Key Takeaways:
The S&P 500's April-May surge of 16% ranks among the four strongest two-month rallies since 1950, powered entirely by artificial intelligence chip stocks.
The S&P 500 surged 16% during April and May, a two-month gain matched only four times since 1950, as AI chip stocks powered a historic rally. The index was higher six months later each time, by a median 17%, according to Dow Jones Market Data.
"The AI train is moving forward and you don't want to try to stop it or sit on the sidelines," said Joe Tanious, chief investment strategist for North America at Northern Trust Asset Management.
The PHLX Semiconductor Index posted its strongest performance through the first 100 trading days of any year on record. Micron Technology increased roughly 10-fold over 12 months to a market capitalization above $1 trillion. Samsung rose about 465% in South Korea over the same period, while Intel tripled in 2026 to its first record since 2000. Cisco Systems and Qualcomm both surged about 50%. The S&P 500 has gained 11% since the end of December and posted nine consecutive weekly gains.
Analysts at Goldman Sachs raised their year-end target for the S&P 500 to 8,000 from 7,600, implying a further 5.5% rise. The biggest threat to the rally may be inflation, with consumer prices climbing faster than expected because of energy-supply disruption from the Iran conflict and overwhelming demand for AI hardware including memory chips. If the Federal Reserve moves toward raising interest rates, the yield on the 10-year U.S. Treasury note could climb back toward 5%, creating volatility, said Angelo Kourkafas, senior global strategist at Edward Jones.
Chip Earnings Justify the Rally
Strong corporate earnings and upbeat forecasts are underpinning the advance. Companies in the S&P 500 traded at about 22.5 times their projected earnings over the next 12 months, a slightly lower valuation than at the start of the year because earnings projections have grown significantly. Jason Pride, chief investment strategist at Glenmede, estimated that 75% to 80% of the rally over the past two months has been fundamental, fueled by legitimate hopes for a resolution to the Iran conflict and excellent earnings from tech companies.
Micron's ascent to a $1 trillion market cap was the fastest in history. UBS more than tripled its price target for the stock to $1,625 from $535, while Bank of America nearly doubled its target to $950. Barclays noted that Micron recently signed its first strategic customer agreement guaranteeing long-term supply purchases over five years, removing it somewhat from the traditional semiconductor boom-bust cycle. Gartner estimates that DRAM and NAND prices will soar 125% and 234%, respectively, this year, with no meaningful relief until late 2027 at the earliest.
Global Ripple Effects
The AI trade has spread across global markets. South Korea's Kospi rose 28% in May, led by chipmakers Samsung Electronics and SK Hynix, after a 76% increase last year. South Korean exports surged 53% in May from a year earlier, with semiconductor exports up 169% and computer exports up 291%. In Japan, SoftBank became the highest-value company on the Tokyo Stock Exchange, surpassing Toyota, as its shares rose as much as 8% in a single session. The Nikkei 225 gained 12% in May and hit a new record.
Hyperscalers including Meta Platforms and Alphabet plan to spend nearly $700 billion on AI infrastructure this year alone, according to Barclays. Anthropic, the AI company expected to go public this year, closed a funding round at a $965 billion valuation after posting its first operating profit in the second quarter, powered by coding tools popular with corporate clients.
"We are squarely in the acceleration phase of the AI era," said Kevin Shea, senior equity strategist at BNY Wealth. "You take a look at the revenue growth from some of these large language models, it's faster than anything we've seen before."
Recent Bank of America surveys show that fund managers reduced their cash levels by the most in a month since 2024 and are holding significantly more stocks than their benchmarks. The 10-year U.S. Treasury yield stood at 4.46%, while the Bloomberg Dollar Spot Index rose 0.1%. Brent crude traded at $93.40 a barrel, up 2.5%, as tensions in the Middle East persisted.
This article is for informational purposes only and does not constitute investment advice.
