Markets Broaden as Geopolitical Risks Remain Fluid

May 26, 2026

Executive Summary

Markets continue to demonstrate resilience as easing energy prices, strong corporate earnings, and sustained AI-driven investment support investors’ risk appetite. Encouragingly, market participation showed signs of broadening beyond a narrow group of mega-cap technology leaders, a constructive signal for the durability of the recent rally.

At the same time, the broader backdrop remains increasingly complex. Inflation pressures are beginning to re-emerge, geopolitical risks remain elevated despite tentative diplomatic progress in the Middle East, and the Federal Reserve faces a more complicated policy environment as it balances resilient growth against energy-driven inflation risks and an increasingly uncertain rate outlook.

Key Takeaways:

• The S&P 500 posted its eighth consecutive weekly gain, while improving breadth and new highs in the equal-weighted S&P 500 suggest broader market participation may be returning.
• AI-related earnings, investment, and infrastructure spending continue to provide a major tailwind for corporate profits and market leadership.
• Economic data point to an increasingly bifurcated economy, with manufacturing and AI-related investment remaining strong while services activity and lower-income consumers show signs of strain.
• Inflation pressures are firming again, driven by supply-chain disruptions, tariffs, elevated energy prices, and renewed geopolitical uncertainty.
• The Federal Reserve remains cautious as policymakers debate the path forward, while incoming Chair Kevin Warsh inherits a divided Committee and a highly uncertain macro environment.

Financial Markets

U.S. equity markets continued to advance last week, with the cap-weighted S&P 500 posting its eighth consecutive weekly gain, the longest streak since 2023. Beneath the surface, however, market breadth improved meaningfully. The equal-weighted S&P 500 outperformed during the week and reached a new all-time high, suggesting broader participation may be re-emerging after several months of unusually narrow leadership dominated by a small group of mega-cap technology and AI-linked companies. Historically, this type of broadening has been a constructive signal for the durability of a market advance.  The stocks of mega-cap and AI-related companies have driven headline cap-weighted S&P returns for over three consecutive years.

Geopolitical developments remain a key driver of sentiment. Over the weekend, reports suggested that a potential memorandum of understanding between the United States and Iran was close, including a proposed 60-day ceasefire framework and a temporary reopening of the Strait of Hormuz. The agreement would reportedly establish a second phase of negotiations focused on Iran’s nuclear program and broader regional stabilization. However, progress remains fragile following renewed U.S. military strikes on Monday, underscoring that geopolitical risks remain elevated despite tentative diplomatic traction.

Markets are beginning the week with a constructive tone. Oil prices and Treasury yields are moving lower while equities are trading higher, reflecting investor optimism that diplomacy may ultimately reduce the risk of a prolonged energy shock and broader economic disruption.

Economics

Recent economic data continue to highlight the increasingly bifurcated nature of the U.S. economy. May PMI (Purchasing Manager’s Survey Index) data showed a sharp divergence between manufacturing and services activity alongside renewed inflation pressure. Manufacturing activity rose to its highest level since May 2022, supported by inventory stockpiling and continued industrial and AI-related investment demand, while services activity softened and came in below expectations. At the same time, supply-chain disruptions tied to geopolitical tensions, tariffs, stockpiling activity, and higher energy costs contributed to the sharpest supplier delays since August 2022, while both input costs and selling prices accelerated. Labor trends mirrored this divide, with manufacturing hiring strengthening even as service-sector employment softened amid weaker demand and rising operating costs. Overall, the data suggest the economy continues to expand, though increasingly unevenly and with inflation pressures beginning to re-emerge.

Labor and consumer data continue to reflect an economy that remains resilient on the surface, though signs of friction are becoming more visible beneath it. Initial jobless claims remained subdued at 209,000, reinforcing the broader “low-hiring, low-firing” labor-market backdrop. However, hiring trends continue to shift, particularly within technology industries, where firms have announced more than 100,000 layoffs this year as spending increasingly rotates toward AI-related investment. Consumer sentiment weakened further, with the University of Michigan’s May sentiment index falling to a record low amid rising gasoline prices and elevated inflation expectations. Still, actual spending trends remain more resilient than sentiment surveys imply, supported by low unemployment, wage growth, higher equity prices, and larger tax refunds. Even so, a more pronounced “K-shaped” economy continues to emerge, with higher-income consumers remaining relatively healthy, while lower-income households face growing pressure from rising costs and financial strain.

Policy

The Federal Reserve’s April meeting minutes reinforced a more cautious, modestly hawkish policy stance amid ongoing inflation pressures and geopolitical uncertainty. While rates were left unchanged as expected, the minutes revealed growing debate within the Committee, with several officials objecting to maintaining language that implied an easing bias and others favoring its removal altogether. Policymakers expressed concern that higher energy prices, tariffs, and supply-chain disruptions could become embedded in inflation expectations, with many indicating that additional policy firming could become necessary if inflation remains persistently above target. At the same time, some participants still viewed rate cuts as possible later this year should geopolitical tensions ease and inflation pressures moderate. More broadly, the Fed continues to balance resilient growth, stable labor-market conditions, and strong AI-related investment activity against renewed inflation risks tied to energy markets and ongoing geopolitical instability. While the outlook remains uncertain, one thing appears clear: incoming Chair Kevin Warsh will inherit a divided Committee and an increasingly complex macro environment marked by elevated energy prices, supply-chain disruptions, and growing uncertainty around the path of inflation.

Conclusion

Markets begin the week with improving sentiment as tentative diplomatic progress in the Middle East has helped ease immediate concerns surrounding energy prices and inflation. Additionally, resilient economic growth, strong corporate earnings, and continued AI-driven investment continue to provide an underlying foundation for markets. Encouragingly, stock performance has also begun to broaden beyond a narrow group of mega-cap leaders, a historically constructive signal for the rally’s durability.

Even so, the environment remains increasingly complex. Inflation pressures are beginning to firm again, geopolitical risks remain elevated, and the path for monetary policy has become more uncertain as the Federal Reserve balances resilient growth with energy-driven inflation. Markets have shifted from pricing in conflict-escalation risk to cautious optimism about diplomacy, but confidence remains fragile amid a fluid geopolitical backdrop and a narrowing margin for policy error. In this environment, diversification, quality exposure, and a disciplined long-term approach remain essential.

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