May 3, 2024 - A Look at the Month of May

In today's video Observations and Expectations, Virtus Senior Managing Director and Chief Market Strategist, Joe Terranova, provides a look into the month of May, including earnings, the technical conditions for the S&P 500, the actions of the Federal Reserve, and opportunities for investors.

Transcript

Intro: In today's video Observations and Expectations, Virtus Senior Managing Director and Chief Market Strategist, Joe Terranova, provides a look into the month of May, including earnings, technical conditions for the S&P 500®, the actions of the Federal Reserve, and opportunities for investors.

Joe Terranova: Some observations and expectations as we move into the month of May, checking in on where markets are, we have to begin with earnings because the current earnings season has continued the positive trend of recovering from the earnings recession in the second half of 2022 and the early part of 2023. Now, for S&P 500 companies, 80% of companies have reported to date. What we see in front of us is that you have 4.2% revenue growth and earnings growth of 4.6%. Let's highlight where we see the weakness in earnings growth and if we could have the expectation that there will be improvement.

First of all, health care, down nearly 28%. Will we see an improvement? In fact, we will see a dramatic and significant improvement in earnings growth for health care as you move through the course of 2024. Why? Because the numbers that we were comping against previous were difficult numbers related to COVID figures that provided a significant earnings boost. You work off those comps, that's going to be favorable.

Same thing could be said for energy and for materials, which see earnings growth down over 20%, working off very difficult comps. The improvement comes as you move through the course of 2024.

Let’s check in on the S&P 500 itself, see where we are. Technical conditions, basically from the middle of April towards the back end of April, we have the S&P 500 trading in a very neat band between the 100-day moving average where we found support in the middle of the month and the 50-day moving average. So, you've got some consolidation price action, and clearly after the historic announcement from Apple on Thursday, May 2^nd, that in fact, they would be purchasing $100 billion of stock that's historic in its nature.

And then in addition to that, you had the unemployment report this morning indicating a little bit of weakness in the labor market. Maybe that plays into exactly what the Federal Reserve is doing in terms of looking for the reason to cut rates. But the S&P 500 sitting in the back end of that range, probably pop above that 50-day moving average after Apple and the unemployment report.

As it relates to the Federal Reserve, I think I've been rather consistent with all of you, and I remain consistent in my expectation. This is a Federal Reserve that believes monetary policy is restrictive. This is a Federal Reserve that is looking for a reason to move monetary policy into a more accommodative position. Didn't understand where this word stagflation came from, or the premise that ultimately, you'd get a rate hike at some point this year.

What we see in terms of inflation is you now have a U.S.-centric inflation stickiness. The rest of the world continues with their disinflation trend, and I would expect as we move through the course of 2024, the U.S., that disinflation trend, is going to allow for the Federal Reserve to normalize policy with a rate cut at some point.

And last point on all of that, let's remember, maybe it's not the soft landing or the hard landing the Federal Reserve is really looking for. Maybe it's something in the nature of a firm landing. And what we've heard recently from companies like Starbucks and Whirlpool and Harley Davidson is that the consumer is becoming more cost conscious.

Let's take a look at some performance statistics year to date and quarter to date, because I think this is rather interesting. When you look at the major U.S. indexes, you’ll see it’s the S&P 500 exhibiting the most strength year to date. The Russell having a very difficult quarter, down 5%. You can find opportunities outside the U.S. I continue to emphasize this. Developed international, for the very first time, providing investors that opportunity. Nikkei up 14% year to date. Hang Seng up 8.3% year to date, very quietly, up 11% this quarter. Shanghai also positive this quarter, up 1.89%, up 5% for the year. And let's look towards Germany where monetary policy is expected to be accommodative earlier than the Federal Reserve. We've got inflation readings with a two-handle on it. You have the FTSE 100 up 6.2% year to date. German Dax up 7%.

Again, emphasizing that the opportunities for investors have broadened in 2024,looking internally within the S&P 500, the 11 sectors. Leading sector year to date, energy up 10.4%, followed by communication services, financials, and let's pause for a second on utilities. Utilities up 7.1%. Now quarter to date, it's up 3.3%. And that's the only sector that's higher in the quarter. And let's remember, utilities are rate sensitive. Utilities are actually rate sensitive in an environment where rates are moving higher. OK,  that's counter to what the historical performance should be.

So, let's think about what's going on with utilities here, and it really goes back to artificial intelligence, and this is a great investment premise for everyone to begin to research and educate themselves on. But we are going to see significant power demand increase as a result of data centers having far more activity surrounding artificial intelligence. That’s going to put a lot of strain and certainly a lot of demand for the supply that comes from utilities. And that’s one of the reasons why we see utility performance so strong recently.

Rounding out the rest of the sectors, you see technology towards the bottom, up 2.38%. Real estate still struggling so far, year to date. But collectively, we're in a period where the seasonally consolidation sideways trade is generally the prevailing trend. Patience is the best position. Don't move away from the understanding that we are at the genesis of a new bull market that has the foundation of four critical tail winds; a Federal Reserve that's no longer adversarial, disinflation trends globally and here in the United States, a recovery from an earnings recession, the advancement of technological innovation, on-shoring near-shoring,  all collectively provides great opportunities for investors in the current bull market environment.

Recorded May 3, 2024.
Edited from the original.