Memorial Day is a day to pause, reflect and remember the ultimate sacrifices made by our nation’s heroes. One of my favorite quotes regarding Memorial Day is:
“All gave some; some gave all. Remember them this Memorial Day.”
There is much to talk about in The Week Ahead so grab a cup of coffee and enjoy.
This week, the Dow hit a record closing high, as investors cheered signs of progress in talks to end the Middle East conflict and a strong corporate earnings season. The S&P 500 notched its eighth consecutive weekly gain, its longest since a nine-week streak ended in December 2023.
But can the market rally keep on keeping on? High-flying U.S. equities could face turbulence in the final days of a blowout corporate earnings season as investors confront an increasingly tricky backdrop of spiking inflation and rising bond yields. Strength in earnings has allowed investors to look past negative factors such as higher yields, surging oil prices and the ongoing U.S.war with Iran. A selloff in the bond market has the market on edge but these jitters took a back seat to earnings.
The 30-year hit its highest level since 2007 before easing, while the 10-year touched its highest level in over a year, as traders feared a prolonged U.S.-Iran war would keep oil prices elevated and putting upward pressure on inflation. Yields, which rise as bond prices fall, pose headwinds for stocks as they increase rapidly, including by pressuring valuations and translating into higher borrowing costs for consumers and businesses. (More on that below).
A view of inflation is due on Thursday with the April reading of the personal consumption expenditures price index. The release of PCE, the measure favored by the Federal Reserve for setting its 2% annual inflation target, follows hot readings this month for other gauges of consumer and producer prices. Inflation worries are increasingly filtering into expectations for interest rates. Futures markets now price in the potential for a rate hike by the Federal Reserve later in 2026. At the start of this year, markets were pricing in the probability of multiple rate cuts.
For the week, the Dow gained +2.1% to 50,580, the S&P 500 added +0.9% to 7,473, the Nasdaq closed higher by +0.5% to 26,344 and the Russell 2000 shot higher by +2.3% to 2,869. The CBOE Volatility Index dropped -9.9% to 16.7.
Not a Great Record!
The U.S. economy is showing the strain of the nearly 3-month-old conflict with Iran as another flareup in inflation has raised business costs and pared customer demand. US consumer sentiment fell in May to a record low and long-term inflation expectations worsened primarily due to the Iran war.
The University of Michigan’s final May sentiment index decreased 5 points to 44.8 from April, according to the survey released Friday. The gauge was weaker than all projections in a Bloomberg survey of economists as well as the preliminary reading of 48.2.
Consumers expect prices to rise an annualized 3.9% over the next five to 10 years, up from 3.5% in April and the highest in seven months. They also saw costs advancing 4.8% over the next year.
So far, consumer spending has proved resilient as the job market holds up and a stock-market rally bolsters wealth. But surging gasoline prices hovering near the highest since 2022 are compounding Americans’ concerns about the cost-of-living and the absence of a deal to end the war. The toll of inflation on household budgets, particularly for lower-income consumers, poses a risk to the spending outlook.
Consumers’ grim mood spanned people from both political parties and reflected concerns about high living costs and the prospect of more inflation ahead, said survey director Joanne Hsu. Lower-income people, and people without college degrees, were particularly unhappy.
Which leads us to the next major concern:
The job market is, let’s call it what it is – AWFUL!!!!
Companies in the U.S. are increasingly laying off employees, with many of them attributing the job cuts to AI-driven efficiencies and higher spending on the new technology. The layoffs also come at a time when the labor market is seeing a slowdown in hiring and wage growth that lagged retail inflation in April for the first time since 2023.
But how much of this slowdown is because of AI?
“The evidence from job postings suggests that while AI may be contributing to recent labor market developments, it is not the main driver of the slowdown in hiring,” New York Federal Reserve researchers noted recently.
They said the NY Fed’s business surveys indicate that companies so far intend to incorporate AI mainly via retraining, with limited effects on hiring. And while job postings show a relative decline in vacancies in occupations with greater AI exposure, that divergence began before the release of ChatGPT in late 2022.
As for concerns that AI is reducing demand for entry-level jobs, the
researchers found that the slowdown in job postings is not concentrated in junior roles with high AI exposure. Elsewhere, Goldman Sachs economists estimated that AI reduced monthly payroll growth by ~16,000 jobs in the past year and raised the unemployment rate by 0.1 percentage point.
The bottom line is that companies are blaming AI for their decision to lay off staff. According to the latest Job Cuts Report from Challenger, Gray & Christmas, 26% of the total layoffs in April were attributed to AI. Around 16% of all 2026 job cut plans were because of AI, up from 13% through March.
Now That Earnings Season is Over…
Markets are about to be left without the steady drumbeat of earnings. Expect stocks to get more volatile from here as inflation, war, and a huge stock listing tug investors in various directions.
It’s been another positive earnings season on the whole. More than 80% of companies in the S&P 500 have delivered upbeat earnings surprises, with an average growth rate of nearly 28%—the highest since the end of 2021, according to FactSet. That has pushed the benchmark U.S. index to a series of record closes, driven by tech stocks.
And with NVDA reporting actual results for Q1 this past week, the Magnificent 7 companies reported actual earnings growth of 63.2% for the first quarter, which is the highest earnings growth rate reported by these seven companies since Q2 2021 (89.2%). On the other hand, the blended earnings growth rate for the other 493 S&P 500 companies for Q1 is 17.4%, which is also the highest earnings growth rate reported by this group of companies since Q4 2021 (32.3%).
But clouds are gathering. With hopes of a quick resolution to the U.S.-Iran war fading, government bonds have sold off, with the yield on the 30-year Treasury hitting its highest level in nearly two decades (notice how I keep repeating this?) The Federal Reserve appears to have little to no room to cut interest rates as surging energy prices drive up inflation—something even President Donald Trump appeared to acknowledge.
Looking ahead, the estimated earnings growth rates for 2026 for both the “Magnificent 7” companies (34.9% vs. 24.3%) and the other 493 S&P 500 companies (17.9% vs. 14.7%) are higher today compared to March 31, as analysts have increased full-year EPS estimates for both groups of companies in aggregate.
Earnings season provides a reminder of the strength of corporate America but uncertainty could knock things back in their absence.
Stock markets have risen to new highs despite geopolitical tensions and a jump in energy prices. However there is a growing risk that rising bond yields, along with a slowing economy or inflationary pressures, could trigger a stock market correction, according to Goldman Sachs Research.
As mentioned above, the main reason equities are making new highs is because of robust earnings growth. Stock market gains reflect the ongoing expansion in the global economy and the extraordinary growth in technology-and energy-related earnings.
But rising bond yields could pose a challenge to equity gains. After years of ultra-low interest rates, long-term bond yields have increased significantly. The yield on the 30-year US Treasury has moved above 5%, reaching its highest level since 2007. Yields of similar maturity bonds in Germany, Japan, and other major markets now range between 3.5% and 6%.
The market moves have caused the correlation between equities and bond yields to turn negative—stocks have climbed as bonds have declined in price. Rising bond yields have also compressed equity risk premiums, meaning investors are being paid less to take on the additional risk of owning stocks instead of risk-free assets like government bonds.
Economic Reports of Note (All Times EST):
Monday
U.S. Markets Closed in Observance of Memorial Day
Tuesday
8:30 am – US: Chicago Fed National Activity
9:00 am – US: House Price Index10:00 am – US: Conference Board Consumer Confidence
10:30 am – US: Dallas Fed Manufacturing Business Index
11:30 am – US: 3 & 6-month Bill Auctions
1:00 pm – US: 2-year Note Auction
10:00 pm – NZ: RBNZ Interest Rate Decision
Wednesday
7:00 am – US: Mortgage Data
8:15 am – US: ADP Employment Change
8:55 am – US: Redbook
10:00 am – US: Richmond Manufacturing Index
10:30 am – US: Dallas Fed Services Revenues
1:00 pm – US: 5-year Note Auction
3:55 pm – US: Fed Governor Cook Speaks
Thursday
8:10 am – US: Building Permits
8:30 am – US: PCE
8:30 am – US: GDP
8:30 am – US: Durable Goods
8:30 am – US: Personal Income & Spending
8:30 am – US: Weekly Jobless Claims
8:55 am – US: FOMC Member Williams Speaks
10:00 am – US: New Home Sales
10:00 am – US: Dallas Fed PCE
11:30 am – US: Atlanta Fed GDPNow
11:30 am – US: 4 & 8-week Bill Auctions
12:00 pm – US: Crude Inventories
1:00 pm – US: 7-year Note Auction
Friday
8:30 am – CAN: GDP
8:30 am – US: Retail & Wholesale Inventories
8:30 am – US: Goods Trade Balance
9:10 am – US: FOMC Member Bowman Speaks
9:45 am – US: Chicago PMI
