The major indices closed May on a high note with another set of all-time highs. Strong Q1 earnings, resilient consumer spending, and optimism over a U.S.-Iran peace deal trumped inflationary headwinds from higher oil prices throughout the month as the Strait of Hormuz remained largely closed to ship traffic. Bulls now look ahead to June, hoping to put their stamp on the second quarter.
Economic Highlights:
- Inflation cooled heading into April. The Fed’s preferred inflation gauge, the core PCE index, which excludes volatile food and energy, rose 0.20% month-to-month and was up 3.30% YOY. That was below analysts’ monthly estimate of 0.30% but in line with their YOY expectations. Meanwhile, the headline figure rose 0.40% for the month, pushing the 12-month inflation rate up 3.80%. Higher prices for goods, housing, utilities, and gasoline drove the YOY increase.
- Consumers continued to burn through their savings, increasing their spending in April despite persistent inflation. Consumer spending rose 0.50% while disposable personal income fell 0.10%. To make up for elevated prices, consumers have been tapping their personal savings, resulting in their savings rate falling to 2.60% for the month, down from 3.20% in March and 4.30% in January. April’s reading was also its lowest since June 2022.
- New orders for long-lasting goods like cars, appliances, and televisions surged 7.90% in April, up from a 1.30% increase in March. Excluding volatile transportation, new orders rose a modest 1.10% in April and were up 9.1% from a year ago.
May Released the Stampede
Bullishness was alive and well in May, lifting the Dow Jones Industrial Average, S&P 500, and Nasdaq Composite Index up 2.78%, 5.15%, and 8.36%, respectively. May’s record-setting run has been fueled by robust Q1 earnings, AI momentum, and optimism for a U.S.-Iran peace deal. Through May 29th, earnings are expected to be up 29.30% (Q126 vs Q125). That’s up sharply from Q4 2025’s 14.10% rise. To no one’s surprise, tech earnings drove much of the increase with information technology and communication services vaulting 56.40% and 50.90%, respectively. The AI momentum was on full display this week as investors snatched up memory chip stocks Micron Technology and SK Hynix, catapulting them into the elite $1 trillion market capitalization club. Although tech earnings dominated the headlines, the consumer discretionary sector also had a surprisingly strong showing with earnings increasing 40.40%. For much of the quarter, economists have all but written off the consumer as they’ve been squeezed by a tough jobs market and persistent inflation. However, consumers have continued to defy the doomsayers, spending their tax refunds and drawing down their savings to maintain their spending. The resilient consumer has prompted businesses to keep investing in order to meet that demand as exhibited in this week’s durable goods report.
With May in the books, bulls are on the hunt for more gains in June to close the quarter on an even stronger note. Just given May’s strength and with summer traditionally being slightly weaker, that may be a tall order. However, analysts and investors are showing great confidence in Q2’s earnings. Analysts are currently modeling a 22.40% earnings growth rate for the quarter. Tech stocks – to no one’s surprise – are expected to lead the charge. However, energy is also expected to put up a 115.60% growth rate as the U.S.-Iran war pressures energy prices. Strong energy earnings are a double-edged sword, however, with investors cheering domestic producers’ results while consumers grumble at high prices at the pump. A rumored peace deal, however, looks to be closer at hand with Washington and Tehran reportedly hammering out final details. Relief at the pump could ease the squeeze on consumer budgets and provide a further lift to consumer discretionary earnings which are expected to rise 5.20% for the quarter. The confluence of strong consumer spending, robust AI-business investment, and easing global supply chain congestion appear to be setting up for a strong finish for the year’s first half.
The Week Ahead
Key reports include nonfarm payrolls, manufacturing, and services.
Wall Street Cheers as Main Street Frowns
Earlier this week, the Conference Board released its Consumer Confidence Index for May. The index is based on a survey of roughly 5,000 households, measuring consumers’ optimism or pessimism about their personal financial situation and the health of the broader economy. This monthly economic indicator is closely watched by investors and economists because high confidence typically signals increased consumer spending, which drives about 70% of the U.S. economy. The most recent index showed its first decline after three months of improvement, slipping 0.7 points to 93.1 in May. A reading of 100 represents average confidence levels from that year. In practice, the index has ranged from a low near 25 (during the 2008-09 financial crisis) to highs above 140 (during strong labor markets). Additionally, the University of Michigan reported that its index of consumer sentiment fell to the lowest level ever recorded in more than 70 years of surveys, falling to 44.8 and marking a 10% drop from April. These two surveys anchor to different historical economic climates with each base year representing 100. Michigan started their survey in 1966 and the Conference Board started in 1985, so the numerical levels themselves cannot be directly compared between the two surveys; only their trajectories or trends provide meaningful insight.
The current low sentiment stands in contrast to the strength of the financial markets which have repeatedly been hitting record highs. Historically, high stock prices have been associated with happy consumers. This has many people pondering the question, if stocks are so high, then why are consumers so low?
Consumers experience the economy through their wallet and not typically through stock prices. Even investors with hefty portfolios — those in the top third by stock wealth — are still relatively unhappy, although they are on average feeling better than their peers. When budgets are under stress, sentiment often deteriorates even if the economy looks fine. Earlier this year, the Iran war sent gas prices soaring. The national average for regular gasoline is about $4.49–$4.50 per gallon, up over $1.50 since the start of the Iran war in February. Gas averaged $2.98 a gallon the day before the Iran war began. Gas is a visible and immediate cost for consumers that can hit budgets hard. Higher gas prices feed into higher shipping and freight costs, which can raise grocery, housing, and the prices of other goods, contributing to broader inflation. Yesterday’s inflation report shows consumer prices in April were at their highest level in almost three years. Consumers are feeling the pinch of rising costs while incomes have not kept up with inflation. Annual personal income growth has slowed to 2.5%, falling below the pace of inflation which means that households are losing purchasing power.
Robert Barbera, director of the Center for Financial Economics at Johns Hopkins University, notes in an article this week in the Wall Street Journal, The Stock Market Has Never Been So Good When People Have Felt So Bad, May 23, 2026, that the disconnect between a strong stock market today and unhappy consumers might be due to one of three things: (1) stock prices being out of touch with fundamentals such that consumers are right to be unhappy, (2) stocks could be foreseeing a future where the war in Iran ends, inflation eases, and growth picks up such that markets are right to look exuberant, and (3) enthusiasm about the growth and potential of Artificial Intelligence to reduce labor costs and increase profit margins that serves as a boon for stocks. The Wall Street Journal article is available here.
The historic disparity between soaring portfolios and sinking spirits remains a challenge for investors, policymakers, and consumers.