“Sell in May and go away” was not great advice for investors this year. Even with the backdrop of multiple wars, global energy uncertainty, elevated inflation, and slowing growth, markets refused to stop advancing. The S&P 500 Index was no exception, gaining an impressive 5.26% for the month.
Technology Leadership Extends Beyond AI Semiconductors
The large-cap index was led by the Information Technology sector, up 15.99% for the month. Returns in the sector are no longer just from cutting-edge AI semiconductor companies such as Nvidia and Broadcom; 15 companies in the sector have returned between 100% and 630% so far this year.
There seems to be an insatiable appetite for semiconductors and memory. Revenue, earnings, and projected growth are all strong. The returns are both exciting and concerning at the same time. Valuations, such as the trailing 12-month price-to-earnings ratio, are extremely elevated. Future projections are still elevated but are significantly lower than the trailing ratio. Time will tell if the run these companies are on is a bubble. For now, investors are clearly enjoying the gains.
Sector Breadth Narrows as Energy and Utilities Retreat
Only three sectors in the S&P 500 Index were positive for the month. Energy and Utilities recorded the biggest drops, both down over 5% for the month, as hopes for cheaper energy took hold due to ongoing negotiations with Iran. The prospect of higher interest rates contributed to weakness in several sectors.
Smaller U.S. Companies Join the AI Opportunity Search
Small U.S. companies followed their large-cap peers higher for the month, although the gains were less pronounced than those of the large-cap index. The S&P MidCap 600 gained 2.45%, and the S&P Small Cap 600 was up 1.04% for the month. Investors have started scouring these markets for opportunities tied to the AI trade that has been powering both the market and the economy.
Foreign Markets Benefit from Semiconductor Strength
Foreign markets continued to climb, with the S&P Developed Ex-U.S. Broad Market Index (BMI) increasing 4.06% and the S&P Emerging BMI rising 2.91% during the month. The drivers in foreign markets are similar to the U.S.; countries that produce semiconductors, such as South Korea and Taiwan, are leading global returns.
Bonds Edge Higher Amid Fed Leadership Transition
Bonds rose even as interest rate volatility remained elevated. The S&P U.S. Aggregate Bond Index increased 0.18% for the month. New Federal Reserve Chair Kevin Warsh was sworn in during the month, while Jerome Powell elected to continue working at the Fed after his term as Chair expired. No chair has stayed past their leadership term since 1948. Warsh has indicated that he plans to make reforms during his time with the Fed but will contend with the former chair still serving.
New Fed Chair Faces a Complex Economic Backdrop
Stepping in as a new leader is difficult. Stepping in when the old leader is still serving may be even more difficult. But Warsh’s task is more challenging than that: he inherits an economy that is slowing, inflation that is rising, an administration wanting lower interest rates, an oil supply shock looming in the background, and record debt showing no signs of slowing down.
Precious Metals Pull Back as Rate Pressures Build
Precious metals declined 0.78% as the prospect of higher interest rates reduced the allure of metals. Additionally, central bank selling by several countries to manage currencies and raise dollars for oil purchases has increased supply. Longer term, the structural move by countries around the world to build non-dollar reserves is likely to continue, as national economic security pushes countries to diversify from the dollar.
Summer Focus Turns to Oil Prices and Global Supply Risks
As we move into the busy summer months and peak driving season, all eyes will be on oil prices and a narrow waterway that is demanding global attention. But even as the world feels pain at the pump, investors felt the positive returns of late spring.
Investment Commentary by Jason Flores, CFA, CAIA – Executive Vice President & Chief Investment Officer at Central Trust Company.
At Central Trust Company, we continue to reassess the rapidly changing investment landscape for both risks and opportunities. If you would like to access our full monthly outlook and additional investment commentary, visit our Investments Learning Center. As always, if you have questions or concerns, please contact your Central Trust Company team. We are always ready to help.
