MAY 2026 MARKET INSIGHTS

By: DOUGLAS A. RILEY, CFA, PORTFOLIO MANAGER

In April, the US military operation against Iran took a strategic turn as the Trump administration pivoted from intense bombing of the Iranian interior to the imposition of a naval blockade against ships transiting Iranian ports following the announcement of a Cease Fire. Without the ability to sell oil, the Iranian regime will be unable to fund additional arms purchases. Iran’s economy is in freefall with raging inflation and surging unemployment while the civilian population faces widespread goods shortages. The Cease Fire has already been extended, and peace negotiations are supposedly ongoing. President Trump appears to have a drawn a line in the sand, insisting that Iran have zero nuclear weapon capability and has rejected multiple purported offers.

Iran’s strategy seems to be to wait Trump out, hoping he will cave to get a peace “deal.” Will the Iranian population hold out long enough to break Trump’s resolve, or will there be a change in attitude that forces a leadership transition to a far less hardline regime? Should Trump cave on the nuclear issue it will be a bad look and Operation Epic Fury is likely to be viewed more as Operation Epic Failure. Recurring reports about a proposed deal continue to feed financial market volatility, with oil, interest rates and the dollar whipsawing. Equities were the outlier, as stocks staged an epic rally with the S&P 500 Index surging almost 14% from March 30^th through April month-end^[1].

Leading the charge were semiconductor and memory stocks as investors turned to the AI/Data Center theme with a near singular focus. The Semiconductor Group, which includes 19 stocks, jumped 27% in April and contributed nearly 40% of the total benchmark gain for the month^[1]. With that outperformance added to previous gains in the first quarter, the group now makes up 16.7% of the S&P 500 Index by weight, which is notably larger than any sector in the benchmark outside of Tech and is 2% greater than the weight of the entire Staples, Energy, Materials, Real Estate and Utilities sectors, combined^[1]! Amazingly, as of May 1^st, three semiconductor stocks (Nvidia, Broadcom, Micron) sport a combined market capitalization equal to the entire Financials sector^[1]. All of this helps drive home the reality that April saw a return to a narrow, narrative-driven market, a step backward from the broadening progress witnessed over the prior six months. In April, the top 20 contributors accounted for 79% of the total benchmark return^[1]. All but two of those were technology or industrial names linked to the AI/Data Center/Power theme^[1].

This month we are introducing a table showing returns for the various Catholic benchmarks used in our strategies. We hope you find this less cumbersome and more helpful than reading through text citing returns. Unsurprisingly, given the above discussion, growth stocks were the top performers in April (including a rebound in the Mag-7, +14.9%) though they remain laggards year-to-date^[1]. Non-US stocks had a strong month in April also, but still trailed US equities^[1]. Real Estate is having a sneaky good year thus far, with April’s jump adding to the first quarter gain to put the REIT index at the top of the year-to-date returns list, followed by US Small-Caps, with Large-Cap Growth at the bottom^[1]. The US Bond indexes registered good performances in April in the face of significant volatility and somewhat higher rates, as investment-grade spreads tightened about four basis points versus the end of March^[1]. On the riskier end of the spectrum, High-Yield spreads tightened more dramatically^[1]. The US 10-Year treasury bond finished the month with a yield of 4.37%, up five basis points from March 31^st^[1]. The rise in yields can be at least partly attributable to concern over a reversal of the favorable inflation trend due to the energy shock. The US dollar fell slightly but remains above the lows prior to the commencement of hostilities in the Middle East and trades roughly where it was at the end of 2025^[1]. The cost of the war is likely to erase the positive budget impact from tariff collections. Gold and Silver both fell slightly as they continued to digest previous huge gains^[1]. Finally, oil (WTI) closed April at $105.1 per barrel versus $101.4 at the end of March^[1]. But that modest rise belies considerable volatility as crude traded as high as $113 in early April before dropping as low as $84 after the Cease Fire announcement^[1]. Summing it up: the dollar, gold, silver and treasury bonds down; stocks, real estate and oil up^[1].

Bloomberg Catholic Values Indices	Period Total Return
	Month %	QTD %	YTD %
Large Cap 1000 Index	10.79	10.79	5.90
Large Cap 1000 Growth	12.84	12.84	4.03
Large Cap 1000 Value	5.05	5.05	11.82
Small Cap 2000 Index	10.60	10.60	12.30
World ex-US Index	10.39	10.39	9.70
US Corporate IG Bond Index	0.47	0.47	-0.06
US Short-Term Gov/Credit Bond Index	0.27	0.27	-0.41
US 3000 REIT Index	9.34	9.34	13.61

The initial estimate of first quarter GDP came in at an annual growth rate of 2.0%, shy of the 2.3% consensus expectation but a pickup from a downwardly revised 2025 Q4^[1]. More than 75% of the increase was driven by capital spending on AI and data centers and associated power needs, again highlighting the concentrated nature of growth and validating the market’s narrow focus. Growth in Personal Consumption was slightly better than forecast, at 1.6%, while the Core PCE Price Index, up 4.3%, showed accelerating inflation^[1]. April’s Core PPI and CPI indexes came in lower than consensus YoY, but both ticked higher from the previous readings^[1]. Labor data continues to point to a stable jobs market. March Non-Farm Payrolls rebounded sharply from February, especially Private Payrolls (+186k) and Average Hourly Earnings growth continued to print at or slightly above average inflation^[1]. Initial Jobless Claims came in well below consensus on April 30^th, with the four-week moving average flat compared to the start of the month^[1]. Consumer sentiment improved in March, as well^[1].

Nearly all the ISM and PMI survey indexes posted above-50 readings for March, indicating expanding business activity^[1]. But the prices paid components showed sharp increases^[1]. And with elevated energy inputs beginning to show up more broadly, inflation pressure is likely to build. The Fed held steady at its last meeting, with a couple of governors apparently irked at the continued easing bias of certain members. Based on the CME’s Fed Watch, market participants currently assign an 80% chance of the Fed Funds rate holding steady at its current 3.50%-3.75% level for the remainder of the year.

Equity markets are currently buoyed by solid earnings growth and positive revisions. Thus far only a small number of companies reporting first quarter earnings have guided negatively. Provided that bond yields remain contained, equities should continue trade constructively. But a surge in inflation pushing the 10-year yield towards 5% and/or a hike in the Fed Funds rate could derail the bull market, at least temporarily. We do believe that a settlement of hostilities would ultimately lead to broader economic strength on falling energy prices and, accordingly, broader participation from equities beyond the AI/Data Center narrative.

[1] Source: Bloomberg