May 2024 Market Commentary

Jed Glick, CFA – Portfolio Manager

Stocks bounced back in May on renewed prospects for a soft landing. The major US stock indexes bounced back from April’s pullback to march to new highs as inflation and jobs data moderated, while first-quarter corporate earnings growth was solid, keeping hopes alive that current restrictive monetary policy can ease inflation and the Fed can pivot before the economy slips into a recession.? April’s nonfarm payrolls report showed that employers added 175,000 jobs in the month, well below expectations and the lowest number since November.? Moreover, monthly wage increases eased to a 0.2% increase in April from 0.3% in March, while the year-over-year increase fell to 3.9%, the lowest level in over two years.? Inflation data also eased fears from earlier in the year that prices were on the cusp of reaccelerating. Core CPI fell to 3.6% year-over-year in April, the lowest level in three years.? First quarter S&P 500 earnings were higher by 7%, handily ahead of the 3.5% growth expected, thanks to the contribution from mega-cap tech growth and the biggest gain since the first quarter of 2022.?

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Tech once again leads the way.? Ten of the eleven sectors were higher in May, led by tech, which gained 10% thanks to solid earnings results and AI enthusiasm.? Utilities also outperformed, gaining 9%, as investors weighed the increasing power demand necessary to power data centers.? Energy was the only sector in the red for the month, declining a modest 0.4% as oil prices fell on easing geopolitical fears.?

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Growing angst about growth and narrow market breadth.? Since the end of the first quarter, there have been a few worrisome signs regarding economic growth, including the latest ISM manufacturing purchasing managers index, which slowed for the second straight month in May and remains in contraction territory.? The consumer also seems to be wavering from the burden of higher interest rates and diminishing savings, reflected by the most recent reading of the University of Michigan’s consumer sentiment survey, which came in below expectations.? Recent corporate earnings reports also paint a more mixed view of the economic backdrop.? Software makers Salesforce and Workday both recently reported weak quarterly results, noting longer sales cycles and increasing budget scrutiny as issues and industrial distributor MSC Industrial cut its earnings guidance, noting ongoing softness in its manufacturing-related end markets.? Outside of AI-infused growth, economic activity seems to be more muddled, and this is reflected in recent moves in stocks as well, where, once again, the major indexes are being driven by a handful of mega-cap stocks.? According to Bespoke Research, the six mega-cap stocks with market caps over $1 trillion are up 11.5% on average in the second quarter, while the remaining S&P 500 stocks are down 3% on average. The current dynamics are providing opportunities in overlooked stocks of companies that, in many cases, now trade at valuations below their pre-COVID levels, have strong growth prospects (some even AI-driven), and may see outsized benefits from easing monetary policy over the coming months.?

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As always, we would enjoy hearing from you. Please reach out with any comments or questions to [email protected].

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