May 2026
US Economy: Growth Holds, Inflation Pressures Rebuild.
April showed US economic resiliency with Q1 GDP growth rebounding to 2.0%, but also renewed inflation pressure from energy, freight and raw materials. The ISM Manufacturing PMI held at 52.7, indicating expansion, while the Core PCE price index jumped to 3.2%, its highest level since November 2023 as Iran-war disruptions continued to pressure supply chains.
US Stocks: AI and Earnings Reignite the Rally.
US equities rebounded sharply in April, with the S&P 500 up nearly 11%. Strong earnings, renewed AI enthusiasm, and leadership from large-cap technology and infrastructure-linked companies overwhelmed lingering concerns about oil, inflation and Fed policy. Small-cap stocks continued to outpace their large-cap peers with investors paying closer attention to valuations.
Foreign Stocks: Relief Rally, but Energy Risk Lingers.
Foreign markets participated in the broader risk-on move, though unevenly. Emerging-market stocks benefited from their strongest monthly gain since 2022, even as renewed Iran-related oil shocks weighed on oil-importing economies and currencies. South Korea (+65.4% YTD) has driven EM results with the AI semi-conductor boom continuing to boost SK Hynix (+93.4% YTD), among the largest global semi-conductor and chip manufacturers.
Fixed Income: Rates tick up, Munis Outperform.
Fixed income remained challenged by the same problem that hurt bonds in March: higher oil prices feeding inflation expectations. Treasuries sold off modestly as oil climbed, then rebounded as Brent eased from four-year highs; the 30-year Treasury yield briefly topped 5% before moving back below that level. Meanwhile, municipal bonds that offered attractive yields relative to Treasuries at the start of the month, rallied as investors perceived value.
Real Assets: Oil Remains in Focus.
Oil remained the central macroeconomic variable. Brent crude spiked to $112 after US/Iran peace talks fell apart but finished the month near $108. Meanwhile, gold was headed for a second monthly decline with interest rates looking less likely to ease meaningfully in the months ahead. REITs (+9.0%), an area that has lagged the broader category in recent years, saw a rally in datacenter and health care sectors.
Alternatives: Market Recovery Eases Liquidity Strain.
The public market rebound reduced some immediate pressure on private markets, but investor scrutiny of liquidity, valuation marks and AI-exposed business models remains elevated. Hedge funds performed well amid the rally, outpacing fixed income and capturing returns from the resumption in volatility as the peace talks fizzled, with the strongest returns from EM and directional strategies.
Source of data: Bloomberg
Equities Total Return
| APR | 3 MO | 1 YR | |
|---|---|---|---|
| U.S. Large Cap | 10.5% | 5.7% | 31.0% |
| U.S. Small Cap | 12.3% | 13.3% | 44.5% |
| U.S. Growth | 12.2% | 1.5% | 31.0% |
| U.S. Value | 8.2% | 10.6% | 29.9% |
| Int’l Developed | 7.5% | 6.1% | 24.6% |
| Emerging Markets | 14.7% | 14.5% | 46.7% |
Fixed Income Total Return
| APR | 3 MO | 1 YR | |
|---|---|---|---|
| Taxable | |||
| U.S. Agg. Bond | 0.1% | 0.1% | 4.1% |
| TIPS | 1.2% | 1.4% | 4.1% |
| U.S. High Yield | 1.7% | 1.1% | 8.7% |
| Int’l Developed | (0.1%) | (1.2%) | (2.4%) |
| Emerging Markets | 0.7% | 0.3% | 2.1% |
| Tax-Exempt | |||
| Intermediate Munis | 0.5% | 0.4% | 5.0% |
| Munis Broad Mkt | 1.1% | 0.9% | 6.1% |
Non-Traditional Assets Total Return
| APR | 3 MO | 1 YR | |
|---|---|---|---|
| Commodities | 4.2% | 29.6% | 44.8% |
| REITs | 9.0% | 13.1% | 14.9% |
| Infrastructure | 2.8% | 11.3% | 25.8% |
| Hedge Funds | |||
| Absolute Return | 0.7% | (0.2%) | 4.2% |
| Overall HF Market | 2.9% | (0.6%) | 6.0% |
| Managed Futures | 2.6% | 10.2% | 18.1% |
Economic Indicators
| APR-26 | OCT-25 | APR-25 | |
|---|---|---|---|
| Equity Volatility | 16.9 | 17.4 | 24.7 |
| Implied Inflation | 2.5% | 2.3% | 2.2% |
| Gold Spot $/OZ | $4617.9 | $4002.9 | $3288.7 |
| Oil ($/BBL) | $114.0 | $65.1 | $63.1 |
| U.S. Dollar Index | 118.7 | 121.4 | 122.6 |
Our Take
April was a reminder that markets can move quickly from first-order fear to selective optimism. Whereas March was dominated by geopolitical shock and inflation anxiety, April saw investors re-engage with strong earnings reports, AI-driven capital spending, and the possibility that the worst of the immediate stress had passed. However, beneath that recovery, the economic foundation is becoming more fragile. The growing tension between inflation, fiscal policy, and institutional credibility as a unique challenge facing the Fed is the story worth noting even if the rebound in equities is welcome.
On the first point, inflation hasn’t been slowing for more than a year amid the introduction of the new tariff regime. Now, with conflict persisting with Iran and the closure of the Strait of Hormuz, inflation appears to be accelerating across both goods and services. That the acceleration has happened so quickly suggests that the underlying inflationary pressures were already broader and more persistent than perhaps the Fed had expected. Regardless, a shift to outright acceleration complicates the Fed’s path at precisely the wrong moment.
Compounding the challenge is the growing dominance of fiscal policy. With US debt levels elevated and interest expense rising rapidly, deficit dynamics are becoming a driver of inflation expectations and bond market behavior. In this environment, monetary policy alone is unlikely to restore price stability, and the burden of adjustment may ultimately shift to the bond market itself.
To that end, today the bond markets are increasingly bifurcated between long and short-term perspectives. Long-term yields, including the 10-year Treasury, are increasingly driven by inflation expectations and fiscal concerns rather than Fed guidance which continues to drive short-term yields. The risk is the following: easing Fed policy, absent inflation slowing, may not lower borrowing costs for consumers and businesses and could instead push long-term yields higher if investor confidence weakens.
Meanwhile, the Fed itself is entering this backdrop from a position of unusual internal division. The final meeting chaired by Jerome Powell produced four dissents—the highest level of disagreement in decades—highlighting a lack of consensus on both the inflation outlook and the appropriate policy response. Incoming leadership under Kevin Warsh will inherit not just a difficult macro environment, but a fractured committee and heightened scrutiny around institutional credibility. This creates a narrow and complex path forward for the Fed.
Fed challenges aside, the economy does not yet present a clear case for urgency. Growth remains positive, employment is stable, and consumption—while moderating—has not broken, though much of the recent strength is dependent upon AI-related investment. In other words, the economy is slowing, but it is not contracting. A modest, symbolic Fed rate cut could be justified, but only if paired with strong communication reinforcing that inflation control remains the primary objective. Anything less risks undermining credibility at a time when it is most needed.
For investors, the unfolding environment supports our hypothesis that we are entering a different global economic and political regime marked by more persistent and structurally embedded inflation and volatility as primary considerations. This environment may challenge several assumptions that have held over the past, chief among them, the effectiveness of bonds for diversification to equities. What that means is that meeting desired portfolio downside risk characteristics means employing some creativity beyond a simple stock/bond mix. Real assets have performed well in this backdrop, underscoring their role in portfolios amid an inflationary environment after more than a decade where meaningful inflation never materialized. Other diversifiers such as hedge funds have also quietly demonstrated that they can improve expected returns and should buffer portfolio risk in more challenging equity markets as they did in 2022 and just over one month ago.
