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Good Morning!
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Now let’s break down what actually moved markets this past week and what to watch next.
Market Recap
Markets pushed to fresh record highs this week, shrugging off the hottest inflation reading in nearly three years and continued flare-ups in the Middle East. It was a holiday-shortened week, with U.S. markets closed Monday for Memorial Day, but the rally rolled on regardless. The S&P 500 closed out its ninth straight week of gains, with the Nasdaq capping an 8% increase for the month of May.
The most important economic event of the week was Thursday's inflation report. The Fed's preferred inflation gauge, the PCE price index, rose to 3.8% year over year in April, the highest reading since May 2023, as the energy shock from the Strait of Hormuz continued to filter through the broader consumer basket. That headline number confirms inflation is still moving in the wrong direction. But there was a meaningful silver lining underneath it. The monthly gains in both headline and core inflation came in below economists' projections, suggesting some softness beneath the surface and giving the Fed room to stay in wait-and-see mode rather than feeling pressure to raise rates in the near term. That nuance is exactly why stocks were able to rally on what looked at first glance like bad news.
The strain on consumers, however, is becoming impossible to ignore. High gas prices pushed inflation to a three-year high while Americans saved at the lowest rate in nearly four years, with the personal saving rate dropping to 2.6% in April as households tapped their savings to keep up with rising costs. Inflation-adjusted disposable income actually fell during the month, and consumer spending barely grew. This is the central tension in the market right now: stocks are at record highs while ordinary households are getting squeezed harder every month.
The new Fed chair now owns this problem. This was the first inflation report under Kevin Warsh, who steps in with inflation flaring due to the Iran war's impact on energy prices. The central bank's earlier forecast of one rate cut in 2026 now looks increasingly unlikely given the jump in fuel costs. Markets will be watching closely to see whether Warsh treats the energy spike as a one-time shock or takes a more hawkish stance.
Oil and the Iran situation remained a persistent source of volatility. Crude swung throughout the week on conflicting headlines. Prices fell sharply midweek after Iranian state media said the country was committed to restoring commercial traffic through the Strait of Hormuz to pre-war levels within a month, though the White House denied that report as a fabrication. Later in the week, oil climbed again amid renewed military hostilities, with Iran saying it targeted an American air base in response to new U.S. strikes it called a violation of the ceasefire. By Friday, crude prices slipped again and the major averages closed at record highs, helped by a strong showing in technology.
Technology and AI names were the standout performers. The AI trade continues to be the engine carrying this market higher even as the macro backdrop grows more complicated.
What's Coming Next Week
The single biggest event is the May jobs report. The Employment Situation report is scheduled for release Friday, June 5. This will be the clearest read yet on whether the labor market is holding up under the weight of three-year-high inflation and elevated energy costs. A strong number would ease recession fears but give the Fed even less reason to cut. A weak number would raise the specter of stagflation, where growth slows while prices stay high.
The Iran negotiations remain the biggest wildcard hanging over everything. U.S. and Iranian negotiators reportedly reached a tentative deal this week to extend the ceasefire and begin new nuclear talks, though it remained unsigned as of Friday. The core sticking point continues to be the reopening of the Strait of Hormuz, which is the key to bringing energy prices down. Any concrete, durable agreement would be the single most powerful catalyst available to ease inflation and consumer pressure. Any breakdown would send oil higher and threaten the rally.
Finally, watch the bond market and any commentary from the new Fed leadership. With inflation at a three-year high and the saving rate collapsing, the path forward is genuinely uncertain. The market is betting the worst is behind us. The data over the next few weeks will tell us whether that optimism is justified.
The bottom line: stocks are at record highs and the AI trade remains strong, but inflation is at a three-year high, consumers are stretched thin, and the Iran situation is unresolved. The jobs report and any progress on a peace deal will set the tone heading into June.
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