The S&P 500 is closing out a strong week, with gains +1.4% this week alone, taking total gains for May to close to 6%. As we stated earlier this month, we expected markets to shift from “fear of May” to “buy in May” and as each week has passed, this has been the case. Looking into next week, we expect this to continue.
- The key catalyst for next week, in my view, is AI-related. As highlighted below, there are several important AI-related events:
– 5/20 Mon: Microsoft hosts Windows and Surface AI event
– 5/21-5/23 Tue to Thu: Microsoft Build AI event
– 5/22 Wed (after the close): Nvidia reports F1Q results - Overall, we expect these events/earnings to reinforce the improving visibility and capabilities of AI and the related spending. And as a consequence, will be an overall positive for Technology stocks and the broader market. The US is the leader of AI innovation, so this halo is primarily US.
- NVDA -1.63% has been selling off recently, which means that expectations are being reduced into earnings. And of course, this is signalling jitters given what might have been viewed as lofty expectations. But to us, it is a good sign to see the softness into earnings. This makes the stocks more likely to gain post earnings. This is also true of Supermicro SMCI 3.06% , which will likely move in tandem directionally with NVDA post earnings.
- There are other reasons for stocks to rise next week. Foremost, there remains a lot of dry powder on the sidelines. The latest data from ICI shows cash balances continue to rise for corporates and for individuals.
– institutions added $11 billion to cash
– 4 consecutive weeks, wow.
– institutions selling this rally
– retail added $6 billion to cash
– 3 consecutive weeks.
– Retail still selling the rally. - This skepticism is evident in our meetings and zooms with institutions this week. There is simply skepticism that there is any reason to be long equities. And many are doubting progress on inflation, viewing the CPI report skeptically. Are these correct views? Our take on CPI and the progress seen has been written about extensively (see past notes). But the key is that auto insurance and housing are finally starting to move incrementally in the right direction.
- The Macro calendar is pretty light. Perhaps, FOMC minutes will be the most closely watched:
– 5/22 Wed 10:00 AM ET: Apr Existing Home Sales -0.11%e
– 5/22 Wed 2:00 PM ET: May FOMC Meeting Minutes
– 5/23 Thu 8:30 AM ET: Apr Chicago Fed Nat Activity Index
– 5/23 Thu 9:45 AM ET: May P S&P Global Manufacturing PMI
– 5/23 Thu 9:45 AM ET: May P S&P Global Services PMI
– 5/23 Thu 10:00 AM ET: Apr New Home Sales -1.80%e
– 5/24 Fri 8:30 AM ET: Apr P Durable Goods Orders 0.05%e
– 5/24 Fri 10:00 AM ET: May F U. Mich. 1yr Inf Exp - Similarly, there is a lot of Fed speak. Powell speaks Sunday at a commencement, so not a Q&A session:
– 5/18 Sat 5:45 PM ET: Kugler speaks at University of Virginia
– 5/19 Sun 3:30 PM ET: Powell speaks at Georgetown University Law
– 5/20 Mon 8:45 AM ET: Bostic Gives Welcome Remarks at Atlanta Fed
– 5/20 Mon 9:00 AM ET: Barr Gives Keynote at Atlanta Fed
– 5/20 Mon 7:00 PM ET: Bostic Moderates Keynote at Atlanta Fed
– 5/21 Tue 9:00 AM ET: Barkin Gives Welcome Remarks at Richmond Fed
– 5/21 Tue 9:00 AM ET: Waller Speaks on Economic Outlook
– 5/21 Tue 9:05 AM ET: Williams at Governance and Culture Reform Conference
– 5/21 Tue 9:10 AM ET: Bostic Gives Welcome Remarks at Atlanta Fed
– 5/21 Tue 7:00 PM ET: Collins and Mester Participate in Panel Conversation
– 5/23 Thu 3:00 PM ET: Bostic Participates in Q&A at Stanford
Bottom line: We are dip buyers into next week. Thus, we are buying dips.
We are surprised to see so many bearish/cautious investors with equities near all-time highs.
- historically, this is a bullish set up
- stocks consolidating for 10 weeks
- interest rates and VIX falling
- Fed is dovish
- $6 trillion of cash on the sidelines
- bearish sentiment high
Thus, we lean towards expecting stocks to rise following the April CPI report. Even a slightly worse print (higher CPI) likely means stocks have positive follow through.
We still favor those things working in 2024 so far:
- Ozempic-related LLY -0.78% NVO -1.68%
- Bitcoin & Proxies BTC MARA -1.60% PYPL 1.99% COIN -2.32% MSTR -3.00%
_____________________________
36 Granny Shot Ideas and 44 SMID Granny Shot Ideas: We performed our quarterly rebalance on 4/16. Full stock list here -> Click here
______________________________
PS: if you are enjoying our service and its evidence-based approach, please leave us a positive 5-star review on Google reviews —> Click here.
