MONTHLY MARKET MUSINGS

May 2026

April Rally Takes Root

Despite the Iran war and ongoing tensions continuing with no clear resolution yet, North American markets managed to post a strong performance in April. While the uncertainty remains, the markets have increasingly shown a willingness to look past the near-term geopolitical risks as both sides are seeking a conflict resolution which allow each to walk away and declare victory in some capacity.

The current macroeconomic backdrop is characterized by sticky inflation and resiliency in U.S. employment. Together, these variables have caused a shift in the market view on the direction and pace of U.S. monetary policy. Expectations have changed from a more dovish stance and hopes for multiple rate cuts as early as late summer to the sentiment now resetting expectations to only possibly one rate cut in 2026. The change in sentiment was evident in U.S. yields, which saw U.S. 10-year treasuries climbing higher as the "higher-for-longer" tone took over. The traditional framework of disinflation leading to aggressive rate cuts and a tailwind for equities seems overly simplistic in the current environment. Rather all the recent contributing factors are likely making for a less linear path forward and a more nuanced trajectory for interest rates.  

The technology sector came back into favour following several months where we saw rotation away from tech names. This led to a strong outperformance by the Nasdaq Composite Index, which outpaced both the S&P 500 Index and the S&P/TSX Composite Index. More specifically, semiconductors saw a strong resurgence, while financials also experienced meaningful upside performance. Energy also remained in focus as oil prices continued to swing wildly due to the conflict.

The early stages of the quarterly earnings season have produced mostly positive results. One aspect that seems clear is that the market is more focused on forward-looking guidance and commentary than headline results. Overall, company fundamentals have been solid with margins showing stability, consumer demand remaining consistent across sectors, and corporate balance sheets still quite healthy overall. The quarterly conference calls have highlighted several recurring topics and concerns across many sectors. One key topic is AI and the large capital expenditures of hyperscalers. Many continue to ask when it will begin to have a significant impact on the bottom line. The market seems to be a tad bit impatient with this, which is perhaps a symptom of our current societal trend for immediate gratification. For some of the companies that are further down the supply chain, monetization of AI will take longer to materialize and the sooner the market comes to terms with this, the more accurate the expectations will be. Supply chain and energy price volatility was another topic of choice. Ultimately, the length of the war will determine how much impact this has on input costs. A prolonged conflict will have a more drawn-out pressure on costs while a shorter-lived one will result in transitory spikes in costs which will fade as shipping route and energy costs revert to pre-war prices.

As noted above, consumer resilience has remained mostly stable and consumer spending levels are quite high. What has been seen however is that while high-end spending has remained constant, lower-income households are trading down towards more value brands and putting off big-ticket item purchases. This shouldn't come as a surprise given the impact inflation has had on more essential items such as gas and groceries. Typically, this tends to benefit major retailers with strong in-house brands as these proprietary labels and products tend to carry higher margins despite the lower price points on the products.

Market breadth has been a topic of conversation as some are suggesting that we are beginning to see broader participation and contribution to returns across sectors and industries[1]. The group of stocks known as the Magnificent Seven[2] have accounted for a large portion of the market's returns over the past several years, but an improvement in market breadth and a wider variety of sectors and market capitalization sizes driving returns would be a welcome development. This is mostly because it is a key sign of a healthy bull market and would support the view for positive returns in the coming quarters. In an environment where breadth improves, diversification becomes increasingly important as market leadership spans across industries and sectors. From a portfolio construction perspective, improving market breadth creates an opportunity for active managers to generate alpha by making sector and factor allocation decisions while avoiding overconcentration.

As we head into the coming months, inflation will remain a key determinant of the market's sentiment and will be a driver of volatility. The hand-off of the U.S. Federal Reserve to the new Chair will be highly scrutinized. Markets do not move in straight lines and a war, sticky inflation, a transition at the U.S. central bank will continue to keep volatility alive and well. That said, the economic picture is still constructive overall, earnings remain strong and the U.S. consumer is healthy and resilient all of which should bode well for equities and investors in the months to come.

JAY SMITH, CIM®, FCSI®

Senior Portfolio Manager & Senior Wealth Advisor    

jay.smith@cibc.ca

BRAD BROWN, MBA, CFA®
Portfolio Manager & Associate Investment Advisor

brad.brown@cibc.com