PNC Directions Portfolio and Performance Review 

• Equity markets continued to rally amid resilient earnings and AI momentum. Following April’s strong rebound, U.S. equities delivered another positive monthly performance in May, with the S&P 500 advancing approximately 5.26% reaching new highs during the period. The NASDAQ 100 outperformed with 10.58% gains, driven by continued strength in technology and AI-related sectors. Small-cap stocks showed mixed but generally positive performance, contributing to broader market participation as investor sentiment remained constructive despite lingering geopolitical uncertainties.
• Geopolitical tensions and energy prices shape the macro backdrop. While the temporary ceasefires in April between the U.S. and Iran as well as Israel and Lebanon helped stabilize markets, ongoing developments in the Middle East, including the U.S.-backed conflict with Iran continued to influence energy markets and inflation dynamics. Oil prices remained relatively elevated, contributing to a pickup in headline inflation (with the Consumer Price Index reaching around 3.8% in April data, with May estimated to deliver similar results). This environment supported expectations of a ‘higher for longer’ rate environment with officials signaling caution around potential rate hikes if inflationary pressures from energy and supply chain disruptions do not moderate.
• Commodity inflation shows signs of structural hedging. Elevated oil prices and related disruptions have added to cost pressures, though central bank hands remained somewhat tied amid mixed signals on demand. Markets continued to price in resilience, with high-quality growth companies, particularly in tech and healthcare, generally perceived as more resilient in the current environment. Gold and other traditional safe havens retained appeal as hedges against fragmentation and inflation risks.
• Growth-oriented sectors showed renewed participation. The strong first quarter earnings season, especially from mega-cap leaders and AI beneficiaries, provided support to valuations even as investors rotated selectively toward areas deemed to offer better risk and reward tradeoffs. Small- and mid-cap participation improved at times, improving sentiment regarding domestic economic conditions.

• Diversified Emerging Markets performed strongly in May rising 9.22%, as measured by the MSCI EM index, following previously strong performance in April (+14.71%). The combination of a stabilizing US dollar and a rebound in international trade sentiment supported growth-oriented Asian markets and commodity-exporting regions 
• U.S. Large Cap Growth was the next best performer this month, with the S&P 500 Growth index rising 8.09% - that compared to the S&P 500 at 5.26% for the same period. Strong first-quarter earnings and geopolitical ceasefire hope contributed to valuation expansion in mega-cap technology and AI-adjacent leaders. 
• U.S. Small Cap Growth also delivered strong performance, delivering 7.16% for the month, as measured by the Russell 2000 Growth index. Its continued outperformance versus the S&P 500 in May continues the April small-cap innovators “relief rally,” as their prior economic concerns moderated. High-growth companies rebounded from previous declines.

• U.S. Mid-Cap Value was relatively flat at -0.12%, delivering a slight loss to investors in May. The S&P Mid-Cap 400 Value was pressured as market gains remained concentrated in large-cap technology companies. With the likelihood of near-term rate cuts fading and policy holding higher-for-longer, small- and mid-sized companies experienced volatility as investors reassessed valuations relative to larger-cap peers.
• U.S Core Bonds slightly outperformed U.S. Treasuries, with the Bloomberg US Aggregate Bond index finishing the month with a 0.31% return. While it fared better than long-duration alternatives, the index’s returns were limited as the 10-year Treasury rose 24 basis points to 4.59% during the month. Modest positive returns were primarily supported by coupon income, which counteracted price declines as “sticky inflation” reinforced a higher rate environment. 
• US High Yield Bond performance ended the month with a modestly positive return of 0.49% as tracked by the Bloomberg US Corporate High Yield index, but faced pressure from increased issuance and earnings-related activity.

During the month of May, there were no changes to target asset allocation models in the program.

Within the equity sleeve, portfolios currently maintain an overweight to U.S. companies relative to non-U.S. developed markets across most portfolios, while also recognizing a need to balance domestic opportunities versus attractive relative valuations overseas. U.S. firms have demonstrated earnings durability, strong financial metrics, and sector leadership supported by capital markets. Nevertheless, valuation dispersion remains an area of focus, as the relative resilience of U.S. cash-flows and profitability continues, even as higher-for-longer rates weigh on rate-sensitive segments.

Within fixed income, portfolios are positioned with an intermediate duration posture with an emphasis on diversifying income across core fixed income and satellite positions such as high-yield credit, emerging markets debt, and mortgage-backed securities. We remain selective and deliberate with our allocations towards below-investment grade opportunities, considering potential spread volatility. As always, we will continue to evaluate market conditions, value dispersion, and evolving macroeconomic risks, adjusting positioning as needed to remain consistent with our long-term strategic mandates.