Monthly S&P 500 forecast for May 2026
May 1st, 2026
Our monthly S&P 500 forecast for May is a 1 percent increase over the average of April 2026.
The model-based forecast takes into account the changes in oil prices and wages. However, a forecast model cannot possibly capture the full impact of uncertainty caused by tariff wars and geopolitical tensions, such as the war in Middle East.
April’s remarkable rebound
When the S&P 500 index ended March 5.1% down from the end of February, there were worries that the market was entering into the correction territory (-10%). March’s stock market sell-off was driven by the war in the Middle East and its inevitable impact on energy prices. The price of oil surged to its highest level since the start of the war in Ukraine.
Another reason for the panic in stock markets was the apparent slowdown in the US economy. The US GDP growth was significantly slower in 2025 Q4 due to the government shutdown. Although the reversal of the government spending’s negative effect on GDP in Q1 was in the cards, investors were anxious about the US economy entering a stagflationary phase.
On the back of the ceasefire between the US and Iran, and the calming news about the economy, the global stock markets rallied in April. Furthermore, the US corporate earnings surprised on the upside. Investors were less worried about the stock market overvaluation when the Magnificent 7’s Alphabet and Microsoft reported strong results. As cloud companies pledged a whopping investment of around $670 billion in AI infrastructure, the future earnings potential owing to productivity gains increased confidence in stocks, even in small-cap companies.
The S&P 500 index reached its highest level in the last six years. At the end of April, the index was 9.6% higher than at the end of March.
Although some domestic indices, such as PMI, point to contracting business activity, markets expect further positive impulse from Trump’s ‘One Big Beautiful Bill Act’ (OBBBA). The bill is to be effective as of May 2026, through which, consumer incomes and short-term corporate earnings may benefit from favourable tax reliefs. The act also promotes oil and gas drilling, a populist policy in the time of rising energy prices. The bill is expected to increase the long-term national debt, but the short-term impact on stock markets has been positive.
PMI deteriorates, consumer confidence improves
The Chicago Purchasing Managers’ Index (PMI) fell to 49.20 in April from 52.8 in March, after rising to 57.7 percent in February. The index averaged 54.25 between 1967 and 2026. The contraction in business activity has been a theme over the last two years. The latest data indicate that the market turnaround driven by new orders has begun to lose steam.
The Conference Board’s consumer confidence index edged up by 0.6 points to 92.8 (1985=100) in April, from 92.2 in March’s upwardly revised reading. The Present Situation Index—based on consumers’ assessment of current business and labor market conditions—retreated by 0.3 points to 123.8. The Expectations Index—based on consumers’ short-term outlook for income, business, and labor market conditions—rose by 1.2 points to 72.2. The survey period for this month’s preliminary results included the temporary ceasefire in the Middle East, and presumably was positively affected by the recovery in the stock markets.
Although consumers appeared less pessimistic in April, the war in the Middle East is likely to dampen any positive sentiment if the war with Iran drags on.
Inflation spikes as expected, and GDP recovers from the shutdown
The annual inflation rate in the US spiked to 3.3% in March from 2.4% in February 2026, as expected. 12.5% increase in energy prices was the main driver of the higher inflation rate.
The personal consumption expenditures (PCE) index, a key barometer of inflation and consumer spending, rose at a 3.5% annual pace in March, in line with the market consensus.
Core PCE, which excludes the more volatile food and energy categories, grew 3.2% in March, also in line with market forecasts.
Both inflation indicators are well above the Federal Reserve’s annual inflation target of 2%.
As Brent crude price currently hovers well above the 100-dollar-a-barrel mark, it is clear that a prolonged war has grave consequences for the global economy and the future US inflation.
The US economic growth in 2024 Q4 was revised further down to 0.5% from the second estimate of 0.7%. This was sharply lower than Q3 (4.4%) (Source: Bureau of Economic Analysis (BEA)). It was somewhat expected that the US government shutdown would put a damper on the Q4 growth. Indeed, the advance estimate for GDP growth in 2026 Q1 showed a strong recovery coming at 2% annualized rate. Economists polled by Reuters had forecast GDP growth increasing at a 2.3%.
Looking forward, things can progressively worsen as inflation starts to approach the 4 percent mark with the rising energy prices. Stagflation may become a dominant theme, even if a hard landing for the US economy is avoided.
The Fed kept interest rates on hold in April
After the 25 bp rate cut in December, the Fed’s target range for interest rates is 3.50% to 3.75%. As expected, the Fed kept the U.S. short-term interest rates unchanged in its January, March, and April meetings.
As a result of the war in the Middle East, the near-term price path of energy prices is currently uncertain. The oil price is well above $100, the highest in four years. Oil traders are worried that an escalation in the US-Iran war would keep the Strait of Hormuz effectively shut. There is no Fed meeting in May, and the next meeting is in June. Under the circumstances, we believe it is unlikely that the Fed would cut the interest rates before September.
S&P 500 index is slightly overvalued
According to Factset Insights from April 24, the forward 12-month P/E ratio for the S&P 500 is 20.9. This P/E ratio is above the 5-year average(19.9) and above the 10-year average (18.9). For 2026 Q1, FactSet reports that the blended (year-over-year) earnings growth rate for the S&P 500 is 15.1%. If 15.1% is the actual growth rate for the quarter, it will mark the 6th consecutive quarter of double-digit earnings growth.
The latest forward 12-month P/E ratio is above the P/E values from the previous month (19.9). That said, the recent strong company earnings have reduced the extent of overvaluation. Our monthly S&P 500 forecast for May indicates a 1% increase over the average of April. We expect the forward P/E value to be fairly valued in April.
Our monthly S&P 500 forecast is a model-based fair-value estimate. Announcements of tariffs and cancellations cannot be captured in our model unless the impact appears in historical data. The possible impact of geopolitical tensions is fed into the model through keyword searches (Google clicks) and the advanced retail sales index. However, these variables perform better in normal times. Our quarterly S&P 500 forecast discusses these issues in more detail.
