Another great month! The S&P500 gained another 5.15%, building on last April's climb (https://ycharts.com/indices/%5ETSX/level#). The TSX however, saw some drag but still managed to pump out a 2.37% gain. The stock market rally leading into and throughout May 2026 was largely fueled by an impressive blend of robust corporate earnings, a significant surge in capital expenditures for artificial intelligence, and a pivotal geopolitical de-escalation in the Middle East.  

Despite ongoing macroeconomic challenges, including persistently high interest rates and stubborn inflation, investors essentially ignored short-term concerns and instead focused on strong corporate fundamentals. The rally gained momentum from several major catalysts. First, the exceptional Q1 earnings season was the primary driver, as S&P 500 earnings grew 28% year-over-year, surpassing Wall Street’s initial expectations of roughly 14% (https://middlefield.com/may-2026-market-commentary/). The median company posted its strongest quarterly growth rate in a decade, outside of the post-pandemic recovery, and an impressive 84% of S&P 500 firms beat their earnings-per-share estimates (https://www.communityamerica.com/blog/2026/may-2026-market-insights).  Furthermore, S&P 500 companies achieved a blended net profit margin of 13.4%, marking a 15-year high and demonstrating their ability to maintain profitability despite rising input costs https://insight.factset.com/sp-500-reporting-highest-net-profit-margin-in-more-than-15-years-1).

Another major factor was the ongoing AI infrastructure boom. Optimism about artificial intelligence shifted from speculative excitement to tangible financial results, with large tech companies and semiconductor leaders making massive capital investments. Analyst consensus tracked a record $754 billion in capital expenditures for the biggest tech companies in 2026, an 83% increase from the previous year. This surge in spending not only benefitted software and chip manufacturers but also created substantial earnings momentum for tech hardware, industrials, and utilities supporting the growth of AI data centers (https://www.goldmansachs.com/insights/articles/s-and-p-500-forecast-to-climb-as-earnings-growth-powers-stocks-higher). 

Geopolitical developments also played a crucial role, particularly the semi quasi ceasefire in the Strait of Hormuz, which had temporarily closed the vital shipping lane and drove Brent crude oil prices between $90 and $120 per barrel. The early-spring conflict remained intact into May, signaling some stabilization. A highly anticipated summit among global leaders in mid-May offered a diplomatic framework that investors hoped would eventually fully reopen the Strait. This easing of peak pessimism enabled equity markets to rapidly normalize and factor in a return to global growth (https://middlefield.com/may-2026-market-commentary/).

Resilient domestic economies and careful policy adjustments further strengthened the rally. Even as the U.S. Federal Reserve delayed expectations for imminent interest rate cuts, and some market participants even prepared for a potential rate hike, equity markets remained steady. Solid economic indicators, such as U.S. GDP growth tracking at 2.0% and strong labor and retail sales, reassured investors that the economy could withstand higher borrowing costs (https://www.communityamerica.com/blog/2026/may-2026-market-insights). Despite elevated oil prices putting pressure on consumer discretionary spending, they simultaneously bolstered large-cap energy stocks, especially in Canada where international players aggressively pursued scalable natural gas assets. This provided a strong structural foundation for the broader indices (https://middlefield.com/may-2026-market-commentary/).

The bigger news though, in my opinion, is the Federal Reserve transitioning to a new phase of leadership. With Kevin Warsh stepping in as the incoming Chair as Jerome Powell’s tenure, spanning from 2018 to 2026, comes to an end. Such transitions at the Federal Reserve are infrequent but are nonetheless significant, as they have broad implications for interest rates, financial markets, and long-term investment planning. Historical evidence demonstrates that market performance has remained robust across various Fed Chairs, even during periods marked by economic crises, such as recessions, the 2008 financial crisis, and the pandemic. Since 1979, the S&P 500 has delivered notable long-term gains irrespective of leadership changes at the Fed. A critical insight from this historical record is that while short-term volatility frequently accompanies periods of transition, long-term outcomes for investors have generally remained positive (https://www.wisdomtree.com/us/insights/blog/the-market-moves-in-regimes-a-historical-look-at-sp-500-price-cycles).

The new chair, Kevin Warsh, is a former Fed Governor who was appointed at the age of 35 and brings experience from his tenure at Morgan Stanley and his role as an economic advisor to President George W. Bush. He was also an active participant in the Federal Reserve’s crisis-era decision-making during 2008, when Ben Bernanke was Federal Reserve Chairman.  Warsh has historically expressed criticism of policies involving prolonged low interest rates and the maintenance of an expansive Federal Reserve balance sheet. His policy orientation suggests a preference for a more disciplined and restrained approach to central banking.

One notable area of potential change under Warsh’s leadership is the measurement of inflation. There has been speculation regarding a possible shift from the use of Core Personal Consumption Expenditures (Core PCE), which excludes food and energy, to a Trimmed Mean PCE, which removes extreme price movements from the calculation, ie. the removal of outlier data.  This methodological change could have significant implications for how aggressively the Federal Reserve adjusts interest rates in response to inflationary pressures. In terms of communication strategy, Warsh may reduce both the frequency of press conferences and the amount of forward guidance provided to markets. A reduction in communication could, in turn, contribute to heightened market volatility surrounding Federal Reserve decisions.

There is some relief though, Jerome Powell is going to stay as a voting member.  I firmly believe that this will help avoid institutional degradation and sovereign risk. Jerome's presence will limit further polarization and stop these institutions from being dragged into the political mud. The historical record, exemplified by the Volcker era, underscores that policy discipline maintained independently of political pressures tends to yield more favorable long-term economic outcomes.

So, in closing, May our stocks keep climbing, May the algorithms stay happy, and May the new Fed Chair's first official policy be: Whatever Jerome was doing, just copy and paste! LOL. Have a pleasant June.

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