May 2024 -April Showers Bring May Flowers

After a strong first quarter for stocks, April showers rained down as the S&P 500 Index fell about 4% last month. It appears, those showers will continue to bring May flowers, despite the widely cited stock market adage, “Sell in May and go away.”

While stocks have delivered solid gains this year, the steady growth of the U.S. economy alongside rising corporate profits increase our outlook confidence for more gains ahead. While last week’s data on gross domestic product looked soft on the surface, the U.S. economy still grew 1.6% in the first quarter. Consumer spending rose at a solid 2.5% pace, while capital investment rose 2.9%. The economy may slow later this year, but we’re not there yet.

So, what caused stocks to dip in April? Beyond digestion of strong gains through March, stubborn inflation and higher interest rates were the main culprits. As the downtrend in inflation has stalled recently, expectations for the start of the Federal Reserve’s rate-cutting campaign have now been pushed back. In our March note, we expected the first 25 basis point rate cut to occur on June 12th but given three consecutive months of hotter than expected inflation data we now anticipate the first cut may be announced at its September or November meetings.

We do expect inflation to ease again later this year as demand likely slows, but patience will be required. Despite the market’s obsession with rate cuts, we do not believe we need five of them for markets to continue to grind higher.

Of course, we’re always concerned about a bigger slide, but first quarter corporate earnings have been quite reassuring. A solid 80% of S&P 500 companies have beaten earnings estimates so far this quarter, with more than 8% average upside beats relative to estimates.

More importantly, results from our core portfolio holdings have mostly exceeded expectations and their forward earnings estimates have moved higher providing further evidence of upbeat guidance across corporate management.

With the economy growing steadily and corporate profits rising, the near-term outlook for stocks still remains supportive. As always, there will be rainy days. Sticky inflation remains a thorn in the market’s side and geopolitics are a potential stumbling block. But for markets, we expect more flowers than showers in May and into the near future.

 

As always, we wish you and your family a great Friday evening, and a wonderful weekend!

Please reach out to us with any questions or comments you may have regarding your specific situation.

 

Jaran C. Day, Chief Investment Officer

Griffin Dalrymple, CFP®, Chief Strategy Officer

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