Economic Strength Continues to Support Equities

1. Economic Data Reinforces the Growth Narrative Last week’s economic data came in broadly stronger than expected, reinforcing the view that the U.S. economy remains on solid footing despite ongoing geopolitical uncertainty. Nonfarm payrolls increased by 172,000¹ in May, marking the third consecutive month of more than 100,000 jobs added, while ADP employment also exceeded expectations with a gain of 122,000 jobs. Labor market conditions remain healthy, with initial jobless claims coming in at 225,000,² a level that remains well below levels historically associated with recessionary periods.

Economic activity outside the labor market also remained constructive. Both ISM Manufacturing and ISM Services exceeded expectations, coming in at 54.0 and 54.5,³ respectively, and remaining firmly in expansion territory. Additionally, new orders and factory orders surprised to the upside, further supporting themes we have discussed for some time: including the continued reshoring of manufacturing activity and growing demand tied to the AI food chain. These trends continue to benefit a broad range of industries, from industrials and transportation to semiconductors and power infrastructure.

Perhaps the most encouraging data point came from productivity and labor cost figures. Unit labor costs came in at 1.8% in the first quarter, better than the expectation of 2.4%, while productivity increased 2.8% year-over-year.⁴ This combination is particularly constructive because improving productivity can help offset wage pressures and support moderating inflation over time. While the conflict in Iran and above-trend economic growth may keep inflation somewhat sticky in the near term, the overall backdrop remains favorable. A resilient labor market, expanding business activity, and improving productivity provide a strong foundation for continued earnings growth and economic expansion.

2. Rotation Beneath the Surface Last week, we began to see some cooling within semiconductors and the broader AI food chain following earnings from Broadcom. While the company delivered another strong quarter and continued to benefit from robust AI-related demand, the stock sold off after results, weighing on sentiment across much of the semiconductor complex. Given the significant gains many AI beneficiaries have generated over the past year, some consolidation is not surprising and may ultimately prove healthy for the broader market.

At the same time, there are early signs of a potential rotation into other areas of the market. Whether this trend persists remains to be seen, but broader participation would be a constructive development. Several sectors, including financials, consumer discretionary, and select areas of consumer staples, continue to trade at more attractive valuations relative to many of the market’s recent leaders. A widening of market leadership could help support the next phase of the rally and reduce the concentration that has characterized much of the market’s advance.

Investors are also navigating an additional source of near-term volatility surrounding SpaceX and the potential implications for capital markets and liquidity. If portfolio managers are required to raise cash, the question becomes where those funds will come from. Given that many portfolios are already carrying relatively low cash balances, managers will have to source liquidity by selling recent winners, reducing exposure to underperformers, or trimming positions within the Magnificent Seven, which remain among the largest holdings across many portfolios. While this could create volatility over the coming days or weeks, it would likely represent a positioning-driven adjustment rather than a deterioration in the underlying fundamental outlook.

3. Fixed Income U.S. Treasury yields moved higher across the curve last week following a strong May payrolls report that also featured a sizable upward revision to April’s data. By Friday’s close, the 2-, 10-, and 30-year yields had risen by 14, 10, and 3 basis points, respectively. The yield curve has continued to flatten year-to-date. The 2s10s spread narrowed 4 bps last week to + 39 bps, marking a -31 bps move YTD.⁵

Credit markets deteriorated modestly last week, with widening evident across both the investment-grade and high-yield sectors. Investment-grade spreads moved 1 basis point wider to +107, while high-yield spreads expanded 4 basis points to +317. In the municipal market, tax-exempt yields were lower by 4-9 basis points across the curve as June 1st maturities fueled demand.⁶

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Sources:

1. Bloomberg: As of June 5, 2026 ↩︎
2. Bloomberg: As of June 4, 2026 ↩︎
3. Bloomberg: As of June 3, 2026 ↩︎
4. Bloomberg: As of June 4, 2026 ↩︎
5. Bloomberg: As of June 8, 2026 ↩︎
6. Bloomberg: As of June 8, 2026 ↩︎
7. Bloomberg: As of June 8, 2026 ↩︎