Global markets
Global equity markets delivered another strong month in May, with major indices once again pushing toward record highs, despite uncertainty around geopolitics, inflation, and interest rates. Investor sentiment was supported by resilient economic data, strong corporate earnings, and continued enthusiasm for artificial intelligence-related investment. Hopes for a more durable ceasefire between the United States and Iran also helped improve risk appetite during the month, contributing to lower oil prices and easing concerns around global energy supply. The MSCI World Index rose 4.6% in US dollar terms during the month to reach a new all-time high.
However, the strength of headline indices masked a narrower market underneath. Much of the advance was concentrated among a relatively small group of mega-cap technology and AI beneficiaries, while many other sectors and regions delivered more modest returns. This widening gap between index performance and broader market participation became one of the defining themes of the month, highlighting the importance of looking beyond the headline numbers.
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United States markets
The United States remained at the centre of market attention during May. All three major indices reached fresh record highs. The S&P 500 advanced 5.2%, the Nasdaq surged 8.4%, and the Dow Jones gained 2.8%.
Nvidia once again dominated headlines after reporting quarterly revenue of US$81.6 billion, up 85% from a year earlier. Data-centre revenue increased 92%, while management guided to approximately US$91 billion in revenue for the current quarter. The result reinforced the view that the AI investment cycle remains in full swing, extending well beyond semiconductors into networking, servers, memory, and electricity infrastructure.
Economic data painted a more mixed picture. First-quarter GDP growth was revised lower, highlighting some moderation in economic momentum, while retail sales remained relatively subdued as consumers continued to grapple with higher borrowing costs and elevated living expenses. Consumer sentiment also remained weak, reflecting ongoing concerns around inflation and household finances
Inflation remains a key challenge. The Federal Reserve's preferred inflation measure, the Personal Consumption Expenditures (PCE) Price Index, remained above target, while the release of the latest FOMC minutes reinforced the cautious tone from policymakers. Officials acknowledged progress on inflation but indicated they require greater confidence that price pressures are moving sustainably toward target before considering further rate cuts. The uncertain trajectory of the conflict in the Middle East, and its potential implications for oil prices, inflation and economic growth, means inflation risks have not fully disappeared.
The labour market continued to show resilience. Non-farm payrolls increased by a better than expected 115,000 in April, with this figure revised upwards to 179,000 in May’s employment report, suggesting the world's largest economy continues to generate jobs despite slowing growth elsewhere. Broader indicators nevertheless pointed to some cooling beneath the surface. For example housing activity remained subdued as mortgage rates stayed elevated, limiting affordability and keeping pressure on the residential property market.
Overall, the US economy continues to expand, but the combination of resilient growth, sticky inflation and elevated asset prices leaves markets highly sensitive to incoming economic data and Federal Reserve commentary.
European markets
European equities also performed well during May, with the STOXX50 rising 2.9%, supported by easing inflation pressures and expectations that interest rates may gradually decline later this year. Major indices remained close to record highs, with investors encouraged by signs that the region may avoid a more significant economic slowdown.
Economic growth across Europe remains modest, particularly in Germany where manufacturing activity continues to face challenges. However, services activity has remained more resilient, helping offset some of the weakness in the industrial sector.
The prospect of lower interest rates and easing energy costs toward month-end helped support sentiment, although geopolitical developments and global trade remain important risks for the region.
Asian markets
Asian markets delivered mixed performances during May. Japan remained one of the strongest-performing developed markets, with the Nikkei surging 11.9% to new all-time highs, on the back of continued strength in semiconductor and technology-related stocks. A weak yen was also supportive.
In China, economic data continued to point to an uneven recovery. Manufacturing activity stabilised and industrial production remained relatively resilient, while policymakers continued to implement targeted measures aimed at supporting growth. However, weakness in the property sector and softer consumer spending continue to weigh on confidence. Nonetheless, the CSI300 in China rose 1.8% during the month.
Australian markets
The Australian market delivered a modest gain during May, with the ASX200 rising 0.8%.
In a move that was widely expected by markets, the Reserve Bank of Australia raised the cash rate by 25 basis points to 4.35%, marking an increase for the third consecutive meeting. The decision reflected growing concern that inflation pressures are proving more persistent than previously anticipated, particularly following the sharp rise in oil prices linked to the conflict in the Middle East. Importantly, Australia was already grappling with elevated inflation and strong domestic demand before the conflict began, meaning higher energy prices have added to an already challenging inflation backdrop.
Headline inflation rose to 4.6% in the year to March, prompting the RBA to revise up its near-term inflation forecasts. The Bank warned that a longer or more severe conflict in the Middle East could place further upward pressure on global energy prices, potentially lifting inflation expectations and delaying the return of inflation to target.
Governor Michele Bullock acknowledged that the outlook has become more uncertain. While economic growth has moderated and consumer spending remains under pressure, inflation remains the dominant concern for policymakers. Financial markets are currently pricing roughly a 50% chance of another rate increase in August and have largely priced in one further hike before the end of the year.
The decision highlights the difficult position facing central banks globally. While many economies have seen inflation fall significantly from its peak, geopolitical developments and energy markets remain capable of reversing some of that progress. For Australia, developments in the Middle East and China will remain particularly important factors shaping the economic outlook in the months ahead.
New Zealand markets
The Reserve Bank of New Zealand was a key focus for investors during May. While the Bank ultimately left the Official Cash Rate unchanged at 2.25%, the most notable aspect of the decision was how close policymakers came to moving in the opposite direction. The Monetary Policy Committee was split 3-3, with Governor Anna Breman casting the deciding vote to keep rates on hold.
The split highlights just how finely balanced monetary policy has become. On one hand, higher oil prices and ongoing Middle East tensions are expected to lift inflation in the near term. On the other, policymakers remain conscious that tightening policy further could place additional pressure on an economy that is still lacklustre.
Recent survey data reflected that tension. Business confidence improved during May, and firms became more optimistic about their own activity, although confidence remains below levels seen before the Middle East conflict. Consumer confidence also improved modestly, but households remain cautious and spending intentions subdued.
More encouragingly, inflation expectations eased during the month, while pricing intentions and expected cost pressures also moderated. Wage indicators also remain relatively contained, suggesting medium-term inflation pressures may be less concerning than current headline inflation figures imply. Agriculture and manufacturing have generally held up better than retail and construction, although activity across much of the economy remains soft.
The Government's Budget 2026 reinforced a similar theme of caution and discipline. Key initiatives included additional infrastructure spending, strategic fuel reserves, a projected return to surplus sooner than previously forecast, and a reduction in planned government borrowing. Markets generally responded positively to the more restrained fiscal stance at a time when inflation and debt levels remain important considerations globally.
Overall, the New Zealand economy continues to show signs of gradual improvement, although policymakers remain alert to inflation risks and the uncertain global backdrop.
Portfolio positioning
The strong market recovery that began in April continued through May, with many of the companies added to portfolios during March's period of volatility contributing positively to performance. During that earlier sell-off, our investment team selectively increased positions in several businesses where we believed market prices had become disconnected from long-term fundamentals, while also introducing new investments where we identified attractive opportunities.
While uncertainty remains elevated, recent months have provided a useful reminder that periods of volatility often create opportunities. Maintaining a disciplined investment process and focusing on long-term fundamentals allowed us to take advantage of market weakness. It is also a good example of the benefits of active management, where changing market conditions can create opportunities to add to high-conviction holdings and identify new investments that may enhance long-term returns.
Looking ahead - market outlook
Markets have started June on a more cautious note after a sharp sell-off following the latest US jobs report, highlighting the growing list of competing forces investors must navigate.
Developments in the Middle East will remain a major focus for investors. While recent signs of de-escalation have been welcomed by markets, the conflict remains fluid, and any renewed disruption to energy markets could have significant implications for oil prices, inflation and global economic growth.
In the United States, investors will be watching upcoming inflation, growth and labour market data closely for further clues on the path of interest rates. More broadly, attention will also turn to upcoming decisions from the Federal Reserve, European Central Bank, Bank of Japan and Reserve Bank of Australia.
Central banks are all facing a similar balancing act. Inflation has eased significantly from its peak, but remains vulnerable to energy price shocks and geopolitical developments, while economic growth is showing signs of moderating. The uncertainty created by the conflict in the Middle East adds another layer of complexity, making it more difficult for policymakers to judge how restrictive monetary policy needs to be.
Investor appetite for transformational growth companies remains evident, with SpaceX set to complete the largest IPO in history. At a valuation of around US$1.8 trillion, the listing reflects enormous investor enthusiasm not just for the company itself, but for the long-term opportunities surrounding satellite communications, AI infrastructure, data networks and space technology.
Time will ultimately determine whether SpaceX can justify the lofty expectations being placed upon it, particularly given that many highly anticipated IPOs have historically struggled to meet investor expectations during their first year as public companies. For investors, exciting growth stories often come with plenty of hype, but it remains as important as ever to maintain a long-term perspective and stay focused on fundamentals.