F.N.B. Wealth Management Fast Five

1. What happened in markets during May?

The market rally that we witnessed in April continued into May as strong tech earnings and AI exuberance propelled the S&P500 to 11 all-time closing highs during the month. Declining oil prices resulting from easing geopolitical concerns in the Middle East helped fuel a risk-on sentiment. The S&P500 finished the month with a 5.3% gain, while the Dow Jones Industrial Average was +2.9%, tech-heavy Nasdaq was +8.4%, and Russell U.S. Small Cap Index was +4.4%. International equity markets were also positive during the month, with the MSCI EAFE Index (developed markets) +3.2% and the MSCI Emerging Markets Index +9.7%, illustrating that the AI exuberance has gone global.

U.S. Treasuries yields climbed (Treasuries sold off) in May, as the bond market continues to wrestle with inflation risks from elevated oil prices, relatively strong U.S. economic data and a widening U.S. deficit. The first two items are keeping the Federal Reserve on the sidelines as well. The selling continued in May, with the two-year yield moving higher by 13 basis points (bps) to 4.0%, and the 10-year U.S. Treasury yield also moving up 7 bps to 4.4%. Following the latest jobs report, the Fed Funds market is now pricing in a full 25 bps rate hike by the end of the year.

Oil and gas dominated commodity trading again, as West Texas Intermediate was -5.83% and U.S. gasoline was -12.9%. Elsewhere in the commodity complex, natural gas was +16.6%, gold -1.7% and silver +0.62%, while copper was +8.0%. The U.S. dollar finished flat after recovering from a large sell-off in early May.

2. Why was the U.S. inflation reading released in May (for April) so high?

Headline CPI increased 0.64% in April (vs. 0.87% prior) and core CPI rose 0.38% (vs. 0.20% prior). On a year-over-year basis, headline inflation climbed to 3.8% (vs. 3.3% in March) and core inflation to 2.8% (vs. 2.6% in March). The biggest drivers of the monthly increase came from energy which added 0.27% bps to the headline number, driven by a 5.4% increase in gasoline prices and a rebound in food inflation added 0.5%.

Core services reaccelerated to 0.5% (vs. 0.2% prior) with rents the biggest contributor. Primary rents increased 0.55% (vs. 0.19% prior) and owners’ equivalent rent (OER) advanced 0.53% (vs. 0.28% prior) due to a technical correction from the missing readings registered during 4Q government shutdown. If you strip out the quirk in the Bureau of Labor Statistics (BLS), core inflation would have printed closer to 0.26%, a more subdued pace, despite airfare- and AI-related price pressures.

One area that showed particularly strong price acceleration was information technology goods, driven by a 5.0% increase (vs. 4.0% prior) in computer software and accessories. This category was up 13.9% from a year earlier, and it is likely that the sharp increases will continue due to the supply-chain bottleneck from the AI build-out. Memory storage seems to be a part of the increase but has negligible weight in the CPI, though its contribution to PCE is much larger, which makes the increase more of a concern. We will be watching to see if the increases in energy costs, and constrained technology supply-chains with increased demand raise prices in other areas of the economy.

3. What are the prospects for economic growth going forward?

The World Economic Forum released its Chief Economists’ Outlook in late May, revealing that 89% of the chief economists surveyed expect global growth to weaken over the next 12 months, and more than 1 in 5 expect it to weaken significantly. The closure of the Strait of Hormuz turned a regional conflict into a global shock. The longer it remains closed, the more severe the impact will be.

The economists surveyed expect Southeast Asia to bear the brunt, with 62% of the economists anticipating significantly higher energy prices but still moderate-to-strong growth. The U.S. and China are expected to be resilient, as well, but for different reasons. In the U.S., 74% of the chief economists expected moderate growth, supported by AI investment, consumption and government spending, though more than half expect high or very high inflation in the year ahead. According to the chief economists, China’s outlook has improved, with 77% expecting moderate or stronger growth there, helped by strong export performance and high manufacturing.

India claims the distinction of being the most upbeat global growth story, according to the chief economists, with more than half, or 52%, expecting strong or very strong growth there in the next 12 months. Europe has seen the largest deterioration in forecasts from chief economists, with 65% of the respondents expecting weak or very weak growth in the region along with high inflation and the risk of stagflation.

4. What will the SpaceX IPO and other upcoming AI mega-IPOs mean for the stock market?

The SpaceX IPO on June 12 kicks off an IPO season unlike any that has ever been seen in history. The biggest anticipated IPOs for the rest of the year — SpaceX, OpenAI, Anthropic, Databricks, Stripe, Revolut, Canva and Anduril — are worth close to $4.6 trillion cumulatively based on current valuations. For comparison, all IPOs since the founding of the New York Stock Exchange in 1792 have raised less than $1.5 trillion. Retail interest in these IPOs is high, which means these investors will likely sell existing equity holdings to buy shares thus putting selling pressure on parts of the market. Of course, some cash may be pulled in from the sidelines as well.

While many of these companies are raising less than 10% of their market capitalization, and most indices are float-adjusted, the floats of these companies will expand rapidly as locked-up shares, stock options and restricted stock units vest, essentially forcing these companies into indexes like the Nasdaq 100. This will create a major rebalancing of certain index tracking strategies causing some additional selling pressures. Of course, the rules have also been rewritten so that SpaceX can be included in the total market index within a week of going public. Typically, a new IPO does not have a passive index buyer that is essentially being forced to support the IPO — this is a first. The SpaceX IPO that is scheduled for June 12 and targeting $1.77 trillion (the largest in history).

5. What is the Chief Investment Office monitoring in June?

We are watching the following:

1. Progress with regards to the U.S.-Iran peace negotiations, as the duration of the conflict will determine the amount of global economic impact and inflation due to the corresponding impact on energy prices.
2. U.S. Consumer Price Index (CPI), which will give another data point on inflation. One key reason U.S. stocks have been rising is a belief that inflation is cooling and rate cuts are near.
3. The June Fed meeting will be the first one chaired by the newly confirmed Fed Chair Kevin Warsh. It is expected that Warsh may curb forward guidance and scrap “dot plot” rate projections. He will also need to lead a divided Fed with a more hawkish tone, given the latest inflation readings.

Charts of the Month

Households are feeling the squeeze:

After adjusting for volatility in farm incomes, nominal personal income per capita rose 0.2% in April. Accounting for inflation, this translates to a drop of 0.4% in real terms. On an annual basis, personal income grew at a rate of 2.5% y/y. However, when adjusting for inflation and taxes, this means real disposable income per capita decreased 1.1% y/y due to ongoing price pressures. Spending increased by 0.5% month-over-month, slowing from an upwardly revised 1% gain in March and matching market expectations. The personal savings rate fell to 2.6% in April, down from 5.5% a year earlier, as consumers dipped into their savings to finance the same or slightly more spending while also taking home less real take-home pay.

Growth in Personal Income vs. Savings Rate

Earnings Continue to Drive the Market Higher:

The relationship between corporate earnings and market index levels (like the S&P500) represents the driving force of equity markets. In the long term, stock prices should follow earnings, but in the short term the index level can fluctuate based on valuation changes, interest rates and investor sentiment. The chart shows that the increase in the index has been supported by ever-increasing profits from America’s largest companies and not just greater multiple expansions. The S&P500 achieved an all-time quarterly record for Q1 2026, delivering double-digit year-over-year earnings growth largely driven by the technology sector; 83% of companies in the S&P500 reported positive earnings surprises, while EPS growth was a staggering 29.6%.

S&P500 Earnings Relative to Index Level