Weekly Newsletter: May 11, 2026
Either reference works into today’s markets: “It’s a Mad, Mad, Mad, Mad World”, or “Party like it’s 1999”. If parties were meant to last, then this one could be a doozy. Semiconductors, the guts of all things AI, rose 11% just last week and have perked up 57% this year alone. Yes, earnings have been surprisingly good, with 87% of the SP500 beating estimates this past quarter. The rally in tech stocks in general has put them at the high end of their historical range. Their weight in the SP500 has also created a very expensive market for large stocks in general. From the time the markets stopped worrying about the Iran war and love stocks, the tech indices have jumped over 20%, the SP500 13%, while the average stock has increased merely 6%. That spread between the haves and have-nots mirrors much of the economy. The data on jobs remains in a good place, but wage growth has moderated. This could spell trouble for the consumer in the months ahead if energy prices remain sticky as more of their paychecks go to cover higher gas prices. Consumer prices are due this week, and headline figures could be approaching 4% on a year-over-year basis. Eliminating the large jumps and drops in inflation and focusing on the middle 68% of the data set may put investors at ease that the only thing pushing inflation higher is energy.
This economic highlight of the week was indeed the jobs data, which will be followed quickly by the inflation data this week. The combination of the two should provide a basis for the next Fed move in interest rates. There is always plenty to look at and parse out of the employment report, but overall, it confirmed what the weekly jobless claims data has been saying: the job market is just fine. For the first time in a year, the job market saw back-to-back growth. As usual, healthcare led the growth, while government jobs shrank again. A bit of the bad news in the report showed that those who are out of work spent an average of eleven weeks finding a job. Outside of Covid, that is the highest in 10 years and exceeds all months prior to 2000. Wage growth was modest and is now running roughly equal to the overall rate of inflation. This could be problematic for retail sales if inflation remains elevated in the months ahead. The Fed speakers are out in full force, providing some insight into the recent split vote on interest rates. Some felt the “bias” toward easing is not appropriate with inflation getting closer to 4% than 3%. Since the job market is holding up, some believe that maybe a rate hike, rather than a cut, is a more likely course of action.
The 30-year treasury briefly touched 5% this past week as other rates across the treasury curve touched year-to-date highs. One interesting note is the resumption of the flattening of the yield curve. Two-year yields have been rising faster than ten-year, creating a flatter “curve” between the two. Bond investors may be signaling concern about both economic activity slowing while inflation remains high. This stagflationary environment could be pointing to much slower growth, potentially lower corporate earnings, and a more meaningful pullback by consumers. Right now, equity and high-yield bond investors are not putting much credence into that outcome. Were it to come to pass later this year, it could be a catalyst for both lower stock prices and higher bond yields.
Between the “prediction markets,” zero-dated options, and meme stock activity, investors are indeed partying like it’s 1999. As it has been during much of the past 10-15 years, the markets have been bifurcated. Technology is going great guns, while the remainder of the market bumps along. As stocks race higher, the percentage of stocks above their long-term (200-day) average price has been declining since the beginning of the year, now under 55% from nearly 70% in January. This mirrors those stocks above their short-term (20-day) average price at 54%. The shift toward technology stocks has been dramatic. Tech made up less than 20% of the SP500 following Covid and is now nearly 37% of the index. Job growth has been in the healthcare sector, yet as a percentage of the S&P 500, healthcare is merely 8%, the lowest weight since the mid-1990s. The rally in small stocks has begun to shift the valuation across various asset classes to the top quartiles. While that does not doom stocks immediately, it does point to rather poor performance over the next couple of years.
Inflation data, retail sales, and the various Fed governors chatting about the economy might keep investors focused on the economy rather than the next move in the tech sector.