Stocks extended their advance for a ninth consecutive week, with the S&P 500 rising more than 5 percent in May on the heels of April’s 10 percent rally. This nine-week run coincides with the market’s March 30 bottom, when early signs of a potential off-ramp or ceasefire in the Middle East began to emerge. While the index was up over 19 percent as of the end of March, the reality is that performance has once again been driven by a narrow group of sectors and stocks largely tied to the artificial intelligence (AI) buildout.
Despite the broader market’s gains in May, only three of the index’s 11 sectors posted positive returns. The advance was led by the technology sector, up 15.8 percent, with consumer discretionary and healthcare each rising roughly 2.5 percent. Looking beneath the surface, just 27 percent of S&P 500 companies outperformed the index during the period—further evidence of the market’s narrow leadership.
While the market remains fixated on AI, the composition of “winners” continues to evolve as the buildout progresses through the value chain—from chipmakers to hyperscalers to data centers and memory providers. This week introduced new AI-adjacent entrants to the rally, with Dell rising more than 42 percent on strong revenue and earnings growth tied to demand for AI-optimized servers.
More notably—and perhaps potentially concerning—the benefits are no longer confined to technology companies or those generating strong earnings today. Ford Motor Company, for example, rose another 17 percent this past week, bringing its May advance to roughly 46 percent, its largest monthly gain since 2009. This rally has been fueled largely by optimism that its grid battery business could help meet the growing energy demands required to power AI applications. Further highlighting the speculative undertone, a Goldman Sachs basket of non-profitable technology companies has surged over 62 percent since the March bottom. While that basket has gained 148 percent over the past year, it remains 19 percent below its February 2021 peak, which was met with a 78 percent decline through November 2022.
Put simply, recent market performance has been heavily driven by AI enthusiasm, supported in some cases by strong earnings but in others by expectations of future growth. In our view, market behavior ultimately reflects underlying economic conditions, and recent data continues to point to an economy that is expanding—but becoming increasingly uneven. Growth is being supported by AI-driven investment, while other segments face pressure from elevated oil prices, interest rates, and persistent inflation.
The second estimate of first-quarter gross domestic product (GDP) offered a clear illustration of this dynamic. Real GDP growth was revised down to a quarter-over-quarter seasonally adjusted annual rate of 1.6 percent from an initial 2 percent. Importantly, consumer spending—the largest component of the U.S. economy—continued to slow, with growth revised to 1.4 percent from 1.6 percent, following a 1.9 percent gain in the prior quarter. Aside from the 0.6 percent increase in the first quarter of 2025, this marks the weakest pace of consumer spending growth since the fourth quarter of 2022.
This deceleration reflects the ongoing pressure of elevated inflation. Headline Personal Consumption Expenditures (PCE) inflation rose 0.4 percent in April, pushing the year-over-year rate to 3.8 percent. When juxtaposed with wage growth of just 3.6 percent over the past year, it becomes clear why certain segments of the consumer base are under strain. Indeed, real disposable income (total after-tax income, adjusted for inflation) has declined for three consecutive months, while the savings rate has fallen to a historically low 2.6 percent. Increasingly, consumption appears to be supported by a drawdown in savings and, potentially, equity market gains.
On the other hand, AI-related investment continues to surge. Spending on information processing equipment rose 45.9 percent, following a 37 percent increase in the prior quarter, while investment in intellectual property products climbed 11.6 percent after a 5.4 percent gain in the fourth quarter of 2025. Together, these categories—representing roughly 10 percent of economic output—accounted for 1.5 percent of the 1.6 percent GDP growth in the first quarter. This follows a similar pattern in the fourth quarter, when they were responsible for 0.96 percentage points of the total 0.6 percent growth. The takeaway is an economy that continues to expand but that is increasingly reliant on AI-driven investment to sustain that growth.
Both the economy and markets remain in a delicate balance—supported by meaningful tailwinds yet facing a growing list of risks and an elevated degree of uncertainty. Key questions persist: What will be the ultimate economic impacts of AI, both positive and negative? Can the current pace of earnings and investment growth be sustained? Which businesses will emerge as long-term winners—and which may see their models challenged or rendered obsolete?
While the answers remain uncertain, history offers a consistent framework. Diversification and a long-term focus grounded in fundamentals remain the most effective tools for navigating both the opportunities and the risks that lie ahead as we move into the summer months and veer toward the second half of 2026.
About the Author:
Brent Schutte, CFA, is chief investment officer of the Northwestern Mutual Wealth Management Company.
