May 2026 was a positive month for investors. Major stock market indexes climbed to all-time record levels, even as the bond market faced some pressure from concerns about rising prices (inflation). The S&P 500, a widely followed measure of U.S. stock performance, rose above 7,500 for the first time ever, helped largely by strong performance in technology stocks. At the same time, long-term interest rates (the cost of borrowing money over many years) climbed to their highest levels in nearly two decades before easing later in the month as oil prices fell. Hopes for a peace deal in Iran also gave markets a boost, though the situation is still uncertain.
May also brought a significant change in leadership at the Federal Reserve (the U.S. central bank that manages monetary policy) for the first time since 2018. Kevin Warsh was sworn in as the new Fed Chair. While a leadership change at the Fed can raise questions about the future direction of interest rates, history shows that markets and the broader economy have done well under many different Fed leaders. For investors focused on the long term, recent stock market strength is encouraging, though it remains important to keep portfolios well-balanced to handle all phases of the market cycle.
Key Market and Economic Highlights for May
• The S&P 500, Nasdaq, and Dow Jones Industrial Average gained 5.1%, 8.4%, and 2.8%, respectively, for the month. All three major U.S. indexes finished at new all-time highs.
• Market volatility (how much prices swing up and down) fell over the month, as measured by the CBOE VIX index, ending May at 15.32.
• International developed markets returned 2.6% based on the MSCI EAFE Index in U.S. dollar terms, while emerging markets returned 9.5% based on the MSCI EM Index.
• The 30-year Treasury yield (the interest rate on long-term U.S. government bonds) reached 5.18%, its highest level in nearly two decades, before finishing the month below 5%. The 10-year Treasury yield rose to 4.4%. The Bloomberg U.S. Aggregate Bond Index returned 0.3% for the month.
• Oil prices fell, with Brent crude closing at approximately $92 per barrel and WTI at $88.
• Gold ended the month slightly lower at $4,539 per ounce. The U.S. Dollar Index stood at 98.94, also down only slightly.
• First quarter real GDP (a measure of economic growth adjusted for inflation) was revised lower from 2.0% quarter-over-quarter to 1.6%. April inflation showed headline CPI at 3.8% year-over-year and core CPI at 2.8%.
Long-term interest rates climbed then pulled back
One of the biggest stories in May was the sharp movement in interest rates. The 30-year U.S. Treasury yield, which represents the interest rate the government pays on bonds that mature in 30 years, hit its highest point in nearly two decades during the month before settling back below 5%.1 Yields on 10-year and 2-year bonds also moved higher, as investors grew to expect that interest rates would stay elevated for a longer period. Markets now anticipate the Fed will raise rates once by mid-2027 in response to ongoing inflation concerns.
This happened because both the Consumer Price Index (CPI, a common measure of consumer inflation) and Producer Price Index (PPI, which tracks prices businesses pay) came in higher than expected, largely due to energy prices. When inflation rises, interest rates tend to follow, because investors want more compensation when the purchasing power of money is declining. Some economists worry that if fuel prices stay high for an extended period, inflation could spread more broadly across all types of goods. Gas prices have eased slightly to around $4.30 per gallon on average nationwide, but this is still about $1.50 higher than before the war in Iran.2
Higher interest rates affect nearly every corner of the economy and financial markets, especially when driven by inflation. For everyday consumers, higher rates mean it costs more to borrow money, whether for a mortgage, a car loan, or a personal loan. Businesses face similar pressure, as it becomes more expensive to fund their day-to-day operations or borrow to expand.
In financial markets, higher interest rates reduce the present value of future earnings, which can weigh on asset prices. On the other hand, higher bond yields now provide more meaningful income than investors have seen in many years, which can benefit well-diversified portfolios over time.
It is worth keeping these developments in perspective. Markets have moved in both directions multiple times this year as news around a potential peace deal has shifted, and the situation continues to evolve. Interest rates have also been quite unpredictable in recent years. While rates remain elevated today, they are still well below the levels many feared when inflation was running much hotter and the Fed was actively raising rates.
The stock market hit new all-time highs
Despite the pressure on the bond market from higher interest rates, stocks continued to climb to record levels. The S&P 500 crossed 7,500 for the first time in May, and there have been 22 all-time highs this year through the end of May.3 While the Magnificent 7 and other large technology companies have continued to lead the way, this year’s gains have also been more broadly shared across different types of stocks compared to some prior years.
This favorable environment for stocks has generated growing excitement about upcoming IPOs (initial public offerings, which is when a private company sells shares to the public for the first time) from companies such as SpaceX, Anthropic, OpenAI, and others. These companies have grown primarily through private investments, and over the past two decades there has been a trend for companies to stay private for longer before going public. While attention often focuses on how a stock performs right after an IPO, the longer-term benefit is that these offerings expand the range of investment opportunities available to all investors. Looking at today’s large technology companies as an example, it is not their IPOs that stand out most, but the strong performance they have delivered over the decades since.
It is not unusual for markets to reach new all-time highs during a bull market (a period of rising prices). Historically, markets have trended upward over long periods, meaning they often spend a great deal of time at or near record levels. What matters more than any single index level is whether the underlying economic fundamentals remain healthy. Corporate earnings (the profits companies generate) have continued to grow at a solid pace, and analysts expect further growth in the coming year.4
Strong earnings growth has helped keep valuations (a measure of how expensive stocks are relative to their earnings) stable even as markets have climbed. The S&P 500 price-to-earnings (P/E) ratio, which compares a stock’s price to its earnings per share, is currently around 20.9x, within the range seen over the past several years. That said, these valuations are still above long-term historical averages. While high valuations do not necessarily tell us what markets will do in the near term, they are an important factor to consider when building a long-term portfolio. Keeping a balance across different sectors, company sizes, and investment styles can help manage risk while still participating in market gains.
Kevin Warsh takes over as the new Fed Chair
Kevin Warsh was sworn in as the new Chair of the Federal Reserve in May, taking over from Jerome Powell. Warsh previously served on the Fed’s Board of Governors during the 2008 global financial crisis and is widely regarded as someone familiar to markets, with a strong background in monetary policy and financial markets.
Fed leadership changes are intentionally rare, so they naturally prompt questions about what policy might look like in the years ahead. Warsh is seen as someone who favors reform at the Fed, which can introduce some uncertainty about how monetary policy will be conducted under his leadership. In his recent Senate testimony, Warsh emphasized that the Fed’s independence from political pressure is essential and that policymakers must act in the best interest of the country. He has also indicated a preference for a more focused central bank, with views that have historically leaned toward keeping a close watch on inflation.
Regardless of what changes Warsh may bring to the Fed, policymakers clearly face a challenging environment. The overall economy remains healthy, but inflation has picked up in recent months while the job market has sent mixed signals. Normally, a weaker job market would call for lower interest rates to support hiring, while rising inflation would suggest keeping rates higher to cool price pressures. This creates a difficult balancing act, and markets have now shifted from expecting further rate cuts to pricing in at least one rate hike.
For investors, history provides some reassurance. The economy has grown through the terms of many different Fed chairs, across a wide range of political environments and policy approaches. The most important long-run drivers of investment returns are corporate earnings growth, productivity, demographics, and innovation. Leadership changes at the Fed can create short-term uncertainty, but they rarely change these deeper, long-term forces.
The bottom line? May brought new records for the stock market, extending a strong run for investors. While headlines around inflation, the new Fed Chair, and global events will likely keep generating uncertainty, the best approach for investors is still to stay focused on their long-term financial goals.
References
1. https://home.treasury.gov/policy-issues/financing-the-government/interest-rate-statistics
2. https://gasprices.aaa.com/
3. Clearnomics research based on Standard & Poor’s index data
4. Clearnomics research based on LSEG earnings data
5. https://www.cmegroup.com/markets/interest-rates/cme-fedwatch-tool.html
Index Descriptions
S&P 500
The Standard & Poor’s 500 Index is a capitalization-weighted index of 500 stocks designed to measure performance of the broad domestic economy through changes in the aggregate market value of 500 stocks representing all major industries.
Dow Jones
The Dow Jones Industrial Average is comprised of 30 stocks that are major factors in their industries and widely held by individuals and institutional investors.
NASDAQ
The NASDAQ Composite Index measures all NASDAQ domestic and non-U.S. based common stocks listed on The NASDAQ Stock Market. The market value, the last sale price multiplied by total shares outstanding, is calculated throughout the trading day, and is related to the total value of the Index.
MSCI Emerging Markets Index
The MSCI EM (Emerging Markets) Index is a free float-adjusted market capitalization weighted index that is designed to measure the equity market performance of the emerging market countries of the Americas, Europe, the Middle East, Africa and Asia. The MSCI EM Index consists of the following emerging market country indices: Brazil, Chile, Colombia, Mexico, Peru, Czech Republic, Egypt, Greece, Hungary, Poland, Qatar, Russia, South Africa, Turkey, United Arab Emirates, China, India, Indonesia, Korea, Malaysia, Philippines, Taiwan, and Thailand.
MSCI EAFE Index
The MSCI EAFE Index is a free float-adjusted market capitalization index that is designed to measure the equity market performance of developed markets, excluding the US & Canada. The MSCI EAFE Index consists of the following developed country indices: Australia, Austria, Belgium, Denmark, Finland, France, Germany, Hong Kong, Ireland, Israel, Italy, Japan, the Netherlands, New Zealand, Norway, Portugal, Singapore, Spain, Sweden, Switzerland and the UK.
Bloomberg US Aggregate Bond Index
The Bloomberg U.S. Aggregate Bond Index is an index of the U.S. investment-grade fixed-rate bond market, including both government and corporate bonds.