DJIA VS S&P 500

DJIA: 52-wk: +18.65% YTD: +4.84% Wkly: +2.16%

S&P 500: -wk: +26.64% YTD: +9.49% Wkly: +1.85%

NASDAQ Comp.: wk.: +33.02% YTD: +8.86% Wkly: +1.14%

Utilities Select Sector SPDR ETF: wk.: +3.24% YTD: +12.54% Wkly:+4.18%

U.S. CONSUMER SENTIMENT FALLS TO A SIX- MONTH LOW: U.S. consumer sentiment fell sharply in May to the lowest level in six months as Americans cited stubbornly high inflation and interest rates, as well as fears that unemployment could rise.

The University of Michigan’s consumer sentiment index, released Friday in a preliminary version, dropped to 67.4 this month from a final reading of 77.2 in April.

Consumer spending is a crucial driver of growth. Joanne Hsu, director of the survey of consumers, said that the drop was large enough to be “statistically significant” and that it brought “sentiment to its lowest reading in about six months.”

THE FINANCIALS-HEAVY DJIA: Is beating the tech-heavier S&P 500, rising eight days in a row for the first time since December.

Tried-and-true Dow stocks continue beating the tech names that had earlier driven the market higher. Goldman Sachs outpaced Nvidia by 15 percent points in the past month.

This Stock-Market Rally Isn’t What It Seems: Analysts relate the market’s gyrations to economic data and the Federal Reserve’s policy, but valuations may be playing a big role too.

To anybody listening to Wall Street analysts, it might sound like all the market volatility of the past couple of months has had to do with small changes in the economy and the Federal Reserve’s potential response. But it may be that stocks just got too expensive.

So far, May has been a great month for the S&P 500, which is up 3.7%. Compare this to the index’s dismal April, when it shed 4.2% in value. Why did the market whipsaw like this? The popular narrative seems to be—as in the post-2008 period—that “bad news is good news” again. That is, a soft economy is better for stocks because central banks respond by lowering interest rates.

This week’s rally appeared to be boosted by a couple of weak U.S. job reports, which reignited hopes of a rate cut in the summer. Futures markets now price in a 13% chance that the Fed will stand pat by the end of the year, compared with 27% at the end of April, according to CME Group.

As of Friday, the U.K. was officially out of its recession and growing at the fastest pace in two years. In China, the last quarter turned out better than expected. This all points to a “Goldilocks” phase for the global economy, even with inflation stuck above 2%. The experience of the past couple of years shows that high borrowing costs don’t always hit economic growth.

Also running counter to the “bad news is good news” explanation for the recent rally, investors have been betting on companies that benefit disproportionately from a strong economy.

True, a more dovish Fed has pushed down yields on treasuries and lifted the shares of utilities, which behave a bit like bonds because they are steady income payers.

But take the “consumer discretionary” sector, which includes apparel retailers, restaurants and carmakers. Shares in such firms did badly in April, when the concern was allegedly an overheating economy, and have fared much better following the weak employment numbers.

Despite losing some luster by the end of the week, anticipation of consumers rolling back spending should have still tilted the balance even more clearly in favor of less-cyclical staples, such as food brands and must-buy household products.

A starker example is the KBW Bank index outperforming the S&P 500 this month, even though banks would be losers from slower growth and lower rates.

What, then, is the explanation for the April selloff and the early May rebound? One underappreciated factor may be valuations. At the end of March, the S&P 500 had done so well that it started to trade above the high level of 21 times expected earnings. Some sectors, such as consumer discretionary, have been looking particularly frothy.

In April, the sectors with the highest earnings multiples relative to history faced the worst declines—a tell-tale sign that valuation was at the heart of the selloff. By the start of May, the S&P 500 was back to trading at 20 times earnings, and stocks had some room to rise again. Further supporting the impression of a tug of war between share prices and valuations, companies have been rewarded less than usual by investors for beating Wall Street’s profit expectations, and punished more than average when they miss them, according to FactSet.

This isn’t to say that the macroeconomic backdrop didn’t matter at all. Bumpy consumer-price index readings had raised the possibility in investors’ minds, however remote, of a 1970s-style second spike in inflation. This worry was likely soothed by the recent soft payroll numbers. April CPI data, due to be released next week, will be another test. Still, if the stock market hits a wall in the months ahead, it seems more likely to be of its own making than the economy’s.

AI STOCKS RETREAT, BUY NOW?

AI Growth is Still in the Early Innings: According to a new report by Bloomberg Intelligence, "The generative AI market is poised to explode, growing to $1.3 trillion over the next 10 years from a market size of just $40 billion in 2022. Growth could expand at a CAGR (Compound Annual Growth Rate) of 42%, driven by training infrastructure in the near-term and gradually shifting to inference devices for large language models, digital ads, specialized software and services in the medium to long term."

AI Requires Data Centers: Data centers are integral to the AI buildout because they yield the computational power and storage necessary for training and deploying large language models like OpenAI and Microsoft's "ChatGPT," and Alphabets "Bard" at scale. Running a large language model (LLM) requires facilities that house numerous servers and specialized hardware optimized for tasks such as deep learning. Unfortunately, these complex systems require a ton of energy due to their intense processing demands and the persistent need for temperature (cooling) regulation.

THIS WEEKS' INTERESTING SECTOR PIECE. STOCK BUYBACKS: Stock buybacks are soaring in a sign that corporate America is bullish on the US economy. Companies have announced share repurchases of more than $383 billion in the last 13 weeks, up 30% from the year-earlier period and the largest sum since June 2018, per research from Deutsche Bank. The total includes Apple's $110 billion plan, the largest buyback in history.

The equity strategy team at Deutsche Bank notes that the "boom" in buybacks extends beyond the big names like Apple (AAPL) and Alphabet (GOOG, GOOGL), which just announced a $70 billion buyback plan.

Of the $262 billion in buybacks reported in first quarter earnings season, $82 billion has come from companies outside the large tech giants. This is a welcome sign for those looking for a broadening out of the stock market rally. "Buybacks have been the biggest driver of equities over time in the medium term," Deutsche Bank chief equity strategist Binky Chadha told Yahoo Finance ahead of the start of first quarter earnings reports.

To Chadha, the importance of buybacks is simple: They tell investors how companies feel about the macro environment. Buybacks typically rise when earnings rise, Chadha said. This is because as earnings rise, which is currently happening at its fastest pace in nearly two years, cash flow at companies increases.

Companies can then use this cash flow to increase dividends paid to shareholders, increase capital expenditures to invest back in the company, or repurchase stock, and, in turn, return capital to shareholders. This trend failed to materialize in 2023. Earnings picked up, but buybacks didn't. Chadha reasoned this likely had to do with the overwhelming majority projecting a recession to hit the US economy.

"When macro consensus is for a severe slowdown, or recession, companies aren't going to do buybacks," Chadha said. "They're going to hold on to their cash." But that macro consensus has shifted. Economists and macro strategists are feeling more optimistic about economic growth for the US this year.

Corporations are confirming that confidence with buybacks. "What you saw in fourth quarter earnings reporting earlier this year is that buybacks really started to move back up," Chadha said. "So, I'd say that this cloud of a cyclical overhang is lifting. Corporates are getting more comfortable with the outlook."

JPMorgan Private Bank global investment strategist Elyse Ausenbaugh noted that the tick-up in buybacks provides a "nice foundation for investors" as companies buying back their stock helps support the market even if individual equity investors aren't pouring money into stocks.

OF NOTE: Utilities Select Sector SPDR ETF has returned 19.34% in the last three months, according to Morningstar data. DOW 40,000 is so close.

Should you be worried?

— Richie

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