Inflation Accelerates to Multi-Year Highs as BlackRock Upgrades Developed Market Equities Strategically

Weekly Market Commentary | Week of May 18th, 2026

A Recap of Economic and Financial Trends from the Prior Week

By: Michael Horvath, The Quinnipiac University Global Economics Research Team

Last Week in Review

• U.S. CPI accelerated to 3.8% annually and PPI surged 6.0% year over year in April, with the Fed's Goolsbee acknowledging an "inflation problem" as Treasury yields climbed to their highest level in over a year

• Most major U.S. indexes finished lower despite the S&P 500 hitting a record high Thursday, as rising yields and persistent inflation concerns outweighed AI-driven earnings optimism heading into the weekend

• The Trump-Xi summit in Beijing concluded with signals of bilateral stabilization but no major policy breakthroughs, while European markets fell on stalling U.S.-Iran peace talks and Japan's 10-year government bond yield reached its highest level since 1997

Economic Recap

U.S. economic data last week reflected a significant acceleration in price pressures alongside continued consumer spending. The Bureau of Labor Statistics reported that CPI rose 0.6% month over month in April and 3.8% year over year, the sharpest annual increase since May 2023, with energy prices rising 3.8% during the month after a 10.9% increase in March. Core CPI, which excludes food and energy, rose 0.4% in April and 2.8% over the prior 12 months, above estimates for increases of 0.3% and 2.7% respectively. Wholesale price data reinforced inflation concerns, with the PPI rising 1.4% in April, the largest monthly increase since March 2022, while prices jumped 6.0% over the prior 12 months. Energy prices saw a sharp rise for the second straight month, increasing 7.8% after a 10.1% rise in March. Chicago Fed President Austan Goolsbee acknowledged after the CPI release that the U.S. has an "inflation problem" and that inflation is "going the wrong way not just in oil-related things and not just in tariff-related things," fueling concerns that the Federal Reserve may need to keep monetary policy restrictive for longer. U.S. retail sales rose 0.5% in April, in line with consensus expectations but slowing from March's downwardly revised 1.6% increase, with control group sales increasing 0.5%. Initial claims for unemployment insurance during the week ended May 9 came in at 211,000, slightly above estimates for around 207,000, while continuing claims increased by 24,000 to 1.782 million.

Internationally, eurozone industrial production grew 0.2% month over month in March, just below the 0.3% expected, while France's unemployment rate climbed to 8.1% in the first quarter, the highest level since early 2021. Germany's ZEW Indicator of Economic Sentiment rose to -10.2 in May from -17.2 in April, remaining in negative territory but surpassing market expectations of -19.8. In Japan, the corporate goods price index surged 4.9% year over year in April, ahead of consensus expectations for 3.0%, driven primarily by higher petroleum and chemical product prices, while household spending fell 2.9% year over year in March. China's PPI rose 2.8% year over year in April, accelerating sharply from 0.5% in March and marking the fastest pace since July 2022, while CPI rose 1.2% year over year, up from 1.0% in March.

Market Recap

Source: JPMorgan Asset Management, “Weekly Market Recap” (May 18th, 2026). (Chart © JPMorgan Asset Management. Chart used under fair use for educational commentary by The Quinnipiac Global Economics Research Team.)

Most major U.S. stock indexes finished the week lower as accelerating inflation data and rising Treasury yields overshadowed continued AI-driven earnings optimism. The S&P 500 closed at a record high on Thursday before pulling back on Friday, finishing the week up a modest 0.17% to 7,409, while the Nasdaq Composite was essentially flat at -0.06%. The Dow Jones Industrial Average declined 0.11% on the week. Smaller-cap indexes underperformed, with the Russell 2000 falling 2.34%. The Russell 1000 Growth gained 0.66% on the week and is now up 5.31% year to date, while the Russell 1000 Value declined 0.76% and is up 10.87% year to date. The yield on the benchmark U.S. 10-year Treasury note rose to around 4.59%, the highest level in over a year, as investors scaled back expectations for Federal Reserve rate cuts following the hotter-than-expected inflation readings. Within the S&P 500, energy advanced the most while consumer staples and information technology also posted gains; consumer discretionary, real estate, and materials led declines. Brent crude remained near USD 105, more than 40% above pre-conflict levels.

Internationally, the MSCI EAFE fell 1.53% on the week and is up 6.23% year to date, while MSCI EM declined 2.45% on the week but remains up 19.61% year to date. The pan-European STOXX Europe 600 declined 0.85% in local currency terms, with Germany's DAX falling 1.59%, France's CAC 40 declining 1.97%, Italy's FTSE MIB falling 0.35%, and the UK's FTSE 100 slipping 0.37%, as stalling U.S.-Iran peace talks raised fears of further energy-driven inflationary pressure. Japan's Nikkei 225 declined 2.08% as semiconductor and AI-related shares saw profit taking, while the 10-year Japanese government bond yield rose to 2.72%, its highest level since 1997.

Market Themes

BlackRock Upgrades Developed Market Equities Strategically on AI Earnings Momentum

BlackRock Investment Institute upgraded developed market equities to overweight on a strategic horizon of five years or more, citing the strength and breadth of AI-driven earnings momentum as the primary driver. Upgrades to MSCI U.S. 2026 and 2027 earnings expectations over the past two quarters rank in the top five since 1988, and the gap between expected Magnificent Seven earnings growth and the rest of the S&P 500 in 2027 has narrowed to 3 percentage points, down from 31% in 2024, indicating that AI-driven growth is broadening well beyond the largest technology companies. To fund the DM equities upgrade, BlackRock is reducing fixed income exposure in its strategic portfolios and downgrading high yield to neutral, preferring to take growth risk through equities rather than being capped by coupon income. BlackRock also downgrades DM government bonds to underweight, leaving long-term portfolios with less duration risk than benchmark, and overweights inflation-linked bonds given the expectation that inflation will prove more persistent than markets currently price over a strategic horizon. Within DM equities, BlackRock favors technology, AI adopters such as health care, and energy sectors tied to the AI buildout and rising power demand, alongside EM markets tied to AI supply chains including Taiwan and South Korea.

Scenario-Based Strategic Thinking Gains Urgency as Mega Forces Clash

BlackRock Investment Institute frames the current investment environment as one in which multiple mega forces are pulling markets in different directions simultaneously, making a dynamic, scenario-based approach to portfolio construction increasingly essential. The AI mega force is driving stocks higher today, but geopolitical fragmentation and the Middle East supply shock are generating inflationary pressures that feed through to higher yields and complicate valuations. BlackRock's capital market assumptions are built on three distinct scenarios: a starting point scenario reflecting current conditions, an AI productivity boom scenario in which AI drives sustained earnings and growth that justifies higher equity valuations, and a global risk premia rise scenario in which geopolitical fragmentation fuels stagflationary pressures that push investors to demand greater compensation for uncertainty and lower equity valuations. The gap between these outcomes over a five-year span, underscores why no single market view is sufficient. BlackRock sees infrastructure as a particularly resilient allocation across all three scenarios, noting that most investors can increase their holdings materially depending on their tolerance for illiquidity risk.

Chart of the Week

Source: BlackRock Investment Institute, with data from Robert Shiller (Yale University), "Multiple Outcomes: U.S. Equity 12-Month Forward Price-Earnings Ratio, 1991-2031," May 2026. (Chart © BlackRock Investment Institute. Used under fair use for educational commentary by The Quinnipiac Global Economics Research Team.)

The chart displays the U.S. equity 12-month forward price-earnings ratio from 1991 through the present, with three scenario-based markers indicating where the ratio could stand over the five-year strategic horizon extending to 2031. The historical line shows the ratio reaching a peak near 25 during the late 1990s technology bubble before declining sharply, recovering through the mid-2020s to levels approaching 24, and currently sitting near that elevated range. The three forward markers illustrate the breadth of potential outcomes: the AI productivity boom scenario (pink dot) implies a higher forward P/E as sustained earnings growth justifies elevated valuations; the starting point scenario (green dot) reflects BlackRock's current base case at a moderate level; and the global risk premia rise scenario (purple dot) implies a meaningfully lower forward P/E as investors demand greater compensation for uncertainty. The chart reinforces BlackRock's argument that strategic portfolio construction must account for fundamentally different macro paths, and that no single long-run capital market assumption is sufficient given the competing forces currently in play.

Market Outlook

BlackRock Investment Institute will watch UK and Japan CPI and PPI data this week for evidence of how higher energy costs tied to the Middle East conflict are feeding into price pressures in two of the most energy-import-dependent developed economies. Global flash PMIs will provide early signals on whether supply disruptions and rising input costs are starting to weigh on business activity more broadly. The euro area trade balance and China's Loan Prime Rate decision will also be in focus. The key near-term risk to BlackRock's pro-risk stance remains a further rise in yields driven by persistent inflation, which could begin to weigh on equity valuations if it pushes high enough to offset the earnings growth that has so far sustained the rally. Nvidia's earnings report this week represents the most significant individual corporate event of the quarter, with investors focused on whether AI infrastructure demand is running ahead of or in line with surging hyperscaler capital spending commitments.

Calendar Events

Economic Data:

• May 21 (Thu): Global flash PMIs; euro area consumer confidence

• May 22 (Fri): Japan CPI

Major Corporate Earnings:

• May 19 (Tue): Home Depot Inc. (Q1 2026)

• May 20 (Wed): Nvidia Corporation (Q1 2027); Target Corporation (Q1 2026); Lowe’s Companies (Q1 2026)

• May 21 (Thu): Walmart Inc. (Q1 2027)

Sources

J.P. Morgan Asset Management. "Weekly Market Recap PDF." J.P. Morgan Asset Management. https://am.jpmorgan.com/content/dam/jpm-am-aem/americas/us/en/insights/market-insights/wmr/weekly_market_recap.pdf

J.P. Morgan Asset Management. "Economic Update." J.P. Morgan Asset Management. https://am.jpmorgan.com/us/en/asset-management/adv/insights/market-insights/market-updates/economic-update/

T. Rowe Price. "Global Markets Weekly Update." T. Rowe Price Insights. https://www.troweprice.com/personal-investing/resources/insights/global-markets-weekly-update.html

BlackRock Investment Institute. "Weekly Investment Commentary: Upping Developed Stocks Strategically." BlackRock, May 18, 2026. https://www.blackrock.com/us/individual/literature/market-commentary/weekly-investment-commentary-en-us-20260518-upping-developed-stocks-strategically.pdf

BlackRock Investment Institute. "Weekly Commentary Archives." BlackRock. https://www.blackrock.com/corporate/insights/blackrock-investment-institute/archives

Apollo. "The Daily Spark." Apollo. https://www.apollo.com/wealth/the-daily-spark

MarketWatch. "Economic Calendar." MarketWatch. https://www.marketwatch.com/economy-politics/calendar

Yahoo Finance. "Earnings Calendar." Yahoo Finance. https://finance.yahoo.com/calendar/earnings/