AI Drives Stock Market Higher Despite Uneven Growth

Brent Schutte, CFA, is chief investment officer of the Northwestern Mutual Wealth Management Company.

Stocks extended their advance for a ninth consecutive week, with the S&P 500 rising more than 5 percent in May on the heels of April’s 10 percent rally. This nine-week run coincides with the market’s March 30 bottom, when early signs of a potential off-ramp or ceasefire in the Middle East began to emerge. While the index was up over 19 percent as of the end of March, the reality is that performance has once again been driven by a narrow group of sectors and stocks largely tied to the artificial intelligence (AI) buildout.

Despite the broader market’s gains in May, only three of the index’s 11 sectors posted positive returns. The advance was led by the technology sector, up 15.8 percent, with consumer discretionary and healthcare each rising roughly 2.5 percent. Looking beneath the surface, just 27 percent of S&P 500 companies outperformed the index during the period—further evidence of the market’s narrow leadership.

While the market remains fixated on AI, the composition of “winners” continues to evolve as the buildout progresses through the value chain—from chipmakers to hyperscalers to data centers and memory providers. This week introduced new AI-adjacent entrants to the rally, with Dell rising more than 42 percent on strong revenue and earnings growth tied to demand for AI-optimized servers.

More notably—and perhaps potentially concerning—the benefits are no longer confined to technology companies or those generating strong earnings today. Ford Motor Company, for example, rose another 17 percent this past week, bringing its May advance to roughly 46 percent, its largest monthly gain since 2009. This rally has been fueled largely by optimism that its grid battery business could help meet the growing energy demands required to power AI applications. Further highlighting the speculative undertone, a Goldman Sachs basket of non-profitable technology companies has surged over 62 percent since the March bottom. While that basket has gained 148 percent over the past year, it remains 19 percent below its February 2021 peak, which was met with a 78 percent decline through November 2022.

Put simply, recent market performance has been heavily driven by AI enthusiasm, supported in some cases by strong earnings but in others by expectations of future growth. In our view, market behavior ultimately reflects underlying economic conditions, and recent data continues to point to an economy that is expanding—but becoming increasingly uneven. Growth is being supported by AI-driven investment, while other segments face pressure from elevated oil prices, interest rates, and persistent inflation.

The second estimate of first-quarter gross domestic product (GDP) offered a clear illustration of this dynamic. Real GDP growth was revised down to a quarter-over-quarter seasonally adjusted annual rate of 1.6 percent from an initial 2 percent. Importantly, consumer spending—the largest component of the U.S. economy—continued to slow, with growth revised to 1.4 percent from 1.6 percent, following a 1.9 percent gain in the prior quarter. Aside from the 0.6 percent increase in the first quarter of 2025, this marks the weakest pace of consumer spending growth since the fourth quarter of 2022.

This deceleration reflects the ongoing pressure of elevated inflation. Headline Personal Consumption Expenditures (PCE) inflation rose 0.4 percent in April, pushing the year-over-year rate to 3.8 percent. When juxtaposed with wage growth of just 3.6 percent over the past year, it becomes clear why certain segments of the consumer base are under strain. Indeed, real disposable income (total after-tax income, adjusted for inflation) has declined for three consecutive months, while the savings rate has fallen to a historically low 2.6 percent. Increasingly, consumption appears to be supported by a drawdown in savings and, potentially, equity market gains.

On the other hand, AI-related investment continues to surge. Spending on information processing equipment rose 45.9 percent, following a 37 percent increase in the prior quarter, while investment in intellectual property products climbed 11.6 percent after a 5.4 percent gain in the fourth quarter of 2025. Together, these categories—representing roughly 10 percent of economic output—accounted for 1.5 percent of the 1.6 percent GDP growth in the first quarter. This follows a similar pattern in the fourth quarter, when they were responsible for 0.96 percentage points of the total 0.6 percent growth. The takeaway is an economy that continues to expand but that is increasingly reliant on AI-driven investment to sustain that growth.

Both the economy and markets remain in a delicate balance—supported by meaningful tailwinds yet facing a growing list of risks and an elevated degree of uncertainty. Key questions persist: What will be the ultimate economic impacts of AI, both positive and negative? Can the current pace of earnings and investment growth be sustained? Which businesses will emerge as long-term winners—and which may see their models challenged or rendered obsolete?

While the answers remain uncertain, history offers a consistent framework. Diversification and a long-term focus grounded in fundamentals remain the most effective tools for navigating both the opportunities and the risks that lie ahead as we move into the summer months and veer toward the second half of 2026.

Wall Street wrap

Cooling labor market weighs on consumer confidence

The latest Conference Board Consumer Confidence data continues to point to a gradual softening in how consumers are viewing the economy, particularly when it comes to the labor market.

Overall confidence declined modestly to 93.1 in May, down from a revised higher 93.8 in April. While the move lower is not significant in isolation, it does reflect a continuation of a broader pattern of sentiment that is no longer improving and, in many cases, is beginning to fade.

Looking beneath the headline, the most notable weakness came from the Present Situation Index—which is more closely tied to perceptions of the labor market. This measure fell 3.2 points to 121.2 from a revised higher level of 124.4. Importantly, this represents the second lowest reading so far this year—behind only the February 2026 level of 118.7—and continues a clear downtrend from the January 2024 peak of 154.9. It is also the lowest level since March 2021, when the index stood at 119.4 as the economy was emerging from COVID-19.

At the same time, expectations for the future moved slightly higher, with the Expectations Index rising to 74.4 from 73.4. While directionally positive, this level remains subdued and consistent with a consumer that is cautious about what lies ahead rather than increasingly confident.

Given that this survey tends to be more reflective of labor market sentiment—especially compared to the University of Michigan survey, which is more focused on inflation perceptions—the details within the labor market components are particularly important.

The labor differential, which measures the share of consumers saying jobs are plentiful relative to those saying jobs are hard to get, declined to 6.9 from 7.5 last month and 12.7 a year ago. That is a significant drop from the peak of 47.1 in March 2022 and suggests a meaningful normalization in labor market conditions. Historically, this measure has tended to move inversely with the unemployment rate, meaning that a lower differential is consistent with a gradually slowing, rather than tightening, labor market.

Breaking that down further, the share of consumers saying jobs are plentiful fell to 25.5 from 26.9—marking the lowest level since February 2021. At the same time, the share saying jobs are hard to get declined to 18.6 from 19.4. So, while fewer consumers believe jobs are abundant, there is also a modest improvement in perceptions that jobs are not becoming meaningfully more difficult to obtain.

Looking ahead, there is a slight improvement in expectations, with 17.5 percent of consumers expecting more jobs in the future, the highest level since August 2025. This suggests that while current conditions are perceived as weakening, there is still some degree of optimism about the direction of the labor market over the next six months.

Inflation remains sticky as PCE trends turn higher

The latest PCE inflation data continues to reinforce a theme that price pressures have not only remained elevated but in some cases are beginning to move higher again. Headline PCE rose 0.4 percent in April, following a 0.7 percent increase in the prior month. That pushes inflation up to 3.8 percent on a year-over-year basis, the highest level since May 2023. While the monthly pace slowed slightly from last month, the broader trend is one of reacceleration rather than continued disinflation.

Core inflation, which excludes food and energy, rose by a slightly less than expected 0.24 percent for the month. That increase pushes the year-over-year rate to 3.3 percent, the highest level since November 2023. Importantly, when looking at the underlying trend, the pace of core inflation on a three- to six-month basis is running right around 3.8 percent, suggesting that inflationary pressure remains under the surface.

Breaking the data down further, goods inflation continues to be a key driver. Prices for goods rose 0.73 percent in April, following a 1.43 percent increase last month and a 0.74 percent increase in the prior month. On a year-over-year basis, goods inflation now stands at 4.4 percent. This is where the impact of food and energy prices is most evident, with gasoline and other energy goods rising 5.5 percent in April after a 20.9 percent increase in March.

On the services side of the economy, inflation rose 0.25 percent, following a 0.32 percent increase in March. That leaves services inflation running at 3.5 percent year over year. While this is somewhat more stable than goods, there are signs that higher energy prices are beginning to spill over into services categories.

Encouragingly, there was slightly better news within the so-called “supercore” measure of services inflation, excluding shelter, which rose 0.12 percent in April, bringing the year-over-year rate to 3.6 percent. However, even in this category, the trend remains elevated, with supercore inflation running at 3.77 percent on both a six-month and nine-month basis.

Rising prices outpace income growth, placing pressure on consumers

The April Personal Income and Outlays report continues to highlight the growing pressure on the consumer, as income growth slows while inflation remains elevated. Personal income was flat in April, coming in at 0 percent after increasing 0.6 percent in the prior month. Within that, wages and salaries rose 0.2 percent, leaving wages up 3.5 percent year over year. Importantly, that remains below the 3.8 percent increase in PCE prices, underscoring that income growth is not keeping pace with inflation.

On the spending side, personal consumption increased 0.5 percent following a 1 percent gain last month. However, those figures are nominal, not real, meaning they do not adjust for the impact of rising prices. When adjusting for inflation, real personal spending rose just 0.1 percent in April after a 0.3 percent increase in the prior month, during a period when inflation itself was running at 0.4 percent and 0.7 percent. On a year-over-year basis, real personal spending is up 2.1 percent, but that pace has begun to slow.

This dynamic—where prices are rising faster than incomes—has also arisen in savings behavior. The savings rate declined to 2.6 percent from 3.2 percent last month and is down sharply from the 5.5 percent level one year ago. This marks the lowest level since June 2022, when the economy was emerging from the pandemic. Prior to that, the only comparable period when savings rates were near similar levels (since the data was first being collected in 1960) was the period between early 2005 and early 2008.

This decline in savings is likely being driven by a weakening in disposable income. Nominal disposable personal income, which reflects what remains after taxes, is up just 2.6 percent year over year. Outside the COVID-impacted year of 2020, that marks the lowest level since the middle of 2016 and is low by historical standards. More notably, real disposable personal income—which adjusts for inflation—declined 0.5 percent in April, following a 0.2 percent decline in the prior month and similar weakness in the preceding periods. On a year-over-year basis, real disposable income is now down 1.1 percent, which is a rare development

The week ahead

Monday: The Institute for Supply Management (ISM) will release the May 2026 ISM Manufacturing Purchasing Managers’ Index (PMI) at 10:00 a.m. EST. In April, the ISM Prices Index surged to its highest level since 2022, driven by sharp spikes in fuel, oil, and transportation costs stemming from the Middle East conflict, despite the overall index being in a four-month streak of expansion. We’ll be watching to see if the May data sustains this expansion or points to an economic cooling cycle amid escalating geopolitical and industrial pressures.

Tuesday: The U.S. Bureau of Labor Statistics (BLS) will release the April 2026 Job Openings and Labor Turnover Survey at 10:00 a.m. EST, providing a deeper look into labor market tightness. The previous report showed job openings holding steady at 6.9 million.

Wednesday: The ISM will release the May 2026 ISM Services PMI on Wednesday at 10:00 a.m. EST. Coming off an April report where the services sector logged its 22nd consecutive month of expansion at 53.6 percent, the upcoming May data will reveal whether high energy prices and global strains are finally leaking into the broader consumer economy.

Also on Wednesday, the Federal Reserve Board will release the June 2026 Beige Book at 2:30 p.m. EST. Offering anecdotal insights into current economic conditions across the various Federal Reserve districts, the publication will help steer monetary policy decision-making at the Federal Open Market Committee’s upcoming June 16–17 meeting. We will be looking for insights into whether consumers are shouldering higher costs from inflation or if companies have begun to absorb those expenses into their profit margins.

Thursday: Global outplacement firm Challenger, Gray & Christmas will release the May 2026 Challenger Job Cuts Report at 7:30 a.m. EST. April’s job cut announcements spiked 38 percent month over month to roughly 83,000, though year-to-date figures remain 50 percent below last year’s levels. The report will show whether the “low-fire, low-hire” environment has continued as well as shed more light on the high concentration of AI-driven cuts within the technology and information sectors.

Friday: The Bureau of Labor Statistics will release its May 2026 Non-Farm Payrolls at 8:30 a.m. EST. April’s report showed a moderating but resilient 115,000 jobs added and an unemployment rate steady at 4.3 percent. We will be paying particular attention to wage growth in the upcoming report, which is projected to drop to 3.3 percent year over year. This would mean that real wages will turn further negative, weighing heavily on U.S. consumer spending.

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