To say May was an eventful month for the market is an understatement. Investors navigated around the latter half of first-quarter earnings, a breakout to record highs for the broader market, elevated volatility across fixed income and currency markets, and a mixed bag of economic data — not to mention elevated political uncertainty stemming from the conviction of former President Donald Trump. Overall, markets shrugged off political uncertainty, bad economic data was mostly taken as good news for stocks by reviving hope for interest rate cuts, while good news helped write the goldilocks narrative of economic conditions being just right.

Despite the S&P 500 capping off the month by ending its five-week winning streak, the index still added around 5% in May and posted its 24th record high this year. The advance was largely driven by a handful of mega cap stocks that rallied on strong earnings. In fact, chipmaker Nvidia (NVDA) contributed to just over one-quarter of the S&P 500’s monthly gain alone. Technical evidence points to May flowers beginning to wilt. Participation in the latest rally was relatively narrow, with fewer S&P 500 constituents making new 52-week highs or trading above their 200-day moving averages (dma) than when the market last reached new highs back in March. Furthermore, the lack of overbought conditions during the rally created a negative divergence between price and momentum.

Narrow participation in breakouts above key resistance has been characteristic of this bull market (generals lead, soldiers follow). For example, the breakout to new highs in January had fewer stocks trading above their 200-dma or making new highs than in December.  Rotational forces outside the mega cap space kept the rally going — something we expect will be required again for this market to keep moving higher.

The month of May provided more evidence of a slowing but growing economy, easing inflation, albeit at a slower pace than desired, evidence of softening consumer spending, and resilient earnings from corporate America.

Valuations are elevated, as we have pointed out numerous times in recent months. But with prospects for a soft landing still favorable as inflation pressures ease, the start of the Fed’s rate-cutting campaign potentially just a few months away, and corporate profits growing nicely, we would not want to turn bearish here. If companies can deliver near-consensus earnings estimates in 2024, buoyed by big tech, and inflation resumes its downward trajectory, enabling a soft landing, then we believe stocks stand a good chance of adding to year-to-date gains through year-end and hold a P/E ratio over 20. If a slowing economy weighs on earnings in the second half and inflation remains frustratingly sticky, then we would consider fair value for the S&P 500 at year-end to be closer to our original projection in the 4,850 to 4,950 range.

As always, we welcome any investment questions you may have. Please do not hesitate to contact us if you have any. Summer has come upon us quickly in Reno, we hope yours is a pleasant one.

~Mark and Elise

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