June 4, 2026

Record Highs Backed by Earnings Growth

Equity markets continued their advance in May, with all three major U.S. indexes reaching new all-time highs. The S&P 500 gained 5.2% during the month, while the Nasdaq and Russell 2000 also finished at record levels. The move higher extended what has become one of the strongest two-month rallies of the current bull market.

The bull market that began in the fourth quarter of 2022 remains firmly intact. While periods of volatility are inevitable, the market continues to be supported by a combination of strong corporate earnings, resilient economic growth, and significant investment in artificial intelligence and related infrastructure.

The market’s performance over the last two months has been particularly impressive. The S&P 500 advanced roughly 16% during April and May, a gain matched only a handful of times since 1950. Much of the rally has been driven by semiconductor and AI related companies, as investors continue to reward businesses benefiting from the ongoing buildout of data centers, cloud infrastructure, and next generation computing technologies.

Importantly, the rally continues to be supported by fundamentals rather than speculation alone. According to FactSet, first quarter earnings for the S&P 500 grew 28.6% year over year, the strongest growth rate since late 2021. At the same time, analysts have continued raising forward earnings estimates, resulting in one of the largest upward revisions to projected profits in several years.

As we often remind clients, earnings are the foundation upon which long-term stock market returns are built. While headlines and sentiment can drive short-term market movements, rising corporate profits remain the most important driver of stock prices over time.

One area worth monitoring is the narrow leadership of the current rally. While the major indexes reached new highs during May, much of the advance continues to be driven by a relatively small group of technology and semiconductor companies. Nearly 80% of the S&P 500’s gain this year has come from just 10 stocks, highlighting the market’s continued reliance on AI-related leaders. While this concentration has fueled impressive returns, it also increases the likelihood of periodic volatility.

Source: Bespoke Investment Group

Although concentrated leadership can create concerns about market breadth, there are also encouraging signs beneath the surface. Small cap stocks, represented by the Russell 2000, reached new all-time highs during May as well. We believe broader participation across sectors and company sizes could emerge if inflation pressures continue to ease and geopolitical tensions begin to stabilize.

The economic backdrop remains supportive. Consumer spending continues to grow, business investment remains strong, and companies are investing heavily in productivity enhancing technologies. The Atlanta Fed’s GDPNow model currently projects second quarter economic growth near 3%, while the labor market remains remarkably resilient. According to Schwab, the unemployment rate has remained between 4% and 4.5% for 22 consecutive months.

At the same time, inflation remains the primary risk to the current market outlook. Elevated oil prices resulting from the conflict with Iran, along with lingering tariff related pressures, have kept inflation above the Federal Reserve’s long-term target. While recent inflation readings have shown some signs of improvement, sustained progress will likely be necessary before policymakers become more comfortable easing monetary policy.

The conflict in the Middle East also remains an important variable. Thus far, financial markets have largely looked through the uncertainty, focusing instead on earnings growth and economic resilience. However, a significant escalation that pushes energy prices materially higher could place additional pressure on both inflation and consumer spending.

Looking ahead, investors are also preparing for a series of potentially historic public offerings. SpaceX is expected to make its public market debut in June, with additional AI related companies likely to follow in the coming quarters. These offerings reflect the enormous amount of capital flowing toward advanced technologies that continue to reshape the global economy. The size of the capital flow could lead to significant volatility in the stock market in June.

As we enter the second half of the year, our outlook remains positive. Valuations are no longer inexpensive, and risks certainly remain, particularly surrounding inflation and geopolitics. However, the combination of strong earnings growth, a healthy labor market, resilient consumer spending, and ongoing investment in transformative technologies continues to provide a favorable backdrop for equities.