Key Takeaways
1. Stocks Pullback in Early June After Ending May Near Record Highs
The S&P 500 and Nasdaq entered June near record highs but have each traded lower the first two weeks. Despite the headline selloff, the pullback has been narrower and shallower than it appears. Technology and semiconductor stocks led both the recent rally and this month's pullback, and there have been signs of rotations to small caps and the equal-weight S&P 500, with market breadth holding steady.
Why it matters: Pullbacks after record highs are normal and don’t mean something is broken. However, they are a reminder that when gains are concentrated in a few sectors, those same sectors can cut both ways.
2. Inflation Climbed to a 3-Year High Last Month
Consumer prices rose +4.2% from a year earlier in May, the fastest annual pace since 2023 and up from +3.8% in April. Energy drove more than 60% of the monthly increase, with gasoline up about 7% during the month and nearly 40% over the past year. The picture underneath was calmer. Core inflation, which strips out food and energy to show the underlying trend, slowed to +2.9% and rose just +0.2% from the prior month, slightly below expectations. Housing costs, a large and slow-moving part of the inflation basket, also continued to ease. The gap between a hot headline and a steadier core suggests the spike is concentrated in fuel for now.
Why it matters: Inflation sits above the Fed’s target as energy prices remain elevated. The market and the Fed continue to watch for signs the pressure is spreading beyond energy.
3. Labor Market Conditions Improve After Slowing in Late 2025
Employers added +172,000 jobs in May, more than double what was expected, and the unemployment rate held at 4.3%. Hiring for the prior two months was revised higher by a combined +93,000, but there are signs of labor market slack. The job gains were concentrated in a handful of industries, the ranks of the long-term unemployed remain elevated compared to a year ago, and wage growth cooled to +3.4% year-over-year.
Why it matters: The labor market continues to improve after slowing in late 2025, but some softness is starting to show in the data. The Fed will need to balance the labor market against inflation that's still elevated.
4. Oil Prices Remain Elevated as the Middle East Conflict Continues to Disrupt Energy Markets
Renewed military strikes this week and continued shipping disruptions in the Strait of Hormuz, a critical waterway for global oil, are keeping prices high even though oil sits well below its spring peak. The latest strikes spared energy infrastructure, which kept prices from climbing further, but oil remains near $90 per barrel and well above where it traded a year ago.
Why it matters: The conflict is the common thread behind this week's inflation headlines. Oil is the main force pushing prices up, and it is also the variable most likely to bring them back down if tensions ease.
5. Federal Reserve Holds its June Meeting Next Week
The Fed meets next week for the first time under new chair Kevin Warsh. The market expects the Fed to hold rates steady at both the June and July meetings. This week's inflation data and the continued Middle East conflict, however, are reshaping the outlook for later this year. The conversation has shifted from when the Fed might cut rates to when it might raise them, with the market now leaning toward a rate increase in the fourth quarter. The longer the Strait of Hormuz remains disrupted, the more likely that becomes.
Why it matters: Interest rate expectations affect mortgages, savings yields, and bond and stock valuations, so the Fed's tone and outlook could set the market's direction in the coming months.
