May felt like a repeat of April. The conflict in the Middle East continued, and negotiations continued to reopen the Strait of Hormuz. There has been dialogue between Washington and Tehran, but with plenty of hurdles. Meanwhile, investors have largely sidelined stagflation risk from supply disruptions and remain focused on the structural developments in artificial intelligence (AI) and semiconductors. This helped U.S. equity markets reach all-time highs. Taiwan and South Korean equities have benefited too.

The government bond market has been more conscious of inflation risk, and the possibility that central banks could turn more hawkish, which brought short-end yields higher. At some point, the joyous stock market and the bond market’s frown would need to converge. Logic and historical precedents are in stock investors’ corner, but the shadow of disruptions should not be ignored.

Falling oil stock, rising stock market

The closure of the Strait of Hormuz is entering its fourth month, and negotiations to extend the ceasefire and reopen the Strait seem to be making progress. Yet pledges in recent weeks to reopen this critical shipping channel have not been fulfilled, so we would still need to see a solid pickup in shipping data through the Strait to be convinced that normality is slowly returning.

In this best-case scenario, oil prices are expected to ease and settle around USD 80–90 per barrel, instead of falling to the pre-war level of USD 60–70 per barrel. This is because resuming oil and gas exports will take several weeks, and economies would need to replenish inventories to meet summer demand. Moreover, shipping companies may still face elevated insurance premiums, as uncertainty in the Middle East is not completely resolved.

If the Strait remains closed for an extended period, further declines in inventories could eventually force a cutback in economic activity. Currently, the supply cutback from the conflict is around 14 million barrels per day, or 13.5% of pre-conflict output. This would imply that short-term inflation concerns could shift toward a stagflation worry. This poses an even greater dilemma for central banks.

As the European Central Bank (ECB) prepares for a rate hike in June, the U.S. Federal Reserve (Fed) is still in a holding pattern, even though a growing number of Federal Open Market Committee (FOMC) voting members are hinting at the need to raise rates if inflation expectations start to move higher. April consumer price index (CPI) and personal consumption expenditures price index (PCE) deflator data unsurprisingly showed a jump in headline inflation due to higher gasoline prices, but even core inflation is slowly creeping up. On balance, we still don’t see the Fed rushing to raise rates, especially if supply disruptions are easing. However, a rate cut later this year would be off the table for now, given elevated energy prices for the rest of the year.

Corporate earnings give investors something to cheer about

The first quarter of 2026 delivered a solid earnings season, with robust growth and widespread positive surprises in U.S. and Asian equity markets. While the ongoing AI buildout remains a significant structural tailwind, investor focus is increasingly shifting toward monetization and the sustainability of this momentum.

U.S. equity markets have staged a strong recovery, with the S&P 500 rebounding from a 9% drawdown to reach all-time highs following strong earnings. The 1Q26 earnings season was notable, with 85% of companies beating expectations—the highest share since 2Q21 and well above the 73% long-term average.

Market leadership is evolving as capital expenditure (capex) flows down the AI supply chain. Semiconductors have been a standout, posting 97% year-over-year (y/y) earnings-per-share (EPS) growth, significantly outperforming the 8% growth seen among hyperscalers. However, the semiconductor industry’s success remains tethered to hyperscalers, who must effectively monetize their massive investments to justify continued demand for high-end chips.

Despite these requirements, hyperscalers show resilience, supported by strong cloud sales growth and efficiency gains, even as they commit to heavy capital spending in 2026. Beyond tech, financials have benefited from elevated capital markets activity, while industrials have gained from demand for electrical equipment and data center infrastructure.

Asian equities have enjoyed a sharp rebound, delivering an outsized 16.3% year-to-date return in U.S. dollar (USD) terms, outperforming most developed markets. This performance is largely fueled by the technology sector, with leading tech names contributing significantly to the region’s 53.6% y/y earnings growth.

The Asian AI hardware value chain—including foundries, memory manufacturers and semiconductor production equipment (SPE) suppliers—has seen earnings more than double y/y. The sector continues to face a supply–demand imbalance, with persistent bottlenecks in advanced logic chips and memory. Crucially, this strength is broadening: demand for AI data center infrastructure has lifted earnings for industrial and electrical component makers, while select base-metal miners are also seeing benefits. Analysts remain optimistic, with consensus estimates pointing to 36.8% earnings growth for 2026, supported by the strong 1Q26 results.

The primary question for both regions remains the durability of AI-driven momentum. In the U.S., “picks and shovels” opportunities across the data center infrastructure stack—including CPUs, memory and cooling—are increasingly central to the AI ecosystem, though higher component costs are beginning to impact consumer electronics pricing.

In Asia, this broadening dynamic suggests that investors may find more sustainable value by looking beyond headline tech names to the wider AI value chain, which offers both structural tailwinds and geographic diversification. Ultimately, as market concentration in leading names intensifies, investors in both regions must balance the potential for continued growth against the risks of increased volatility and the necessity for downstream monetization to validate these high-valuation environments.

Global economy

• The market remained focused on the Fed’s leadership transition and its implications for the policy outlook, as Kevin Warsh became the new Fed Chair. Warsh’s term as Chair will run through May 21, 2030, and his Board term through January 31, 2040. The transition came alongside the April FOMC minutes, which showed policymakers divided over whether to retain easing-bias language, as persistent inflation and uncertainty around the economic impact of the Middle East conflict kept open the possibility of a longer period of restrictive policy.
  (GTMA P. 24, 25, 26, 27)
• The ECB came into focus as inflation picked up across most of the eurozone’s largest economies, reinforcing expectations for a June rate hike. France, Italy and Spain saw headline inflation rise, driven largely by higher energy and transport costs, while Germany’s headline rate eased but core inflation increased. Markets are pricing in a 25-basis point (bp) ECB hike in June, with further tightening expected by September, as policymakers debate whether the energy shock will remain temporary or become embedded in broader inflation. In the UK, the Bank of England was more cautious, with Governor Bailey signaling no rush to hike given weak growth and already tighter financial conditions.
  (GTMA P. 14, 15, 16, 17)
• In China, April activity showed a broad-based moderation—retail sales weakness was led by auto sales, investment dragged by the real estate sector and production also moderated. That said, external demand remains the key pillar of strength, as exports rebounded during the month and industrial production was also lifted by an acceleration in high-tech manufacturing. As such, fiscal spending was generally more patient, especially following a strong 1Q.
  (GTMA P. 4, 5, 6, 7)
• Japan’s gross domestic product (GDP) expanded 0.5% quarter-over-quarter (q/q) in 1Q, with strength across all expenditure components, as sustained wage growth and government subsidies helped boost economic activity, though expectations of supply chain disruption could weigh on upcoming prints. Announcements were also made for a supplementary budget to fund energy-related subsidies, with details to be finalized in the coming weeks.
  (GTMA P. 13)

Equities

• Global equities advanced again in May, building on April’s strong recovery, with the S&P 500 and Nasdaq closing the month at fresh record highs. AI remained the dominant market driver, supported by continued enthusiasm around compute demand, capex plans, semiconductors and memory stocks. 1Q earnings also provided support, with S&P 500 companies delivering strong earnings growth. Tech was the clear sector leader, while software, hardware, industrial metals, airlines and life sciences also outperformed.
  (GTMA P. 30, 31)
• Energy, financials, utilities, staples, real estate and some consumer- and rate-sensitive stocks lagged, reflecting ongoing concerns around inflation, consumer stress and higher yields.
  (GTMA P. 29)
• Asian equities also rallied sharply, sending the MSCI Asia Pacific ex Japan index to a fresh record high by month-end. Gains were led by AI-linked markets, with South Korea’s KOSPI up 28% and Taiwan’s TAIEX up 15%, while Japan’s Nikkei 225 rose 12% and outperformed the broader TOPIX. China was mixed, with mainland markets posting modest gains but the Hang Seng Index slightly lower, as stronger exports and industrial activity were offset by soft consumption, weak credit data and continued property pressure.
  (GTMA P. 37, 38, 39, 40, 41, 42)

Fixed income

• U.S. Treasury (UST) yields were slightly higher over the month, with yields on the 2-year and 10-year up by 11 bps and 5 bps, respectively. Concerns over a re-escalation in the Middle East in the first half of the month, coupled with a rise in Brent oil prices, were later pared back on rising market expectations of an agreement between the U.S. and Iran. However, macro fundamentals continue to point to resilience in the labor market and increasing signs of a hawkish FOMC, with markets now pricing in a 15-bps rate hike by the end of this year.
  (GTMA P. 56, 57, 61)
• Credit spreads narrowed further over the month, as the latest earnings results showed broad-based strength across corporate fundamentals amidst geopolitical concerns. Global investment grade and high yield bonds rose 0.6% and 0.7%, respectively, and spreads narrowed by 5 bps and 11 bps, respectively, remaining near the tight end of the historical range.
  (GTMA P. 63, 64, 65)

Other financial assets

• Oil prices moved lower as investors focused on reports that the U.S. and Iran were nearing a framework memorandum of understanding that could extend the ceasefire by 60 days and potentially reopen the Strait of Hormuz. WTI Crude Oil fell 20% and Brent Crude fell 15% over the month. While unresolved issues around Iran’s nuclear program and U.S. President Trump’s red lines on Hormuz kept geopolitical risk in focus, the prospect of easing supply disruption outweighed those concerns.
  (GTMA P. 72, 73, 74, 75)
• The USD partially gained on hawkish expectations, with the DXY rising 0.9% to 98.9 over the month. Most European and Asian currencies declined, with the EUR down 0.5%, the GBP down 0.8 %, the JPY down 1.6% and the KRW down 1.6%. Notable exceptions were the AUD, up 0.1%, as the central bank embarks on a more hawkish interest rate path, and the CNY, up 1.0%, as policy may gradually balance external strength against soft domestic activity.
  (GTMA P. 69, 70, 71)

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