May opened with markets still balancing two competing forces: resilient corporate earnings and AI-related capital spending on one side, and persistent inflation risk on the other.

Research from the Peterson Institute and Mercer suggests that inflation may remain stickier than many investors expected in 2026, while New York Fed analysis indicates that AI’s labor-market impact is still early and uneven rather than broadly disruptive.

At the same time, geopolitical risk remains elevated, and research from Russell Investments and the World Gold Council underscores that investors are increasingly treating commodities and gold as strategic portfolio tools rather than tactical hedges.

Market Overview

Equity markets continue to be supported by strong earnings momentum, especially in technology and AI-linked sectors, but valuation discipline is becoming more important as leadership narrows. The broader market narrative is not one of simple risk-on optimism; instead, it is a selective environment where capital is concentrating in firms with durable cash flow, pricing power, and credible AI investment plans. Research from Mercer notes that developed-market equities are still expected to see solid earnings growth in 2026, although performance outside technology remains more subdued. That makes May a month where breadth matters as much as headline index levels.

The most important cross-current is inflation. The Peterson Institute argues that U.S. inflation could surprise to the upside in 2026 because of tariff pass-through, fiscal deficits, tighter labor supply, and still-loose financial conditions. If that proves correct, the implication is straightforward: the market may have to continue pricing a more restrained Fed and a higher-for-longer rate environment than many hoped at the start of the year.

For investors, that means returns are likely to depend less on multiple expansion and more on earnings quality and balance-sheet strength.

Federal Reserve & Policy

The Fed remains constrained by a difficult combination of sticky inflation and a labor market that is cooling only gradually. Mercer’s 2026 outlook expects U.S. rates to end the year below current levels, but also notes that the pace of easing could slow if inflation stays above target or growth proves firmer than expected. This is consistent with the broader research view that policy normalization in 2026 may be uneven rather than linear. In other words, investors should expect more policy uncertainty than a clean easing cycle.

AI adds another layer to the policy picture. The New York Fed’s May 2026 analysis suggests that AI has not yet produced a distinct, economy-wide collapse in labor demand, even though hiring has slowed and some AI-exposed occupations are seeing weaker posting activity. That matters for the Fed because it implies inflation and labor data may not move in a neat, synchronized pattern. For now, the central bank is still more likely to be guided by inflation persistence than by a sudden AI-driven labor shock.

Economic Landscape

The broader economic backdrop remains resilient, but the balance of risks is shifting. Mercer expects global inflation to stabilize around central bank targets in many regions, but highlights the U.S. as an exception where tariffs and policy uncertainty may keep prices elevated longer than elsewhere. That view lines up with the PIIE assessment that inflation risks in 2026 are still skewed to the upside, particularly if households and businesses begin to embed higher inflation expectations into decision-making. The result is an economy that can keep growing, but with less room for error.

Geopolitical uncertainty also remains an important macro variable. Russell Investments argues that the transmission channels from geopolitical shocks are broader than oil alone, extending into semiconductors, rare earths, and critical production networks. That is especially relevant in a year when supply-chain resilience, industrial policy, and technology dependence are all part of the investment conversation. In practical terms, investors should think of geopolitical risk as a structural input to portfolio construction, not just a headline event risk.

Asset Class Snapshot

Equities remain attractive, but the opportunity set is narrower than the index suggests. Mercer’s outlook points to solid earnings growth in developed markets, while the New York Fed’s AI research suggests that labor-market disruption from AI is still limited, which supports the case for firms that are actually monetizing the technology rather than merely spending on it. At the same time, elevated valuations mean that future returns are more likely to come from fundamentals than from rerating. That favors quality, profitability, and selective exposure over broad beta.

Fixed income is still useful, but less reliable as a pure hedge than in disinflationary periods. Research on geopolitical risk and inflation resilience suggests that bonds can struggle when shocks push commodity prices higher and inflation expectations rise. That argues for a more flexible fixed-income posture, with attention to duration, credit quality, and inflation sensitivity. The classic 60/40 toolkit still works in some environments, but it is less protective when inflation uncertainty is elevated.

Gold continues to stand out as a strategic diversifier. The World Gold Council’s 2026 research emphasizes gold’s role as a long-term portfolio anchor, especially when investors want protection against inflation, policy uncertainty, and geopolitical stress. WisdomTree makes a similar point, arguing that many portfolios remain underweight gold relative to its strategic value. In May, gold looks less like a trade and more like a structural allocation consideration.

Themes to Watch

Three questions are likely to shape the investment debate as May progresses. First, will inflation prove temporary or persistent? The answer matters because the PIIE and Mercer research both suggest that U.S. inflation may stay above the market’s comfort zone longer than expected. Second, can AI investment translate into durable earnings growth rather than just capital spending? The New York Fed’s labor evidence suggests the adoption story is still early, which means the productivity payoff is not yet fully visible in the data. Third, can portfolios stay resilient if geopolitical shocks continue to widen beyond energy into strategic supply chains? Russell’s research suggests that this risk is now deeply embedded in markets.

For allocators, the message is to stay diversified but more intentional. That means favoring quality equities, maintaining disciplined fixed-income exposure, and giving real assets and gold a more meaningful role than in a low-inflation cycle. The goal is not to predict one macro outcome, but to build a portfolio that can function across several.

– Zenith Wealth Partners

Sources:

• Peterson Institute for International Economics, The risk of higher U.S. inflation in 2026.
• Mercer, Economic and Market Outlook 2026.
• New York Fed Liberty Street Economics, Do Job Postings Show Early Labor-Market Effects of AI?.
• Russell Investments, From headlines to portfolio impact: Investing through geopolitical risk.
• World Gold Council, Gold as a strategic asset: 2026 edition.
• WisdomTree, Gold Is No Longer an “Alternative”—It’s a Missing Strategic Allocation.

All written content is for information purposes only. Opinions expressed herein are solely those of Zenith, unless otherwise specifically cited. Material presented is believed to be from reliable sources and no representations are made by our firm as to another parties’ informational accuracy or completeness. All information or ideas provided should be discussed in detail with an advisor, accountant or legal counsel prior to implementation.