Sell in May and go away? Don’t think so. Buy in May because tech is in play. At least that is how the old saying played out this year. The month was exceptionally strong for equities, with the broad indices finishing at or near all-time high levels. The S&P500 delivered an impressive 5.3% return, riding a nine-week winning streak into June and capping one of the best two-month periods since 1950. Beneath the surface however, we saw considerable divergence, with eight of the eleven sectors actually falling during the month and contributing negatively to the larger index return. How could the market be up over 5% while 3/4 of the underlying sectors were red? The answer, of course, is technology. The tech sector, which had come under significant valuation pressure during the Middle East conflict in February and March, did virtually all of the heavy lifting for the S&P500 in May, jumping nearly 20% and dragging the index higher despite softness in other areas. Thus we can say that, while the headline number was indisputably impressive and encouraging, the May rally was not broad-based but narrow and concentrated in just a few sectors, with a relatively small group of names accounting for a disproportionate share of gains.
This dynamic is unsurprising given the dominant narrative of tech and AI earnings growth overwhelming concerns about Iran, inflation, and rising bond yields. The market is hanging its hat on the belief that we are in the early innings of a multiyear investment and spending cycle, similar to earlier booms in cloud computing, mobile payments, and SaaS / enterprise software. One could even draw similarities to the early days of the Internet, when investors shifted thinking from “what is the internet?” and “is this just a passing fad?” to “how meaningful will this become?” and “who will capture most of the benefits?” This theme is likely to remain the driving force of the overall market narrative, as the infrastructure buildout and associated capital expenditures (CAPEX) are still in the ramp-up phase and show no signs of slowing or reversing. As such, the trend is likely to play out over the long term – measured in years or even decades – and will have outsized effects not only on market composition and performance, but on the broad economy at the national level. Clearly, the market believes that AI is not just a passing fad.
At the macro level, there were several factors that supported markets during the month. The first of which was the meaningful easing of tensions between the United States, Israel, and Iran. Although headlines continue to be mixed and ping-pong between peace on and peace off, it does appear that the worst of hostilities are in the rear-view mirror, with an eventual conclusion being a virtual certainty. As these events unfolded during the month, we saw structural relief across the commodity complex, the most important component being oil, which saw WTI prices plunging nearly 17% during the month and settling below $90/barrel. Investors seized on this good news and optimistically began to discount the geopolitical risk premium, which contributed meaningfully to the improving sentiment. Additional macro factors supporting the constructive backdrop include a resilient labor market, robust consumer spending, and remarkably strong corporate profitability.
The one caveat to the above is the hasty reversal of the Federal Reserve rate cut narrative. On the back of higher-than-expected consumer (CPI) and producer (PPI) prices, inflation remains stubbornly above the Fed’s long-term target. Rather than being thought of as “transitory,” inflation is now seen as stickier, more persistent, and more broad-based. Elevated oil and energy prices, the effects of which have arguably not fully trickled through the official numbers, could potentially drive future inflation higher. The result of all this was a pivot in monetary policy expectations, with the bond market (often proudly described as the “smart money”) pricing in a greater than 50% chance of an interest rate hike in 2026. This contrasts with beginning of year expectations for multiple rate cuts. Although opinions on the “cut vs. hike” debate are mixed, the data does support a more hawkish Fed stance, or at the very least a “wait and see” posture. Given that inflation is above target, unemployment is holding at lows, and the macro backdrop indicates a strong growth environment, it is hard to argue the case for rate cuts in the here and now.
This puts the central bank and new Chairman Kevin Warsh in a tricky position. With inflation holding firm and possibly accelerating, it is hard to argue that interest rate cuts are appropriate. But preventatively raising rates could cool down growth and disrupt an economy that is firing on all cylinders. This hike and cut tension will have serious implications for the economy and markets, as interest rates influence bond yields, equity valuations, and a host of other economic factors. It also has the potential to influence diversified portfolios and the interaction between different asset classes. This bears just as much watching as the tech and AI earnings story.
As we head into June, all the above should continue to influence global markets, the global economy, and associated investment opportunities. As always, we will continue to monitor on-the-ground developments as they arise. We are appreciative of your attention, trust, and support.
Sincerely,
Jason D. Edinger, CFA
Chief Investment Officer
Altara Wealth
This material is intended for informational/educational purposes only and should not be construed as investment advice, a solicitation, or a recommendation to buy or sell any security or investment product. Please contact your financial professional for more information specific to your situation. Diversification does not assure a profit or protect against loss in declining markets, and diversification cannot guarantee that any objective or goal will be achieved.