May 2026 edition

Hey, everyone. Thanks for listening. This is, Keith Lerner, the chief investment officer and chief market strategist here at Truist. And, welcome to this month's market navigator audio cast.

In each episode, we try to take a step back from the day to day market noise and really focus on the bigger picture. You know, what's really driving markets and economy? I'll also walk through several key charts from this month's market navigator, and we have quite a few. Obviously, you can't see them, but I would certainly encourage you to to check them out afterwards.

So with that, let's let's start with the big picture.

So as many of you know, as we do our monthly letter, I always try to think about what is the key theme for markets. And, what popped in my head more recently was, this concept of the Teflon market where negative headlines just aren't sticking, at least not yet. And as I've been traveling and getting a lot of questions from not only clients but also from advisers, here's the three main ones that keep coming up that I'll try to tackle today. The first one is, why has the market been so resilient given all the challenges? And there are many challenges. Number two, what would cause risk to start sticking? And then thirdly, and really importantly, is how should investors think about positioning when you have markets which are really trading at all time highs at the same time, uncertainty remains elevated.

Okay. So let's let's tackle question number one. Why has the economy and market been so resilient? So we certainly have a a great deal of geopolitical risk that remains, and that matters. Iran matters. Oil prices matter.

Inflation hasn't fully gone away. We had the Fed, which is on hold at least in the near term versus the expectation of cutting rates in the beginning of the year, and we have these ongoing concerns around private credit and also job displacement. And these are all real concerns, but I would also say they're not the only thing that matters. And here's a stat I keep coming back to because it's remarkable.

Since the global financial crisis ended in two thousand nine, roughly two hundred months ago, we've only been in recession for about two months, and that was during a once in a lifetime pandemic. Think about that. We've only been in recession about one percent of the time over the last seventeen years, though it seems like we talk about it more than eighty percent of the time. Companies have been through a long series of shocks and have adapted each time.

In many ways, they are battle tested. Another chart we brought back this month shows how energy spending has changed over time, and I think it may surprise some folks. While higher oil prices are a risk and consumers certainly feel this at the pump, energy simply consumes a smaller share of spending than it did in the past, few decades.

This is an interesting fact. To get back to the inflation adjusted oil prices seen in two thousand eight, oil prices, are around a hundred today, would almost have to double from here.

Moving beyond the energy markets, we also highlight a labor market chart showing that while job growth has slowed, initial unemployment claims recently hit a cycle low. So what does that tell us? That tells us that the job market, while choppy, remains relatively resilient.

And then I think the last thing I really wanna cover here is this, this idea that we're in this business investment driven recovery, not necessarily a consumer recovery. Again, in some ways, this helps explain why the economy may feel like two speed economy. One of the more powerful charts, that we brought back this month shows that technology spending as a percent of the overall economy has absolutely surged. It's actually at the highest level in more than thirty years, and that trend really shows no signs of slowing down. In fact, it's showing signs of accelerating.

Okay. So we've covered why the economy has been somewhat resilient. Let's talk about why has the stock market been so resilient.

In my mind, it comes down to three key reasons, profits, profits, and profits. I'm not trying to be funny necessarily, but that really is the key. We are in the midst of a profit boom. We can measure this.

And this is actually one of the the more interesting charts this month that we just created in in the Navigator. What we looked at is, since the beginning of the year, the S and P five hundred's forward earning estimates have been revised higher by about eleven percent. Now that's one of the strongest upward revisions we've seen in history. I strongly encourage you to look at that chart.

It explains a big reason why this market has held in there so well. And while technology earnings have led the way, earning revisions have also improved meaningfully for small caps, mid caps, and emerging markets. So it's it's worth highlighting that this is not a just a just a tech and a mag seven story. This is a broader story of an earnings trajectory that is is across markets, and we're also seeing this, globally as well.

Now, of course, with, markets back to new highs, the the question that comes up is, what about valuations? And in our work, valuations are not cheap, but they're not necessarily excessive either. If you look at beyond the tech sector, when we look at small caps, mid caps, or even the what we call the equal weight index for the S and P. We're trading on a on a forward PE basis around the twenty year average. So as this market has moved back to new highs and we compared where valuations were last October when the S and P last made a new high, valuations are actually somewhat cheaper because the earnings strength that I just mentioned has really pushed this market higher.

Okay. So we've tackled question number one. Let's go to question number two. What can cause risk to start sticking? And really, that question is, you know, what could go wrong and really hit the market?

So, you know, what could challenge this Teflon market would be sticky inflation. I think we're all focused on this already. Oil prices do remain elevated, and I would say if a sustained move above that March high that we saw, in in our view, would most likely, certainly pressure markets. And, those high energy costs already feeding into transportation, agriculture costs, and broader prices.

So that's that's one, one thing we're obviously keeping a close eye on. The second is interest rates and the Fed. Markets often test new Fed leadership. It looks like we're we are gonna have a new Fed chairman soon.

And then the thing I would really keep an eye on, the ten year US treasury yield, a move above four fifty, four sixty would likely also be a headwind for risk assets. We've seen that be a problem historically over the last year when we've, you know, risen above this level. So so so far, we have sticky inflation, interest rates in the Fed, and I think the third thing is this kind of discontinued theme around election year volatility.

Historically, and we mentioned this in the outlook, midterm election years tend to experience more pullbacks than we've seen so far. This year, we've had one meaningful pullback. It was, it was around average, but we tend to have about three pullbacks on average each year. So we certainly expect some more curveballs if history is any guide.

Still, when we take a step back and look at the the full picture, you know, the economic data, earnings, valuations, and price trends, the weight of the evidence, yes, I'm gonna use that phrase again, the weight of the evidence continues to support, given this bull market, the benefit of the doubt. And I think it's also worth remembering new highs are not a a bug. It's a feature of a bull market. This won't be a linear path forward, but we still think ultimately this bull market has further to go.

Okay. So we are now in question number three.

How are we positioning portfolios? And to be fair, my discussion is at a high level. Your adviser knows you best, but the way we're thinking about the world is this. From a big picture perspective, we still maintain an equity bias.

Within equities. We still have a favorable view of the US markets, large caps and growth. That's really where we're seeing that earnings momentum driven in part because of tech as key, but we're also still very much emphasizing global diversification, especially given kind of these, you know, these these wide range of outcomes that are still potentially out there. You know, one chart in the Navigator that I really like is also about small caps.

And small caps, you know, have been, I think, a lot more resilient relative to the macro uncertainty. And I think people would be surprised that small cap technology stocks are up over thirty percent this year, far outpacing large caps, and small cap energy stocks are up even more, more than forty five percent. So I think that underscores that even though, like, we like large caps a bit more and we we like this AI theme, that AI theme and also some of, you know, the benefits of what's happening in the energy market is accruing to these smaller companies, and they're just more resilient. And

to us, that just means you still wanna have exposure there as well. And and this, I would say, I would follow through with this to emerging markets. They've continued to demonstrate leadership. We did upgrade emerging markets, earlier this year after being more negative.

There, we're actually seeing, much like the US, improving earning trends, particularly in places like Taiwan and South Korea where you have a lot of tech exposure and you have strong technical trends.

More from a sector level, retain, our long standing favorable view of technology, which I've spoken about. I often say this, so I'm sorry if I'm repeating this, but, you know, when we look at history, every bull market tends to have a dominant theme. And in this cycle, the dominant theme remains AI and tech. And after the tech sector really consolidated since last October, What we've seen more recently, especially off the lows where it's up more than twenty percent, technology has reasserted itself as market leadership and is supported by the strongest sector earning trends.

So we still like that area quite a bit even though it may be due for a bit of a pause after this kind of snapback. We're also maintaining more of what we call cyclical tilts in industrials and materials. They also benefit from AI related investment, infrastructure demand, and also the power grid and this data center build out. And then as I as I already mentioned, we recently upgraded the energy sector following the pullback last month.

I mean, in our mind, this should provide a partial hedge against renewed geopolitical risk. And we're also seeing these things where, you know, where when we have renewed geopolitical risk, energy sector is up and almost all the other sectors are down or vice versa, so it provides a bit of a hedge.

So with that, if you like to explore the charts we discussed today or take a deeper dive into this month's market navigator, I encourage to review the publication that was just released or speak with your adviser.

As always, we'll continue to follow the weight of the evidence, keep an open mind, and update you as our views evolve.

Thanks as always for listening, and we'll talk with you next month.