S&P 500: Rally Resumption

The major U.S. equity market indexes resumed their impressive rallies in May, with the S&P 500 leading the charge. This broadest measure of the U.S. economy clawed back all of the consolidation from April and closed at a fresh monthly high. Marking six out of the last seven months in the green, the S&P 500 experienced its best May since 2009, adding 4.80%. Alongside this, the Nasdaq 100 rose by 6.28%, and the Dow Jones Industrial Average increased by 2.30%. For long-term investors, these gains reinforce the robust health of the equity markets.

Tech Leads the Way

May was particularly strong for the technology sector, with major players such as Microsoft, Apple, Nvidia, Alphabet, Amazon, and Meta accounting for 76% of the S&P 500's gains. The information technology sector exhibited notable strength towards the end of the month, showcasing a solid earnings season. Among the S&P 500 sectors, the information technology sector reported the third highest earnings growth, led by companies like Nvidia Corp, Broadcom, Fair Isaac and Company, and Super Micro Computer.

Fed Meeting: Impacts and Outlook

The Federal Reserve kept the federal funds rate unchanged at 5.25% - 5.50% during their May 1st meeting, as anticipated. The Fed's statement emphasized that reducing the target range would not be appropriate until there is greater confidence that inflation is moving sustainably toward 2 percent. Following the meeting, the S&P 500 experienced a slight dip but quickly recovered, as markets were buoyed by Fed Chair Jerome Powell’s hint that a rate hike would not be the next move. This sentiment helped stabilize the markets as the month progressed.

Earnings Surprises

Attention shifted to Q1 earnings season after the Fed meeting catalyzed a low for the S&P 500 on May 1st. By May 31st, 98% of S&P 500 companies had reported their earnings, with 78% delivering a positive earnings per share (EPS) surprise and 61% reporting a positive revenue surprise. Companies like NVIDIA, Alphabet, Amazon.com, Meta Platforms, and Microsoft were significant contributors to the overall earnings growth, providing a much-needed boost amidst ongoing inflation and high interest rates.

Consumer Moods and Inflation Data

Consumer sentiment showed mixed signals in May. According to the University of Michigan Surveys of Consumers, sentiment dropped by about 13% compared to April, reflecting inflation concerns. However, subsequent consumer confidence data indicated an improvement, with the index rising to 102.0 from April's 97.5, surpassing the forecast of 96.0.

The Consumer Price Index (CPI) data revealed a slight easing in consumer inflation for April, with a 0.3% increase from March and a 3.4% year-over-year increase. Encouragingly, the Core CPI showed a 3.6% year-over-year rise, the lowest since April 2021. The markets responded positively, with the S&P 500 reaching a record-high close on the day of the CPI data release.

The Producer Price Index (PPI) data indicated a 0.5% rise in April, surpassing estimates, with services pricing contributing significantly. Despite initial unease, stock index futures remained nearly flat, but stocks rose following the CPI report, aligning with market expectations.

Strong Labor Market Data

The April employment data, released on May 3rd, showed an increase of 175,000 payrolls, below the estimated 240,000. Surprisingly, this was seen as positive, potentially strengthening the case for future rate cuts. The unemployment rate edged up to 3.9% from 3.8% in March, further fueling optimism for softer upcoming inflation data.

Fed & the Future

As of the end of May, there was a 99.9% probability that the Fed would leave rates unchanged at the June 12th meeting and a 14.5% chance of a rate cut at the July 31st meeting. The highest probability for a rate cut surrounds the September 18th meeting, with a 53.9% chance at the end of May.

The Takeaway

May featured a resumption of rallies for major stock indexes, solid corporate earnings, slightly lower interest rates, and varying economic data, all contributing to a favorable market environment. As June began, the S&P 500 was riding high on the momentum of a significant rally on the last day of May. Whether this signals more to come remains to be seen as the month unfolds.

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