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The Weekly Five

A (Slight) Disturbance in the Force

June 5, 2026

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Eric Freedman

Eric Freedman

Chief Investment Officer, Northern Trust Wealth Management

Riskier asset classes have moved in an almost uniform trajectory higher since the throes of the Iranian conflict. While we remain optimistic about the path ahead, recent volatility in capital markets suggests that investors have questions about Fed policy, tech valuations and other variables we explore in this Weekly Five.

1

Does Friday’s sharp sell-off in risk assets suggest more risk may be ahead for capital markets?

In spite of Friday’s sharp weakness across traditionally riskier asset classes, we continue to forecast glass-half-full outcomes for diversified portfolios. Friday’s volatility has been admittedly uncharacteristic, yet likely overdue. Before Friday’s sell-off, the S&P 500 had risen 20% since March 30, increasing in a near straight-line fashion.

As we often reflect, “in price is truth, at least for the moment.” Friday’s price action reinforced this, with the worst sector-level performers including semiconductors, materials and oil services, while the bulk of the weakness centered in information technology and digital infrastructure stocks. This pattern was echoed in country proxies, where South Korean exchange-traded funds — highly geared to semiconductors — and South Africa — significantly influenced by mining companies — displayed disproportionate weakness.

Earnings continue to drive equity markets, and with the U.S. earnings season largely complete for this quarter, investors are now focused on AI spend and adoption across companies. While we acknowledge lofty earnings expectations for this year and next, they are achievable should AI-driven capital expenditures persist. Consumer spending trends will also play a significant role in realizing earnings estimates, and today’s jobs report suggests positive momentum or, at minimum, stability. We will be watching for incremental change on AI spending and consumer activity, but for now, we see this as a mild pullback with a continued upward trend. 

2

Friday’s U.S. employment situation report drew considerable attention. What stood out from a capital market perspective?

Friday’s Bureau of Labor Statistics (BLS) jobs report carried notable capital market implications. On a headline basis, the U.S. economy doubled analyst expectations for May, with nonfarm payroll additions totaling 172,000 versus estimates of 88,000, and April’s tally revised higher from 115,000 to 179,000. Adding in March, the three month average payroll gain jumped from a previously reported 48,000 to 188,000.1

A more pessimistic view would be that some of the drivers will prove to be ephemeral: Government payrolls grew by 52,000 and leisure and hospitality by 70,000, resulting in these two sectors representing 71% of total monthly payroll growth.2 Average hourly earnings were flat despite the strong headline payroll growth, and the unemployment rate held steady at 4.3%. While all numbers within a data release can be skewed to paint a narrative, this report was stronger than markets expected, with equities, bonds, energy, precious metals and cryptocurrencies all seeing sharp declines. The trend across risk assets remains strong, but Friday represented a reminder that asset prices do move in both directions.

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3

Are events like Friday’s reaction why you retain the view that the bond market remains in charge of capital market outcomes?

Friday’s move in capital markets reaffirms our view that the bond market remains central to asset price movement. We cite the U.S. 10-year Treasury note as the cornerstone of global finance; its yield influences business and consumer borrowing costs and is the anchor for global sovereign borrowers. For investors, the 10-year Treasury yield is often referred to as “the risk-free rate” and serves as the basis for discounting all other assets, including future cash flow expectations.

Perhaps it is a cliché to quote the great Warren Buffett, but his 1999 essays in Fortune — written during the dot-com era’s run-up — remain among the most influential writings for asset allocators. In those essays, Buffett’s friend and editor Carol Loomis captured rare commentary on the broader markets, including one that highlighted the primacy of interest rates. According to Buffett, interest rates “act on financial valuations the way gravity acts on matter: The higher the rate, the greater the downward pull.”3

The reason for this, Mr. Buffett offers, is that “what an investor should pay today for a dollar to be received tomorrow can only (emphasis his) be determined by looking at the risk-free interest rate. Every time the risk-free interest rate moves by one basis point — or 0.01% — the value of every investment in the country changes.”4 As we have highlighted, interest rates have been subdued for 18 calendar years, with 10-year U.S. government interest rates remaining below 5% since the Great Financial Crisis. While Friday’s interest rate move was not massive and rates are contained relative to recent highs reached two weeks ago, underlying economic strength, coupled with uncertain Federal Reserve policy, leave investors considering if rates may break through to higher levels.

4

What are the implications of this number for Federal Reserve policy?

Odds that the Federal Reserve may increase interest rates rose following Friday’s jobs data. Markets now expect at least one interest rate increase before year-end and suggest another hike by September 2027, although expectations follow a very staggered and gradual path.5

Markets await Kevin Warsh’s perspective at his first Federal Reserve meeting as Chair. Warsh inherits a Fed that shifted its primary focus from inflation to labor market weakness in August of last year, leaving markets with the impression that the Fed will maintain an “easing” or accommodative policy bias. Several Fed members have since challenged that bias, and Friday’s job picture represents a labor market that, on a headline basis, appears to be in decent shape despite consternation regarding AI-induced layoffs permeating the job market.

We think the key variable to assess heading into the Fed’s two-day meeting ending June 17 is how much Fed change may be incremental versus how much may be more immediate. This week, the Wall Street Journal reported that Warsh appointed two policy advisors “outside of the central bank’s core responsibilities of monetary policy and bank regulation.”6 While markets await clarity on how Fed communication, policy tool focus, modeling methodologies and other factors may change, we will continue to focus on bond market implications.

5

Speaking of AI, what major stories emerged in the past week?

It was a busy week on the technology front, and overall we continue to see signs of demand exceeding supply with some notable themes reinforced. First, reports of data center buildout delays due to material availability continue. For example, natural gas turbines are booked through 2028, with companies such as GE Vernova highlighting backlogs across power, electricity and wind sources.7

Second, cost and expense continue to gain both user and investor attention. As we highlighted a few weeks ago, Uber’s Chief Technology Officer noted the company exceeded their annual AI budget spend estimate by mid-May.8 In a continuing theme, AI tool GitHub shifted to token-based billing this week. In the process, some larger users of power-hungry applications and tools are reporting bills 25x to 60x higher than the prior month.9

Third, on the individual company level, Anthropic filed for an initial public offering later this year. Broadcom, a major semiconductor producer, fell short of analysts' expectations for both the quarter and the full year due to lofty estimates. Emphasizing that demand is exceeding companies' supply abilities, Broadcom’s CEO noted that “momentum continues and in Q3 we expect semiconductor revenue from AI to grow over 200 percent year-over-year.”10

 

1 U.S. Bureau of Labor Statistics. “Employment Situation Summary.” June 5, 2026. https://www.bls.gov/news.release/empsit.nr0.htm. Accessed 5 June 2026.

2 Ibid

3 Loomis, Carol. “Mr. Buffett on the Stock Market.” Fortune Magazine. November 22, 1999. https://www.berkshirehathaway.com/1999ar/FortuneMagazine.pdf. Access 5 June 2026.

4 Ibid.

5 Northern Trust Wealth Management Research, Bloomberg terminal data. World Interest Rate Probability data gathered on Bloomberg terminal as of June 5, 2026.

6 Timiraos, Nick. “Warsh Names Two Conservative Policy Veterans as Interim Fed Advisers.” The Wall Street Journal, June 2, 2026. Accessed 5 June 2026.

7 Newman, Chris. “Natural Gas Turbines Aren’t ‘Gating’ Data Center Buildouts, GE Teranova Says.” Natural Gas Intelligence. May 28, 2026. https://naturalgasintel.com/news/natural-gas-turbines-arent-gating-data-center-buildouts-ge-vernova-says/. Accessed 5 June 2026. 

8 Janakiram MSV. “Uber Burns Its 2026 AI Budget in Four Months on Claude Code.” Forbes. May 17, 2026. https://www.forbes.com/sites/janakirammsv/2026/05/17/uber-burns-its-2026-ai-budget-in-four-months-on-claude-code/. Accessed 5 June 2026.

9 Paramkusham, Satvik. “AI News Today: Top 10 AI Stories- June 3, 2026.” Unrot.co. https://unrot.co/blogs/ai-news-today-june-3-2026. Accessed 5 June 2026.

10 Broadcom Investor Center. “Broadcom Inc. Announces Second Quarter Fiscal Year 2026 Financial Results and Quarterly Dividend.” https://investors.broadcom.com/news-releases/news-release-details/broadcom-inc-announces-second-quarter-fiscal-year-2026-financial. Accessed 5 June 2026.  

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This document is a general communication being provided for informational and educational purposes only and is not meant to be taken as investment advice or a recommendation for any specific investment product or strategy. The information contained herein does not take your financial situation, investment objective or risk tolerance into consideration. Readers, including professionals, should under no circumstances rely upon this information as a substitute for their own research or for obtaining specific legal, accounting or tax advice from their own counsel. Any examples are hypothetical and for illustration purposes only. All investments involve risk and can lose value, the market value and income from investments may fluctuate in amounts greater than the market. All information discussed herein is current only as of the date of publication and is subject to change at any time without notice. Forecasts may not be realized due to a multitude of factors, including but not limited to, changes in economic conditions, corporate profitability, geopolitical conditions or inflation. This material has been obtained from sources believed to be reliable, but its accuracy, completeness and interpretation cannot be guaranteed. Northern Trust and its affiliates may have positions in, and may effect transactions in, the markets, contracts and related investments described herein, which positions and transactions may be in addition to, or different from, those taken in connection with the investments described herein.

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