May 2026 Sector Allocation Update

Please CLICK HERE to download the sector allocation report in PDF format.

Market Recap

The stock market rose sharply in April to close the month at all-time highs, mounting a V-shaped rally after the March declines largely caused by the beginning of the Iran conflict. As it turns out, markets bottomed on March 30, consistent with the stock-market timing trends seen in previous major U.S. conflicts. For April, the S&P 500 rose 10.4%, while the Nasdaq Composite rose 15.3%.

That said, compared to the V-shaped rebounds of recent years, this one has played out somewhat differently. Since 2020, retail investors have had a habit of buying dips and “legging into lows,” while institutions remained sellers until “all clear” was signaled. In April, this appears to have reversed. Based on our conversations with clients, we believe institutional investors caught this V-shaped rally more correctly. Many have been adding since mid-March.

For those wondering if they have missed an opportunity, we would note that equities have displayed positive follow-through after first reaching all-time highs on April 15, suggesting to us that there is still upside potential. Supporting this view is the AAII sentiment indicator, which shows that individual investors have stayed largely bearish through April’s rally.

Also importantly, ICI data shows retail investors continued to raise cash during the market selloff, with little to no buying of dips. As we have previously discussed, cash on the sidelines represents future buying power. In this case, the retail money that has chased the rally has done so primarily in AI-leveraged areas, which may explain why we are seeing such big moves in things like memory and semis recently.

Beyond positioning, we believe there is now a fundamental argument for why AI is causing earnings growth without inflation, and that is a good combination for stocks. AI is probably adding two percentage points to GDP each year for the next five years in the U.S., which translates to roughly 6% S&P earnings growth coming from AI productivity alone. We acknowledge that many rational investors continue to point to a coming shortage of petroleum products and other reasons to stay cautious, but the underlying earnings backdrop has strengthened materially.

In summation, we believe there is still a lot of “fuel in the tank” for this rally. And it could go beyond 7,300.

Having said that, it is important to acknowledge that we are still in what I refer to as the “fog of war,” in which geopolitical developments, both real and rumored, can have significant short-term impacts on markets. Obviously, oil prices continue to impact equities. Although some technical indicators had suggested that crude oil was set to decline, it surged well beyond $120 on April 30 after reports that U.S. Central Command was considering a short and powerful wave of strikes on Iran (including infrastructure targets), followed by reports in Iranian state media that Iran would soon take “practical and unprecedented action” against the U.S. naval blockade of the Strait of Hormuz.

We take it as a good sign that the S&P 500 remained largely flat and even climbed slightly over the last week of April despite the surge in oil prices. To us, this is a reminder that the fundamentals of the US economy and S&P 500 earnings have strengthened since the start of the year.

That said, as many oil analysts and strategists have noted, there is a supply shock that is being created right now due to the Iran war, and we’ve lost a lot of production. A JPMorgan analyst noted that we in the U.S. may not have seen the shock yet due to the availability of spare capacity, inventories from which to draw down, and emergency releases from strategic reserves. Once those are exhausted however, prices could finally adjust in a way that causes demand to fall.

When oil strategists talk about a supply shock, what they are talking about is a material shortage globally in all the things that are “built in a barrel,” so to speak, things like kerosene, jet fuel, and diesel. We can see this already in jet fuel: prices have surged and shipments, especially to big jet fuel importers like the UK, France, and Germany, have fallen.

For now, the market seems to be comfortable with these risks, but we continue to keep this in the back of our mind. This is one of two developments that might scare markets later this year.

The other potential source of uncertainty later in the year is the Federal Reserve.

Federal Reserve

After the April 29 Federal Open Market Committee (FOMC) meeting, we saw what is almost certainly going to be Jerome Powell’s last post-meeting press conference as Federal Reserve chair. The biggest takeaway from his remarks was his announcement that he plans to stay on as a Fed governor after his chairmanship ends, a decision he explicitly attributed to what he described as President Trump’s attacks on Fed independence.

We looked at annual returns of the Dow Jones Industrial Average by Fed chair since 1914. Under Jay Powell, who became Fed chair in 2018, the stock market has averaged 8.3% in nominal annual returns and 4.7% in real terms. This ranks around the midpoint amongst the 16 Fed chairs we examined. He is also in the middle of the pack compared to his four most recent predecessors:

• Paul Volcker (1979-1987): +15.4%, +9.3% (nominal, real CAGR)
• Janet Yellen (2014-2018): +13.5%, +11.9%
• Alan Greenspan (1987-2006): +7.9%, +4.7%
• Ben Bernanke (2006-2014): +4.8%, +2.5%

Powell navigated the U.S. through COVID, through several war-time black swans, and through inflation shocks (although many blame the Fed for that). With that in consideration, I would give him high marks overall for delivering +8.3% and +4.7% annualized nominal and real returns. I think he can leave on a high note.

Looking forward, Trump’s choice to succeed Powell, Kevin Warsh, has advanced in the confirmation process, testifying in front of the Senate Banking Committee and winning the committee’s approval. He will now face a full vote of the Senate. Historically, this process has typically taken between 50 to 70 days, and if this trend continues, it means that it could be June or July before we get a new Fed chair.

Historically, we have seen that the first year of each Fed chair’s term leading the central bank tends to be accompanied by market uncertainty and a drawdown of at least 10%. This has happened for 10 out of the last 13 Fed chairs, so if Warsh is confirmed, as observers widely expect, the possibility of the market testing a new Fed is very real.

Taken in total, Warsh’s testimony before the Senate Banking Committee would suggest we have a Fed that would operate very differently under Warsh versus Powell, and it would be understandable for the market to require an adjustment period. For example, Warsh expressed skepticism about the benefits of forward guidance from the Fed, about the use of Core PCE as an inflation gauge, and about the views some FOMC members hold about the causes of inflation. There could also be some testing as the market tries to decide whether Warsh is truly independent, despite his pledge to not be a “sock puppet” for the president who nominated him.

The path forward

As discussed, oil prices and changes at the Federal Reserve are two potential sources of uncertainty that could affect markets later in the year. The timing of either or both could coincide with our original projections for how the year might turn out, which call for what might feel like a bear market around the middle of the year. As illustrated below, we continue to see the likelihood of a strong rally as the year comes to a close, with our year-end target for the S&P 500 remaining unchanged at 7,700.

Our three-phase view of 2026 has played out roughly as projected. The original 7,300 target was an aspirational level for a strong start, and now that we are here, we still see fuel for a move higher. But later this year, we will have to confront the two issues already discussed: the market testing a new Fed, and the petroleum products shortage triggering a delayed price reaction. Either or both could be the trigger for a 15% to 20% drawdown. We do think there are the ingredients for turbulence later. But AI, the scarcity of compute, and the U.S.’s position as the provider of that scarcity are why we believe we can exit the year at 7,700 or higher, and arguably 2027 could be one of the biggest rallies we see in our lifetime. The outlook is still bullish, with turbulence in the middle.

For the most part, our recommendations remain unchanged. We continue to favor the Magnificent Seven, industrials, financials (large-cap and regional banks), and small-caps, along with basic materials and energy, though energy is no longer among our top picks.

However, we are also adding software (IGV) to our top sector picks. In our view, the case for software stocks has improved, with risk/reward that is asymmetric for the next 12-24 months. This is partly because software has reversed its entire relative performance since April 10, 2026.

Software has fallen out of favor recently due to the threat that AI poses to the software industry. This is not entirely untrue: AI is indeed a threat to many business models, and the software sector will need to evolve. However, we anticipate that the best software companies will dynamically adjust and arguably leverage AI. In the meantime, given that consensus is cautious, we believe that stronger companies will surprise to the upside. Thus, we would suggest overweighting the sector into year-end.

Strategic Sector Ratings

As we enter May, Tom’s strategic ratings remain unchanged for the month. Mark, however, made four changes to his technical sector ratings, the most active month of revisions in the past year. The adjustments reflect both an upgrade of the leadership group that has driven the rally off the late-March low and a tactical reduction in two areas where the technical setup has deteriorated.

On the upgrades:

• Information Technology (Neutral to Overweight): Mark first noted this upgrade on his April 13 report following the breakout in the equal-weighted Technology ratio (RSPT vs RSP) above resistance that had contained the sector since October 2025. Since the April update, Information Technology has gained 20.7% and outperformed the S&P 500 by 9.3%, with 75.3% of sector members now trading above their 20-day moving average. The combination of the Magnificent 7 reclaiming its prior trading range, Mag 7 weekly DeMark buy signals, and a broad participation across software, semis, and hardware reinforces the case for technology to lead U.S. equities back to new all-time highs through summer.
• Real Estate (Neutral to Overweight): REITs have transitioned from a multi-quarter laggard into one of the more constructive setups across the broader market. Since the April update, Real Estate has gained 7.1% and 67.7% of sector members now trade above their 200-day moving average. Mark views the recent broadening of leadership, where defensives such as REITs and Staples have joined Technology in pushing higher, as an important confirmation that the rally has legs. He has also flagged Homebuilders separately as one of the more actionable setups in his coverage, with multi-year trendline support aligning with 30-year Treasury yields pressing into multi-year resistance.

On the downgrades:

• Energy (Overweight to Underweight): Mark formally lowered Energy on May 1 following the technical breakdown in WTI crude. The price violated its uptrend from mid-April, the Elliott Wave structure suggests the bounce off the March low has now topped, and a composite of Mark’s preferred crude cycles points to a peak in May. With the Strait of Hormuz negotiations advancing and the Iran ceasefire holding, Mark expects WTI to retest and ultimately break the March lows, with downside potentially extending to $79 or lower. Energy was the strongest sector year-to-date, up 27.5% YTD coming into May, but has now declined 5.9% since the April update and underperformed the S&P 500 by 17.2%.
• Consumer Discretionary (Neutral to Underweight): The sector itself has rallied 14.7% since the April update, but the relative ratio of equal-weighted Consumer Discretionary to equal-weighted S&P 500 has fallen to its lowest level in nearly four years. The weakness is concentrated in the Consumer Services side of the sector. Casino, Booking, Cruise-liner, and Hotel operators including DASH, BKNG, NCLH, DPZ, LVS, CCL, and WYNN are all down more than 13% YTD, reflecting weakening consumer demand for travel and discretionary services. The sector also has seen the largest decline in EPS estimates since the earnings season started following Healthcare. Only 18.8% of sector members trade above their 20-day moving average and 37.5% above their 200-day, the weakest internal breadth in our coverage. Mark believes the sector requires further base-building before any sustained relative leadership can emerge.

With Mark’s adjustments, the sectors rated Overweight by both strategists are now Industrials, Information Technology, Basic Materials, and Real Estate. The alignment on Industrials and Materials has been in place since January (Tom’s top 2026 sector picks), while the joint Overweight on Technology and Real Estate is new this month. Consumer Staples remains the only sector rated Underweight by both strategists. Energy and Consumer Discretionary now carry split ratings, with Tom at Overweight or Neutral, and Mark downgrading to Underweight.

Tactical OW/UW – Mark’s Tactical Top 3 and Bottom 3 sector picks

As a reminder, beginning with the April update we shifted the tactical layer of our model to allow Mark to directly select his top 3 and bottom 3 sectors based on his forward-looking technical assessment. The quantitative composite (DQM, EPS Score, Trend Score, plus the moving-average screens) remains an important reference and we publish the full ranking in the methodology section, but Mark’s judgment is the final arbiter of tactical positioning.

Mark’s broader view heading into May is constructive but he expects a near-term pause. He believes the ^SPX and QQQ are at or very near a stall point: DeMark daily exhaustion signals are in place on the ^SPX and likely confirm on the QQQ within the next 1 to 2 weeks, breadth deteriorated meaningfully on Monday with nearly 3-to-1 negative breadth, and mid-term election year May seasonality is historically the weakest stretch of the calendar for equities. The base case is that the ^SPX consolidates through May, retraces 38% to 50% of the rally off the March 30 low, and then resumes the advance into August. This is a hold-and-add posture rather than a sell signal.

Top 3 Sectors (Tactical Overweight, +2% each):

• Information Technology: Combines the strategic upgrade with the strongest tactical setup in our coverage. Information Technology now ranks #1 in the DQM model, #1 in the Trend Score, and #4 in the EPS Score. With 75.3% of members above their 20-day moving average and the cap-weighted price 9% above its 20-day, the tactical signal is unambiguous. We considered Semiconductors specifically but Mark explicitly flagged SOXX as too overdone for a one-month tactical pick. Daily DeMark exhaustion was registered on SMH on May 4 and the daily RSI is 78. The broad-tech tilt captures the leadership without the chase risk.
• Industrials: Despite Industrials underperforming the S&P 500 by 3.6% over the past month as Tech reasserted leadership, the structural setup remains intact. The sector has gained 7.7% since the April update, 58.2% of sector members are above their 200-day moving average (the second-highest reading among cyclicals), and the DQM model now ranks Industrials #6 with the EPS Score and Trend Score both in the top 4. With Tom and Mark both rated Overweight, Industrials qualifies as a double-Overweight sector and receives both the strategic and tactical weight uplift.
• Real Estate: The technical inflection that drove Mark’s strategic upgrade also makes REITs one of the cleaner tactical setups. The Trend Score moved sharply from #7 to #3 and 67.7% of sector members now trade above their 200-day moving average. The sector represents only 1.6% of the S&P 500 by weight, so the +2% tactical addition combined with the strategic upgrade pushes our portfolio weight to 3.8%, our largest overweight versus benchmark in absolute terms (+2.2%) alongside Information Technology (+2.7%) and Industrials (+2.3%).

Bottom 3 Sectors (Tactical Underweight, -2% each):

• Energy: Same logic as the strategic downgrade. Crude has rolled over technically, the 14% gap-down in WTI futures following the ceasefire announcement violated the uptrend from mid-April, and Mark’s cycle work suggests further downside through the summer. Energy declined 5.9% since the April update and underperformed the S&P 500 by 17.2%. While 100% of sector members technically remain above their 20-day moving average and 95.5% above the 200-day, this is a function of the year-to-date strength rather than current momentum. In fact, Mark already had Energy at a tactical Underweight last month despite its strong momentum. The sector is rolling over from a stretched extreme.
• Utilities: Mark maintains his strategic Overweight on Utilities, but the near-term technical setup has deteriorated meaningfully. The sector is down 1.3% since the April update and has underperformed the S&P 500 by 12.6%. Only 38.7% of sector members trade above their 20-day moving average, while 80.6% remain above their 200-day, indicating the recent weakness has not yet broken the longer-term uptrend but has clearly stalled the momentum. The DQM rank deteriorated from #5 to #7. And the trend score deteriorated from #3 to #9.
• Health Care: Health Care continues to struggle. The sector is down 0.9% since the April update and has underperformed the S&P 500 by 12.2%. Only 36.2% of sector members are above their 20-day moving average and the DQM rank improved modestly from #8 to #3 in the quant model but the EPS Score deteriorated. Mark flagged Health Care as one of two sectors with the most negative earnings revisions this reporting season. With the defensive rotation that benefited the sector earlier in the year now fully reversed and no clear technical catalyst on the horizon, the tactical Underweight is maintained for a second month.

Portfolio Weight Changes vs Last Month

Our model weightings for May reflect Mark’s four strategic rating changes plus the tactical top 3 / bottom 3 selections.

Weight Increases:

• Information Technology +2.2% to 32.3%. The largest absolute weight in the portfolio. The increase is driven by the combination of Mark’s strategic upgrade (Tech now joins Tom as a double-Overweight sector) and the continuation of the tactical top-3 selection. At 32.3%, this is also our largest overweight versus the S&P 500 in absolute terms, at +2.7% versus the index weight.
• Real Estate +2.2% to 3.8%. Tied with Technology for the largest weight increase this month, despite a much smaller starting base. The doubling of the weight reflects both Mark’s strategic upgrade and his tactical top-3 selection. Real Estate now sits at +2.2% versus the index, a meaningful tilt given the sector’s relatively small index weight.
• Consumer Staples +1.9% to 2.8%. Worth noting given that Staples remains rated Underweight by both Tom and Mark. The increase here is mechanical rather than thematic. Last month, Staples carried the lowest weight in the portfolio at 0.9% as the methodology had reduced it heavily following the joint Underweight call introduced in April. With no further degradation in the rating this month, the position naturally normalizes back toward its mirror weight. Compared to the index, Staples remains a 1.9% underweight.

Weight Decreases:

• Financials -2.6% to 9.9%. The largest reduction this month. Financials was last month’s tactical top-3 selection, contributing +2% to its weight. With Real Estate now displacing Financials in the tactical top 3, this 2-point uplift unwinds. Mark also remains Neutral rather than Overweight on Financials technically. The sector ended the period virtually flat vs benchmark on Tom’s Overweight. We note that Mark sees a constructive longer-term setup in regional banks and broker-dealers, but the near-term tactical conviction was not strong enough to keep Financials in the top 3.
• Utilities -2.1% to 0.0%. The reduction here reflects Mark’s tactical bottom-3 placement combined with the methodology rule that brings sub-2% Underweight allocations to zero. Mark’s strategic Overweight on Utilities is still in place, but the tactical signal overrides for portfolio construction this month.
• Health Care -0.8% to 5.1%, Energy -0.7% to 1.0%. Both sectors carry tactical Underweights that were already in place last month. Energy’s reduction is more notable in context: Mark’s strategic downgrade adds to the tactical pressure, and the sector now sits at a 2.0% underweight compared to the benchmark. Health Care’s reduction is more modest. The sector remains Neutral by both strategists strategically, with the tactical Underweight providing the only downward pressure.

ETF Performance Recap and 5 ETF Picks for May

Since the April sector allocation report (4/7), our 5 tactical ETFs gained +13.2% on average, outperforming the S&P 500 by +1.9%. This was a strong rebound month for the basket after a difficult March, with the rally off the late-March low rewarding the high-beta and growth-tilt rotation Mark introduced in April.

• Best performer: Global X Lithium & Battery Tech ETF (LIT) gained +24.1% in absolute terms and outperformed the S&P 500 by +12.8%. The lithium recovery thesis played out as expected, with battery tech and EV-related names leading the cyclical rebound.
• Strong performers: Invesco S&P 500 High Beta ETF (SPHB) gained +19.6% (+8.3% relative), and Invesco S&P 500 Pure Growth ETF (RPG) gained +18.6% (+7.3% relative). Both delivered the convex upside profile we sought as breadth improved and growth reasserted leadership.
• Underperformers: iShares Biotechnology ETF (IBB) gained +3.2% (-8.1% relative), and Horizon Kinetics Inflation Beneficiaries ETF (INFL) gained only +0.4% (-10.9% relative). The inflation-hedge thesis behind INFL unwound as crude rolled over, and biotech failed to participate in the broader Health Care rebound.

For May, Mark has rotated 3 of 5 picks. The basket retains its growth and high-beta tilt and continues to lean on the broader thematic recovery rather than concentrating in semiconductors, which Mark views as too overbought to add at current levels.

Mark retained LIT and RPG and replaced the other three with:

• Invesco WilderHill Clean Energy ETF (PBW) (NEW): Provides exposure to the clean energy transition with a tilt toward small and mid-cap names in solar, wind, fuel cells, and energy storage. PBW gained 31.2% YTD and 26.0% over the past 30 days, with daily RSI at 74 indicating strong momentum without yet hitting extreme conditions. Top holdings include Sigma Lithium, Bloom Energy, FuelCell Energy, and Navitas Semiconductor. The pick complements LIT by extending exposure beyond batteries into the broader clean-energy infrastructure layer.
• Global X Autonomous & Electric Vehicles ETF (DRIV) (NEW): Captures the EV and autonomous vehicle theme with a more diversified, large-cap profile. Top holdings include Intel, Alphabet, NVIDIA, QUALCOMM, Tesla, Microsoft, and Samsung SDI. DRIV gained 33.5% YTD and 27.1% over the past 30 days. The mix of established tech leaders alongside pure-play EV names provides leveraged exposure to the secular automation theme without the concentration risk of single-stock plays.
• Global X Internet of Things ETF (SNSR) (NEW): Targets the IoT and connected-device ecosystem, with top holdings in Lattice Semiconductor, Garmin, Rambus, DexCom, Skyworks, and Samsara. SNSR is up 26.0% YTD and 22.5% over the past 30 days. The pick captures the thematic infrastructure layer of AI deployment, where IoT sensors, edge processors, and connectivity stacks underpin the next generation of automation and physical-world data capture. We view this as a complement to our broad-Tech overweight, providing exposure to the “picks and shovels” of AI proliferation outside the Mag 7.

Current Five ETF Picks:

• Invesco WilderHill Clean Energy ETF (PBW): NEW
• Global X Lithium & Battery Tech ETF (LIT): Carry-over
• Global X Autonomous & Electric Vehicles ETF (DRIV): NEW
• Invesco S&P 500 Pure Growth ETF (RPG): Carry-over
• Global X Internet of Things ETF (SNSR): NEW