and 81% beat on revenues, both well above historical norms. For comparison, the 5-year and 10-year averages are ~78% and 76% for EPS beats, and ~70% and 67% for revenue beats, respectively, underscoring the unusually strong breadth of outperformance this quarter, according to FactSet.  This strength translated into a sharp acceleration in growth, with the blended YoY earnings growth rate rising to 28.6%, more than double the 13.1% expected at the end of March and marking the fastest pace since Q4 2021. 

The upside was also broad-based, with clear sector-level drivers rather than narrowly concentrated results. Ten of eleven sectors saw upward revisions to earnings following positive EPS surprises, reflecting widespread participation.  At the high end, Communication Services (+53%) and Technology (+52%) delivered the strongest earnings growth, supported by very high EPS beat rates (roughly 85–93% of companies beating estimates within these sectors).  Beyond mega-cap tech, cyclicals also contributed meaningfully, with Materials (~+42%), Consumer Discretionary (~+39%), and Financials (~+25%) all posting robust double-digit growth.  This combination of elevated beat rates and multi-sector earnings expansion reinforces that the quarter’s strength was both deep and well distributed across the index, supporting a durable earnings backdrop.  The forward 12-month P/E for the S&P 500 is 21.2 versus the 5-year and 10-year averages of 19.9 and 18.9, respectively. 

The information contained herein is provided for informational and educational purposes only, and nothing contained herein should be construed as investment advice, either with respect to a particular security or an overall investment strategy. All information contained herein is obtained by Nasdaq from sources believed by Nasdaq to be accurate and reliable. However, all information is provided “as is” without warranty of any kind. Advice from a securities professional is strongly advised.