Inflation, an unresolved war, and bubble warnings could not stop May's record run
Wall Street ended May with its longest winning streak in more than two years, even as a widening Middle East conflict threatened to derail the rally heading into June.
According to Reuters, the S&P 500 gained 5.15 percent in May, hitting record closing highs 11 times during the month.
That accounted for half of all trading days, and the index notched its ninth consecutive weekly gain, its longest such streak since December 2023.
The Nasdaq climbed 8.36 percent over the same period, while the Dow Jones Industrial Average rose 2.78 percent.
On Friday alone, BNN Bloomberg reported the S&P 500 added 16.43 points to close at 7,580.06, the Dow gained 363.49 points to 51,032.46, and the Nasdaq added 55.15 points to 26,972.62.
Technology stocks drove the bulk of the gains.
Within the S&P 500, the sector rose more than 15 percent in May while most other sectors lost ground.
Dell Technologies led all S&P 500 stocks Friday, surging 32.8 percent after raising its full-year profit and revenue forecasts and citing powerful demand for AI computing, Reuters reported.
Microsoft climbed 5.4 percent, Hewlett Packard Enterprise gained 12.6 percent, and Super Micro Computer rose 11.6 percent.
"There's definitely euphoric sentiment in the market around AI. The rally has really been driven by earnings," Ohsung Kwon, chief equity strategist at Wells Fargo, told Reuters.
The AI frenzy has pushed valuations higher.
The S&P 500 is now trading at about 21 times expected earnings over the next 12 months, above its 30-year average of 17, according to FactSet data cited by the Financial Times.
The Philadelphia Semiconductor index has soared 81 percent since the start of 2026, on pace for its best year since 1999, the FT reported.
Not everyone is convinced the rally is sustainable.
Michael Burry, known for his bet against the US housing market before the 2008 financial crisis, has repeatedly warned that Wall Street's AI enthusiasm resembles the dotcom boom, the FT reported.
Billionaire hedge fund manager Paul Tudor Jones called the market "a crazy, crazy time" in a CNBC interview.
He said conditions resemble late 1999, adding: "If I had to pick a period, we've got another year or two to run."
The Nasdaq's dotcom peak was March 2000.
Others pushed back.
Federated Hermes deputy chief investment officer Steve Chiavarone told the Financial Times "we do not believe that we're in a bubble," arguing current valuations fall far short of one.
Goldman Sachs chief US equity strategist Ben Snider called typical bull market risks, including speculative mania, margin contraction and Fed rate hikes, "absent," and expected the rally to continue.
Companies in the S&P 500 reported overall profit growth of 28 percent for the most recent quarter, according to FactSet data cited by BNN Bloomberg.
"The rally has been largely tech-led and supported by resilient earnings, but the key question is whether it can be sustained," Angelo Kourkafas, senior global investment strategist at Edward Jones, wrote in a research note.
The rally unfolded against a backdrop of rising inflation and an unresolved war.
The Personal Consumption Expenditures Price Index, the Federal Reserve's preferred inflation measure, rose 3.8 percent in the 12 months through April, its largest increase since May 2023, driven largely by higher energy prices from the Iran war, Reuters reported.
Fed officials including Kansas City president Jeffrey Schmid warned the energy shock may not be temporary, while vice chair for supervision Michelle Bowman said persistent inflation might require tighter monetary policy.
Hopes for a ceasefire extension briefly pulled oil prices lower Friday, but those gains reversed sharply over the weekend.
Oil jumped more than 2 percent in late Sunday trading after Israel ordered troops to push further into Lebanon in its battle with Iranian-backed Hezbollah.
Brent futures rose to US$93.28 a barrel and US crude climbed to US$89.73, according to Reuters.
Israeli prime minister Benjamin Netanyahu said Sunday he had instructed the Israel Defense Forces to expand their manoeuvre in Lebanon despite the ceasefire declared in April, CNBC reported.
The escalation dimmed hopes that Washington and Tehran were nearing a ceasefire extension.
US president Donald Trump had said Friday he would soon make a "final determination" on a proposed deal, Reuters reported. Iran said the agreement had not been finalised.
Goldman Sachs said risks to its fourth-quarter 2026 Brent and WTI forecasts of US$90 and US$83 per barrel were "two-sided," warning that while persistent supply disruptions could push prices higher, weakening demand from China and Western Europe posed meaningful downside risk, CNBC reported.
IG analyst Tony Sycamore cautioned that mines laid in the Strait of Hormuz could slow any reopening even after a deal is reached.
"Even if an agreement is reached, it won't deliver a flood of supply," Sycamore said in a note cited by Reuters.
Money markets now expect the Fed to hold rates steady for the rest of the year, with a greater probability of a 25-basis-point hike in December than a cut.
Broadcom's quarterly results, due Wednesday, will serve as another test for the AI trade.
"If you were to get a hot employment report alongside still-rising inflation numbers, I think it continues to change the outlook for Fed policy," Liz Ann Sonders, chief investment strategist at the Schwab Center for Financial Research, told Reuters.
