May was a strong month for markets.
The S&P 500 gained 5.3% and set multiple new all-time highs. The Nasdaq 100, Dow Jones Industrial Average, Russell 2000, and even the equal-weighted S&P 500 also reached new highs during the month.
On the surface, that sounds like a broad and healthy rally.
And in some ways, it was.
But when you look underneath the surface, the story becomes more nuanced. Technology stocks led the market by a wide margin, gaining 16% during the month. Consumer Discretionary and Health Care also moved higher, but eight of the eleven S&P 500 sectors declined.
That means the index made new highs while most sectors moved lower.
This is one of the more important details from May. The market was strong, but leadership remained concentrated. Large-cap growth stocks continued to outperform large-cap value stocks, and companies tied to artificial intelligence remained at the center of investor attention.
In plain English, the market continued to reward the companies viewed as the biggest beneficiaries of the AI buildout, while more traditional and cyclical areas of the market lagged behind.
That doesn’t mean the rally is unhealthy. It does mean investors should be careful not to confuse a rising index with a fully broad-based market.
Bonds Held Up Despite Higher Rates
Bonds also moved higher in May, although the story there was more complicated.
The U.S. Aggregate Bond Index gained 0.3%, while investment-grade and high-yield corporate bonds performed slightly better. Corporate bonds benefited as credit spreads tightened, which means investors were willing to accept less additional yield to own corporate debt instead of Treasury bonds.
That’s usually a sign that investors are still relatively comfortable taking risk.
At the same time, Treasury yields moved higher during the month. The 30-year Treasury yield briefly moved above 5%, reaching levels last seen in 2007, while the 10-year Treasury yield reached a new 52-week high.
The move in rates was driven by renewed inflation concerns. Hotter-than-expected consumer and producer price reports, combined with elevated oil prices, pushed investors to rethink the path of Federal Reserve policy.
Earlier in the year, markets were still leaning toward rate cuts. By the end of May, expectations had shifted meaningfully, with the market assigning a greater than 50% probability to a Fed rate hike at the December 2026 meeting.
That’s a notable change.
For investors, the message is straightforward. The bond market is still trying to adjust to the possibility that interest rates may stay higher for longer. That doesn’t mean bonds have lost their role in a portfolio. But it does mean the path back to lower rates may be less direct than investors hoped.
The Two Themes Driving Markets
Two themes continue to shape the market environment this year.
The first is geopolitics.
Earlier in the year, investors were focused on trade policy and tariff uncertainty. More recently, the focus has shifted to the conflict in the Middle East and the resulting disruption in global oil markets.
The Strait of Hormuz, which carries roughly 20% of global oil supply, has been effectively closed since the conflict began in late February. That disruption has reduced global oil inventories and kept energy prices elevated.
Oil prices have remained high, although they’ve been more contained than many investors might have expected given the scale of the disruption. In May, there was some relief as U.S.-Iran negotiations progressed and markets began pricing in the possibility that the Strait could eventually reopen. West Texas Intermediate crude ended the month below $90 per barrel, down 16.5%.
That was encouraging.
But it doesn’t fully resolve the uncertainty.
Even if a deal is reached, it would likely take months for shipping traffic to normalize. Until then, the Middle East remains a key source of risk for energy prices, inflation, interest rates, and broader market sentiment.
The second theme is artificial intelligence.
The AI buildout is no longer just a technology story. It has become an economic story, an earnings story, and a market leadership story.
The largest technology companies are committing hundreds of billions of dollars to build the physical infrastructure needed for artificial intelligence. That includes data centers, computer chips, power generation, and the broader systems required to support growing AI demand.
Forecasted 2026 capital spending across the leading technology companies now exceeds $600 billion, with much of that spending tied to AI infrastructure.
That level of investment is meaningful.
It is helping drive economic activity. It is showing up in corporate earnings. And it is creating a wide gap between companies connected to the AI buildout and companies that are not.
This explains much of the performance difference we saw in May. Technology stocks didn’t just outperform because investors were excited about the future. They outperformed because the market is starting to see the real financial impact of AI spending.
At the same time, this kind of rapid change creates risks.
Supply chains can become stretched. Expectations can move too far ahead of reality. And when market leadership becomes concentrated in a small group of companies, investor portfolios can become more dependent on a narrow part of the market than they realize.
That’s not a reason to avoid technology or artificial intelligence. But it is a reason to remain disciplined.
What This Means for Investors
May was a good reminder that markets can feel reassuring and uneven at the same time.
The major indexes made new highs. Corporate bonds held up. Credit markets remained stable. And investors continued to reward companies tied to the AI buildout.
But there were also signs of caution beneath the surface.
Most S&P 500 sectors declined. Treasury yields moved higher. Inflation concerns reemerged. Oil prices remained tied to geopolitical uncertainty. And market leadership continued to depend heavily on technology.
For long-term investors, the lesson isn’t to predict which theme will dominate next month.
The lesson is to stay grounded.
Markets are always telling more than one story at a time. Right now, one story is about resilience, innovation, and strong corporate earnings. Another story is about concentration, geopolitical risk, inflation pressure, and higher interest rates.
Both can be true.
That’s why portfolio discipline matters. A thoughtful investment plan should allow you to participate when markets move higher, while also helping you avoid becoming overly dependent on any single theme, sector, or outcome.
May was a strong month. But the strength was not evenly distributed.
And that’s the part investors should remember.
