Launch Pad

North American equities closed higher on Friday with the S&P 500 and Nasdaq indexes hitting new highs, capping off a strong month driven largely by AI and easing geopolitical concerns. The Nasdaq gained more than 8% during the month, while the S&P 500 advanced 5.1%. The TSX lagged its peers in May, rising 2.5% on a total return basis, although it also managed to reach a new all-time high during the month.  Sentiment improved as the U.S. and Iran made progress toward a 60-day ceasefire agreement, helping push oil prices lower, with WTI crude falling nearly 15% during the month of May. Investors continue to view falling energy prices, resilient earnings growth, and massive AI-related capital spending as supportive for equities, though the market’s narrow leadership leaves valuations dependent on continued execution from a relatively small group of tech companies.  

Investors this week will be focused on U.S. employment reports that could determine if markets will continue to rally or begin pricing in a more restrictive Fed. Strong AI-driven earnings and technology leadership have powered the S&P 500 to nine consecutive weekly gains, but a combination of inflation and a resilient labour market could force the Fed to consider rate hikes rather than cuts. A payroll gain significantly above expectations could suggest an overheating economy, putting upward pressure on Treasury yields and challenging equity valuations. Also this week, earnings from Broadcom will serve as another test of the AI investment theme after semiconductor stocks have rallied roughly 80% since March. Recent gains from Micron and Dell have reinforced confidence in the AI supercycle, but market breadth remains narrow, with about 60% of S&P 500 companies trading above their 200-day moving average, below the average of 73% when the index is hitting new highs. Many strategists now believe that the next phase of the bull market will require broader participation from sectors such as industrials, infrastructure, healthcare, and energy, rather than continued reliance on a small group of tech leaders. 

The latest U.S. inflation data highlights how the Iran war has affected consumers, with U.S. inflation rising at its fastest pace in three years as higher energy costs ripple through the economy. Gas prices have risen more than 50% since the conflict began, contributing to higher transportation, food, and household costs and pushing overall inflation to 3.8% in April. It’s clear now that the impacts are being felt by consumers, with wage growth no longer keeping pace with inflation while the personal saving rate falls to 2.6%, suggesting households are dipping into savings to maintain spending. While markets anticipated much of the inflation increase, there are concerns that a prolonged energy disruption could further weigh on supply chains and consumer prices. Although the U.S. and Iran have reached a tentative ceasefire extension, negotiations remain fragile, and any renewed escalation could reverse the recent decline in oil prices and further increase inflationary pressures. 

The disruption in the Strait of Hormuz may last longer than markets currently expect, even if the U.S. and Iran ultimately reach a formal agreement. Experts are drawing parallels to the Red Sea shipping crisis, where vessel traffic remains well below pre-crisis levels more than two years after attacks subsided. Risk premiums, insurance costs, and security concerns could continue to discourage traffic through Hormuz, even after hostilities end. The bigger issue is that regional leaders now view Iran as having established operational control over the strait, raising the possibility of a permanently fragile shipping environment where access depends on political alignment. While alternative pipelines in Saudi Arabia and the UAE can partially offset lost oil exports, they cannot fully replace the waterway that previously handled roughly 20% of global oil and LNG supplies. Even if a deal is reached, the world may be entering a new energy landscape where lower shipping volumes, higher transportation costs, and recurring geopolitical risk premiums become the norm. 

Germany’s latest inflation report offers some encouraging signs that the recent rise in energy prices has not yet spread across the economy. Headline inflation eased to 2.7% in May from 2.9% in April, largely due to lower fuel taxes that helped offset some of the inflationary impact from the Iran war. While core inflation rose to 2.5% from 2.3%, economists attributed the increase to temporary factors rather than widespread second-round inflation effects. Services inflation also moved higher, but remained below levels seen before the conflict began. The report suggests that, for now, higher energy costs are mostly affecting fuel prices rather than triggering a broader acceleration in wages and consumer prices. Still, policymakers at the ECB remain cautious, as business surveys indicate companies are planning to pass higher costs on to consumers, raising the risk that inflationary pressures could increase in the coming months. 

China’s latest PMI data suggests that the economy is losing momentum and becoming more and more dependent on a narrow set of growth drivers. Manufacturing activity stalled in May, with the PMI slipping to 50.0, as weakening domestic demand and a renewed contraction in export orders offset continued strength in high-tech and AI-related industries. The decline in new export orders highlights the challenge facing policymakers as global demand softens and trade uncertainty grows, while ongoing weakness in property, employment, and consumer spending continues to weigh on the economy. At the same time, manufacturers are still dealing with elevated input costs linked to higher energy prices following the Iran was, putting pressure on profit margins even as raw material inflation has somewhat moderated. One bright spot remains advanced manufacturing, where semiconductor demand and AI-related investment continue to support production, with high-tech manufacturing PMI reaching 52.9. 

A statistical anomaly. The Montreal Canadiens were eliminated from the NHL playoffs over the weekend. The loss extends Canada’s Stanley Cup drought, something that is now one of the most statistically improbable streaks in professional sports. Since the Montreal Canadiens last won the Cup in 1993, Canadian teams have gone 0-for-31 despite representing about 25% of NHL franchises during that period. Research from 2024 found that, if Canadian teams had a 25% chance of winning the Cup each year, they would have been expected to win about seven championships over that span, while the probability of winning none is just 0.024%. The odds have gotten worse since the first research report was published, as the drought continues. Even using a more conservative 20% representation, the odds of a 31-year drought is roughly 0.10%. While factors such as taxes, free agency, media pressure, and climate are often cited, playoff success usually comes down to a combination of goaltending, roster depth, special teams, health, and maybe just a bit of luck. Maybe next year. 
 

Copper advanced in New York and London to kick off a crucial month ahead of the Trump administration’s deadline to make a fresh assessment on launching U.S. import tariffs. The Commerce Secretary has until June 30 to give an updated recommendation to Trump on tariffs for refined copper. Ahead of that decision, the premium of U.S. prices over the rest of the world has expanded again, prompting a renewed flow of metal to American ports and pushing the red metal to a 5% gain in May. Efforts by the U.S. and Iran to negotiate a ceasefire have pushed industrial metals higher, while enthusiasm for assets linked to AI has spilled over to copper as well. Analysts are bullish on copper, Citigroup Inc. sees prices hitting $14,500 a ton this month and $15,000 within a year, while Goldman Sachs Group Inc. also upgraded its forecasts.  

We saw on Friday that Canada’s economy slipped into a technical recession in Q1, with GDP contracting at a -0.1% annualized rate following a -1% decline in the previous quarter, marking the first back-to-back quarterly contractions since the pandemic. The weakness was broad-based, driven by falling business investment, lower government spending, weaker exports, and slowing population growth, while U.S. tariffs continued to weigh on key sectors like automotive manufacturing. Although household spending remained positive, consumers cut back on discretionary purchases like travel and vehicles, and the savings rate fell as spending outpaced income growth. The data has raised concerns around stagflation in Canada, where elevated energy prices are increasing inflation risks while underlying economic activity and the labour market continue to soften.