ALTERNATIVE MARKETS UPDATE – END MAY 2026

​Equity markets have continued to grind higher through the second quarter, with all three major US benchmarks closing at record levels at the end of May despite an unresolved geopolitical backdrop and a meaningful repricing of interest rate expectations. The S&P 500 finished the month at a new high, up around 11% YTD, while the Nasdaq Composite has gained roughly 16% and the Dow Jones Industrial Average around 7%. The dispersion across these indices is itself instructive. The market’s leadership remains heavily concentrated in large-cap technology, where enthusiasm around artificial intelligence and a resilient earnings season have offset the drag from higher energy costs and a more cautious rates outlook. As shown in Figure 1, the gap between the technology-heavy Nasdaq and the broader Dow underscores how narrow the rally has been, with a small cohort of mega-cap names accounting for a disproportionate share of index-level gains. It is worth mentioning a notable statistic at this juncture. Nvidia now has the biggest individual weight in S&P 500 ever, at 8%.

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RESEARCH PERSPECTIVE VOL. 276 May 2026 Alternative Markets Update Equity markets have continued to grind higher through the second quarter, with all three major US benchmarks closing at record levels at the end of May despite an unresolved geopolitical backdrop and a meaningful repricing of interest rate expectations. The S&P 500 finished the month at a new high, up around 11% YTD, while the Nasdaq Composite has gained roughly 16% and the Dow Jones Industrial Average around 7%. The dispersion across these indices is itself instructive. The market’s leadership remains heavily concentrated in large-cap technology, where enthusiasm around artificial intelligence and a resilient earnings season have offset the drag from higher energy costs and a more cautious rates outlook. As shown in Figure 1, the gap between the technology-heavy Nasdaq and the broader Dow underscores how narrow the rally has been, with a small cohort of mega-cap names accounting for a disproportionate share of index-level gains. It is worth mentioning a notable statistic at this juncture. Nvidia now has the biggest individual weight in S&P 500 ever, at 8%. Figure 1: Indexed Performance of the Dow Jones Industrial Average, the S&P 500, and the Nasdaq 100, Source: Investing, June 2026 For investors, the central tension is that a handful of AI-related companies have propelled benchmarks to fresh highs while masking weaker participation across the rest of the market. Concentration is a double edged sword both ways. The same names that have driven returns also represent a lack of diversification in risk, which will come with consequence should sentiment around AI capital expenditure or semiconductor demand shift. The question is therefore not whether equities can sustain their momentum, but whether market leadership can broaden out enough to support index levels if the mega-cap complex stalls. The most significant equity market development looking into the second half of 2026 is the anticipated wave of large technology listings. SpaceX has filed its S-1 and is expected to begin its roadshow in early June, reportedly targeting a valuation in the region of $1.75 trillion and a raise of around $75 billion, which would rank as the largest IPO in history. Anthropic is reported to be targeting a public listing as early as October at a valuation approaching $900 billion, while OpenAI is widely expected to pursue a listing in the fourth quarter. Taken together, these deals could demand well over $200 billion from public markets, in contrast to 2025, when the entire US IPO market raised approximately $45 billion. The scale of this pipeline raises a clear question around absorption. While there is an estimated $8 trillion sitting in US money market funds that could be redeployed, a concentrated cluster of mega-cap listings in a short window could pressure liquidity, valuations and secondary-market performance across the broader technology complex. For institutional allocators, the listings also represent the first opportunity to access pure-play AI exposure directly, rather than through proxies such as semiconductor manufacturers or the large platform companies that hold stakes in these businesses. Government bond markets have repriced materially over recent months, with the move in yields reflecting a broad shift in how investors are positioning for inflation and central bank policy. The US 10-year Treasury yield now stands at around 4.5%, having risen from below 4% earlier in the cycle, while the 30-year yield has climbed back to roughly 5.0%. As shown in Figure 2, the long end of the curve has borne the brunt of the adjustment, consistent with concerns that elevated energy prices and a resilient labour market could keep inflation stickier for longer than markets had previously assumed. Recent stronger-than-expected employment data, including a robust private-sector payrolls print and elevated job openings, has reinforced the view that the economy retains momentum and that the disinflationary path is less assured than it appeared at the start of the year. Figure 2: US 30-Year & 10-Year Treasury Yield, Source: Investing, June 2026 Perhaps the most striking shift is in expectations for the policy rate itself. Whereas markets previously anticipated that slowing growth would allow the Federal Reserve to ease, attention has now turned to the prospect of further tightening. Markets currently price in an approximately 85% probability of a quarter-point rate hike by year-end, up sharply from around 60% only a week earlier, driven by the combination of firm labour data and renewed upward pressure on oil prices. This represents a notable reversal in the policy debate, which has shifted from when rates will fall to whether they will rise further if the geopolitical risk premium in energy markets proves persistent. The longer oil remains elevated, the greater the risk that energy costs feed through into transport, production and wage expectations, eventually forcing policymakers to maintain restrictive policy and signalling a possible era of stagflation. The leadership transition at the Federal Reserve adds a further layer of uncertainty to an already fragile rates environment. The arrival of Kevin Warsh has raised questions around the balance between the Fed’s inflation mandate and political pressure to support growth. For investors, the key uncertainty is therefore not simply the direction of the next policy move, but whether the framework guiding that decision has changed. In this environment, term premia and volatility in long-dated yields are likely to remain elevated, particularly if markets perceive any inconsistency between the inflation mandate and the broader political backdrop.   The hedge fund industry has navigated an unusually volatile environment in 2026, and the resulting performance dispersion across strategies has been significant. Total industry capital pushed further above the $5 trillion milestone in the first quarter, reaching a new record of approximately $5.22 trillion, marking the fourteenth consecutive quarterly increase. This continued growth reflects both performance gains and sustained investor demand, as institutions increasingly turn to hedge funds for diversification, downside management and tactical exposure to macro dislocations at a time when traditional asset class correlations have become less reliable. The broader environment of higher volatility, shifting inflation expectations and elevated geopolitical risk has reinforced the case for flexible, actively managed mandates. At the strategy level, the dispersion is clearly visible. Macro strategies have been the standout performers, benefiting from volatility across oil, rates, currencies and commodities, with the relevant industry macro indices advancing strongly over the first quarter even as directional equity exposure suffered during the March risk-off episode. Trend-following and systematic strategies, alongside energy and basic-materials focused mandates, have similarly capitalised on sustained moves in commodity and rates markets. Equity hedge strategies, by contrast, were among the most exposed during the initial risk-off phase but participated meaningfully in the subsequent recovery as volatility normalised and equity markets rebounded. Relative value and event-driven strategies have been supported by wider spreads and higher dispersion, although their returns depend less on broad market direction and more on execution, liquidity and catalyst timing. Unlike during previous cycles, cryptocurrencies did not manage to follow to strong recovery of equities and are down significantly. Fund of Hedge Funds and Multi-Strategy hedge funds also managed the turbulent phase very well due to their differentiated exposure across different strategies. Figure 3 summarizes the performance as of 30th April 2026 of the aforementioned hedge fund strategies. Figure 3: HFR Hedge Fund Strategy Indices YTD Performance as of 30th April 2026, Sources: HFR, HFRX & HFRI, June 2026 Overall, the post-volatility environment appears favourable for hedge fund allocations, but it increasingly rewards managers with disciplined risk control rather than simple directional exposure. The strength of demand reinforces the view that investors are using hedge funds not only as return-seeking vehicles, but as structural components of a diversified portfolio. In a setting where oil prices, interest rates and equity leadership can shift quickly, the ability to manage risk remains particularly valuable, and is likely to be the principal determinant of relative performance through the remainder of the year. STONE MOUNTAIN CAPITAL Stone Mountain Capital is an advisory boutique established in 2012 and headquartered in London with offices Pfaeffikon in Switzerland, Tallinn in Estonia and Dubai and Umm Al Quwain in United Arab Emirates. 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