May has been a month of momentum: AI mania overcame inflationary concerns throughout the month.
The markets reached another set of record-breaking highs driven by AI enthusiasm despite persistent fears surrounding inflation. All major indices posted new highs as capital continued pouring into the AI and technology space. Strong corporate earnings, easing geopolitical tensions, as well as optimism surrounding future Federal Reserve policy helped drive markets higher throughout May.
Although there were a few brief periods of volatility, markets quickly recovered as optimism and momentum continued to dominate trader sentiment.
Markets seem to ignore almost any negative news, while market breadth remained bullish as traders and investors continued putting money to work beyond the “Magnificent Seven.” Quantum computing, semiconductor stocks, and AI infrastructure companies were the darlings of the month. Optimism surrounding these sectors far outweighed any negative sentiment tied to inflationary pressures or broader concerns regarding overall economic growth.
Problems such as job displacement caused by future AI implementation still appear to be concerns for another day.
The Nasdaq 100 as represented by the QQQ has been the main engine of growth for the financial markets, Specifically AI, Semi-Conductor Stocks, Quantum Computing, and AI infrastructure Stocks have driven the Nasdaq to record highs despite historically high valuations.
Energy Markets Still Causing Inflationary Concerns
Perhaps the biggest concern on the current “wall of worry” remains the outlook for oil prices. Oil markets continued to experience volatility throughout May, and elevated energy prices continued driving up the cost of goods, further contributing to inflationary concerns.
However, oil has pulled back from its highs, and markets have continued functioning despite persistently elevating energy prices.
Ironically, energy companies, which have performed exceptionally well this year, under-performed technology stocks during the month of May as capital continued flowing aggressively into AI-related sectors.
Here we see the chart of the USO, the Oil ETF, the low of the month. This pullback on the price of oil has really helped to lift the markets to new highs.
The Federal Reserve and Future Interest Rate Concerns
Markets seemed to ignore the fact that the Federal Reserve may be approaching the end of its rate-cutting cycle. Inflation continues to remain the Fed’s primary concern. Meanwhile, the labor market has remained surprisingly resilient despite widespread concerns regarding workforce reductions tied to future AI implementation.
Interestingly enough, traders and investors continue focusing on the possibility of a so-called “soft landing.” We have been hearing about this soft-landing scenario since around 2023, all while markets have continued pushing toward higher and higher highs year after year.
It almost seems counterintuitive to discuss a “soft landing” while markets continue reaching record levels. Which brings me to my next point of discussion.
Valuation Concerns Begin to Surface
Although overall market sentiment remained optimistic, concerns regarding valuation became louder as the month progressed.
Some analysts pointed out that the S&P 500 is trading at historically elevated price-to-earnings multiples, particularly within the technology sector. The rapid rise in AI-related stocks sparked increasing debate over whether portions of the market may be becoming overheated.
Retail investors and market commentators increasingly questioned whether future corporate earnings growth can truly justify current valuations. While many investors remain confident that AI-driven productivity gains will support long-term profitability, others warn that expectations may have become too aggressive.
Investor Sentiment Heading into Summer
As May came to a close, trader and investor sentiment remained constructive, yet cautious, which is probably prudent under current conditions. The combination of strong earnings, AI enthusiasm, moderating energy prices, and hopes for eventual Federal Reserve easing continued to support equities.
However, markets still face several risks heading into the summer months. Inflation remains above the Federal Reserve’s long-term target, geopolitical uncertainty has certainly not disappeared (in fact, bombs, missiles, and drones are once again flying across parts of the Middle East as I write this), and elevated valuations leave very little room for disappointing earnings results.
Many analysts believe volatility could increase during the second half of 2026, especially if economic growth slows further or if AI-related optimism begins to cool.
Still, for now, Wall Street remains heavily focused on growth opportunities tied to artificial intelligence, and that narrative continues dominating both institutional and retail trader sentiment.
Final Analysis and Looking Ahead
Traders and investors should continue closely monitoring upcoming inflation reports, Federal Reserve commentary, and future corporate guidance throughout June. Continued strength in technology earnings could push indexes even higher, while any signs of a slowdown in AI investment may trigger broader market pullbacks.
The key question entering the summer remains whether corporate earnings growth can continue keeping pace with historically elevated stock valuations.
May 2026 will likely be remembered as another milestone month in the ongoing AI-driven bull market, one defined by record highs, aggressive investor optimism, and a market increasingly shaped by technological transformation, particularly AI implementation.
December 5th, 1996, Alan Greenspan made his famous speech about ‘Irrational Exuberance’. The markets continued higher for 4 more years.
Possibly irrational exuberance? Only time will tell.
On that note, I bid you farewell for this month. Trade well… and trade cautiously.
Written by Michael DiGioia, Director of Education
Mike is available for One-on-One Coaching. Learn More
