LaSalle St. Market Mile Markers – June 2026
Key Takeaways:
• U.S. equities extended their winning streak in May, setting multiple new all-time highs. The S&P 500 gained +5.3% for the month, with the Nasdaq, Dow Jones, and Russell 2000 also reaching new highs. Technology led all S&P 500 sectors with a +16.0% return. However, eight of eleven sectors traded lower on the month, led by Energy (-5.6%), Utilities (-5.1%), and Consumer Staples (-3.2%), underscoring that index-level gains masked significant dispersion beneath the surface.
• Fixed income traded higher despite a mid-month surge in Treasury yields. The U.S. Bond Aggregate returned +0.3%, underperforming corporate bonds as credit spreads tightened. Investment-grade and high-yield corporates returned +0.7% and +0.5%, respectively. The 30-year Treasury yield briefly spiked above 5% following back-to-back hot inflation prints, reaching levels last seen in 2007. The 10-year yield also set a new 52-week high before easing later in the month as oil prices declined and geopolitical tensions showed signs of cooling.
• International equities traded higher in May but were mixed relative to U.S. markets. Emerging markets gained +9.7% and outperformed the S&P 500, supported by a softer U.S. dollar and improving risk sentiment. Developed markets returned +3.2%, lagging both U.S. stocks and emerging markets. The performance gap between international and domestic equities continues to reflect the outsized weight of technology and AI-linked companies in U.S. indexes.
• Oil prices declined in May as Middle East ceasefire negotiations progressed. WTI crude ended the month below $90 per barrel, down -16.5% from its intramonth highs, as markets began pricing in a potential reopening of the Strait of Hormuz. Iran indicated a preliminary agreement to extend the ceasefire and guarantee shipping through the Strait, though U.S. officials disputed the characterization. The conflict remains unresolved, and a successful deal would take months to restore shipping traffic to pre-conflict levels. The Strait of Hormuz carries roughly 20% of global oil supply, and its status remains the single largest variable for the energy and inflation outlook.
• Inflation data remained elevated, and Fed rate expectations shifted toward tighter policy. The April PCE price index rose +3.8% year-over-year, the highest reading since May 2023, driven largely by energy prices tied to the Strait of Hormuz disruption. Core PCE rose +0.2% on the month, below the consensus estimate, suggesting the energy shock has not yet broadly spread through the economy. Markets now assign greater than 50% probability to a Fed rate hike at the December 2026 meeting, a significant shift from earlier in the year when rate cuts were the base case. First-quarter GDP was also revised down to +1.6% annualized from the initial +2.0% estimate, amplifying concerns about a stagflationary backdrop.
• Monetary plumbing dynamics have provided an underappreciated boost to asset prices. The recent easing of the Supplementary Leverage Ratio (SLR) has been a meaningful but largely overlooked driver of equity market performance. Under the prior regime, the SLR was risk-insensitive: banks were required to hold the same amount of capital against a low-risk Treasury or Fed reserve as against a corporate loan. When balance sheet constraints tightened, banks pulled back from repo markets, the plumbing the financial system depends on for efficient circulation of dollar reserves. The SLR reform reverses that dynamic, freeing bank balance sheets to re-engage in repo lending at scale. The result has been the largest sequential buildup in repo activity observed outside of the Covid-era QE period, with Treasury-backed repo volumes approaching $3 trillion. More repo capacity means reserves move through the system more efficiently, reducing the Fed’s role as the ultimate liquidity backstop and allowing private markets to carry more of the load, a structural tailwind for risk assets.
AI, Geopolitics, and the Overlooked Liquidity Shift Driving Markets in 2026
May was a strong month for U.S. equities, with most major indexes reaching fresh all-time highs. The S&P 500 and Nasdaq 100 set new highs each week, and the Dow Jones, Russell 2000, and equal-weight S&P 500 also closed the month at record levels. The equal-weight index’s participation signals improving market breadth relative to earlier in the year, though leadership remained narrow. Technology gained +16% and was the only S&P 500 sector to outperform the broad index. Eight of eleven sectors declined on the month, and ten of eleven underperformed. The divergence also appeared in factor indexes, with large-cap growth returning +7.2% versus +2.9% for large-cap value. AI and technology stocks continued to outpace more traditional, cyclical areas of the market.
Fixed income also traded higher, with the U.S. Aggregate Bond Index returning +0.3% and corporate bonds outperforming as credit spreads tightened. The bond market’s gains came despite a mid-month surge in interest rates. The 30-year Treasury yield spiked above 5%, reaching levels last seen in 2007, and the 10-year yield set a new 52-week high. The trigger was back-to-back hot inflation readings for consumer and producer prices, with Middle East conflict and elevated oil prices creating broader price pressures. The rate spike later reversed as oil prices retreated on ceasefire progress, providing relief to bonds, mortgages, and rate-sensitive markets late in the month. The 10-year yield ended May near 4.45%, and the 30-year fell back below 5%.
There are three themes that have defined markets in 2026 thus far. The first is geopolitics. Trade and tariff uncertainty early in the year gave way to military conflict in the Middle East, effectively closing the Strait of Hormuz since late February and disrupting roughly 20% of global oil supply. Oil prices remain elevated but declined in May as U.S.-Iran negotiations progressed and markets began pricing in a potential reopening of the Strait. WTI crude ended the month below $90 per barrel. The path forward remains uncertain: even a successful agreement would take months to restore shipping traffic to pre-conflict levels. The outcome of ongoing negotiations will shape the energy, inflation, and broader financial market outlook for the remainder of 2026.
The second theme is the artificial intelligence buildout. Companies have committed hundreds of billions to construct the physical backbone of the AI industry, including data centers, computer chips, and power generation. Forecasted 2026 capital spending across the leading technology companies now exceeds $600 billion, with the majority directed at AI infrastructure. That spending is driving economic growth and increasingly showing up in corporate earnings, with AI-linked revenue growth becoming a meaningful contributor to overall S&P 500 profit expansion. The investment is also creating rapid structural change, with supply chain bottlenecks emerging and companies reorienting products and services for the AI era. The pace of spending and technological change explains much of the performance differential between the technology sector and more traditional areas of the market.
The third theme, and perhaps the least widely recognized, is the structural reform to the Supplementary Leverage Ratio. The Fed and FDIC’s decision to ease the SLR has freed bank balance sheets to re-engage repo lending at scale. More repo capacity means reserves move through the financial system more efficiently, reducing the Fed’s role as the ultimate liquidity backstop and allowing private markets to carry more of the load. Broad money supply measures how much money exists in the system; repo leverage measures how many times that money is being recycled to purchase assets. As repo activity has expanded over recent weeks, risk assets have responded positively. The SLR reform is a structural change rather than a cyclical one, and its effects should persist regardless of near-term rate or growth developments.
The macroeconomic backdrop presents a more complicated picture. The second estimate of first-quarter GDP was revised down to +1.6% annualized from the initial +2.0% reading. That downgrade arrived on the same day as a hot inflation print, sharpening the contrast between cooling growth and sticky prices. The April PCE price index rose +3.8% year-over-year, the highest reading since May 2023. Core PCE, which excludes food and energy, rose +0.2% on the month, below the consensus estimate, suggesting the energy shock has not yet broadly spread through the economy. Initial jobless claims remain low, and market volatility declined as the VIX drifted lower amid geopolitical progress. The combination of slower growth and elevated inflation, if sustained, would complicate the Federal Reserve’s ability to respond with rate cuts.
Looking ahead, the key variables remain consistent: the trajectory of Middle East negotiations and oil prices, the Federal Reserve’s response to persistent inflation, and whether the AI capital investment cycle continues to drive earnings growth broadly across the market. The S&P 500’s current forward P/E of 21.3x sits above the long-term average of 17.0x and above the +1 standard deviation band of 20.4x, leaving limited room for further multiple expansion. Continued gains will require sustained earnings growth to meet elevated expectations. June brings important economic data, including nonfarm payrolls, CPI, and PPI releases, which will shape the Federal Reserve’s policy path and the market’s outlook for the second half of the year.
Why It Matters for Markets and Investors
• Market breadth is improving, but concentration risk persists. The equal-weight S&P 500 set a new all-time high in May, and small caps and the Dow joined the Nasdaq and S&P 500 at record levels. These are constructive breadth signals. However, ten of eleven S&P 500 sectors underperformed the index, and technology alone accounted for a disproportionate share of gains. Sustained rallies historically require broader participation; the current concentration in AI and mega-cap technology leaves the index sensitive to shifts in sentiment around that trade.
• The AI capital investment cycle is becoming a measurable driver of earnings growth. Forecasted 2026 capital expenditures across leading technology companies now exceed $600 billion, with the majority directed at AI infrastructure. That spending is beginning to show up in corporate earnings and is a meaningful contributor to S&P 500 profit growth. The S&P 500’s forward P/E of 21.3x is above both the long-term average and the +1 standard deviation threshold. Continued index appreciation will require sustained earnings delivery to justify current valuations.
• SLR reform represents a structural, not cyclical, tailwind for risk assets. The easing of the Supplementary Leverage Ratio has freed bank balance sheets to re-engage in repo lending at scale, improving the efficiency with which dollar reserves circulate through the financial system. As repo volumes expand, private markets are absorbing more of the liquidity function previously carried by the Fed. This is a regulatory change with durable effects, and its impact on asset prices is not yet fully reflected in consensus market views.
• The inflation and rate outlook has shifted meaningfully toward tighter policy. Markets now assign greater than 50% probability to a Fed rate hike at the December 2026 meeting, a significant reversal from the rate-cutting expectations that prevailed earlier this year. The April PCE rose +3.8% year-over-year, the highest since May 2023. Q1 GDP was revised down to +1.6%. The combination of slowing growth and elevated inflation limits the Fed’s flexibility to support the economy through rate cuts, as doing so would risk adding fuel to existing price pressures.
• The Strait of Hormuz remains the central variable for energy prices and the inflation outlook. The Strait carries roughly 20% of global oil supply and has been effectively closed since the conflict began in late February. WTI crude declined in May as ceasefire negotiations progressed, ending the month below $90 per barrel. The situation remains unresolved, and even a successful diplomatic agreement would take months to restore normal shipping volumes. The trajectory of Middle East negotiations will directly shape oil prices, the inflation outlook, and the Federal Reserve’s policy response for the second half of 2026.
• The stock-bond diversification relationship remains challenged. Treasury yields rose alongside equity markets for much of May, then declined when oil prices fell, both driven primarily by geopolitical and energy dynamics rather than traditional macro signals. The bond market’s behavior continues to be closely tied to the oil and conflict situation rather than acting as a conventional offset to equity risk. With the Fed unlikely to cut rates and inflation uncertainty elevated, the traditional stock-bond diversification relationship remains challenged. Investors may continue to emphasize non-traditional sources of diversification in portfolio construction.
Important Disclosures
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