“I wasn’t the fastest guy in the world. I wouldn’t have done well in an Olympiad or a math contest. But I like to ponder. And pondering things, just sort of thinking about it and thinking about it, turns out to be a pretty good approach.” – Jim Simons (April 25, 1938 - May 10, 2024)

Good evening,

An old stock-market adage calls for investors to “sell in May and go away.” Yet to Fundstrat Head of Research Tom Lee, multiple factors make it wiser to “buy in May” this year. Stocks rose this week to extend their weekly win streak to three, and Lee believes more gains are likely for this month. 

In his view, stocks were helped by soft jobs data from last Friday (May 3), which helped convince investors that the “economy is no longer red-hot” and that the Fed is thus increasingly likely to stay dovish. Those numbers are also consistent with the latest weekly unemployment data, which rose to the highest level since August 2023. 

The unemployment claims sparked a discussion during our weekly research huddle. Fundstrat Head of Data Science Ken Xuan said, “I don’t really pay attention to any single week’s unemployment numbers. The number is good for stocks, but from a data-science perspective, you need to look at it over a longer period to see a meaningful trend.”

Yet Head of Technical Strategy Mark Newton pointed out that many investors had a different reaction, pointing to the bond market’s immediate response to the jobless numbers: “Rates plunged, and we also saw the dollar pull back.” 

In fact, Newton continued, “I sense that this could be the start of why the bond market actually starts to rally pretty sharply between now and late summer. I think yields are going to pull back. I think the dollar is going to also weaken, and I think that this recent weakening of economic data sort of sets the tone for why this is going to happen. The equity market has responded pretty positively in response – for a lot of investors, it’s still ‘bad news is good news’.”

With little fresh macroeconomic data this week, earnings reports likely garnered a larger share of the market’s attention. The earnings season thus far has been strong, with 46% of companies reporting EPS growth of 10% or more, as seen in our Chart of the Week. As Lee pointed out, this is the best reading of this metric since early 2022. 

About 81% of companies have beat expectations, and the overall earnings beat for the S&P 500 is around 7.5% – the best it’s been since 2021. In fact, earnings beats have turned out to be strong enough to raise estimates for 2Q2024 EPS as well as FY2024 EPS. “This is the first time since 2021 that quarterly earning estimates have revised higher (+0.5%) in the first month of the quarter (2Q24),” Lee pointed out. The last time this happened was in 4Q21.

Notably, EPS momentum appears to be reversing to positive for three sectors: Energy (going from -24% in 1Q to expectations of +17% in 2Q), Healthcare (from -24% to +21%), and Materials (from -21% -6%). Thus, S&P 500 EPS growth is set to accelerate further in 2Q24, to +11% overall. “This strengthening of earnings momentum, of course, is a tailwind for stocks” in Lee’s view.

From a technical perspective Newton is “still optimistic about the market. My thinking is the S&P [500] will challenge the March highs of around 5,265. If and when it gets above that, we could see it rise to 5400,” Newton said, adding, “Don’t forget about seasonality. Generally, markets tend to do very, very well during this time of most election years – and in years where the prior year was up more than 10% they tend to do even better. And so I think between now and the fall should be a great time for a broad-based rally.”

Lee is similarly constructive. “We are still in the ‘buy in May’ camp. The fact that stocks rose this week is a positive signal. And next week we expect incoming data (CPI, PPI) to show overall softening of the key components of inflation.”

Outside the U.S.

The Bank of England kept rates unchanged this week, but it did signal progress on inflation and at least the possibility of a cut as soon as June. For Head of Data Science Ken Xuan, that could be a sign of hope for those watching the Fed. “Central banks have a tendency to move together, so if we actually end up seeing a BOE cut in June, that might be good for U.S. investors.”

Meanwhile, Newton highlighted “a bigger trade that a lot of people are mentioning: Emerging markets have finally broken out. About a third of this is China, but we are seeing evidence of South Korea, Taiwan and other areas starting to come back.” He added, “I personally think that Brazil is poised to do well even though they're under a very interesting regime. In fact, I think that most of the LatAm space looks appealing. This is happening exactly as the dollar is starting to weaken, so it just makes a lot of sense. I suspect that, over the next few months, we'll see that continue.”

Elsewhere

Riksbank, the central bank of Sweden, cut rates for the first time since 2016, reducing rates by 25 bp to 3.75%. Riksbank said it plans two more rate cuts before the end of 2024, assuming current inflation trends continue. Riksbank is the second European bank to cut rates, after the Swiss National Bank cut rates from 1.75% to 1.50% in March.

Brazil reported at least 113 fatalities in what is being described as the country’s worst natural disaster since 1941, after torrential downpours last weekend caused widespread flooding in the state of Rio Grande do Sul. Hundreds of towns are entirely underwater, and a dam at a hydroelectric plant was destroyed. The catastrophe is expected to worsen, with many more hours of continuously heavy rain forecast throughout this weekend.

The Bank of England kept rates unchanged at 5.25%. BOE Governor Andrew Bailey nevertheless depicted recent inflation trends as “encouraging,” and the bank said it expects inflation to fall to below its target rate of 2% sometime in 2026. Meanwhile, the UK officially exited its most recent recession, reporting 1Q2024 growth of 0.6%, beating expectations of 0.4%.

The European Union reached an agreement to use interest generated from $226 billion in frozen Russian assets to help Ukraine’s war effort. Using the interest – estimated at around $4.3 billion a year –  allows the EU to help the embattled country buy weapons and supplies while forgoing the legally nebulous act of seizing and appropriating Russia’s frozen assets outright.

A study by climate think tank Ember reports that 30% of global energy came from renewable sources in 2023, led by increases in solar-powered electricity generation. In its annual Global Electricity Review, Ember noted that, including nuclear power, nearly 40% of the world’s energy came from low-carbon sources last year.

Bankruptcy lawyers handling the FTX case said customers and creditors might recover all of the money they lost as a result of the firm’s collapse, based on the dollar value of their holdings at the time. However, the sums repaid to investors would not reflect the extent to which many cryptocurrencies have risen since then.

An independent inquiry into the FDIC’s workplace environment found widespread sexual harassment, bullying and discrimination. Hundreds of purported improprieties were reported, and they included, but were not limited to, dissemination of sexually explicit photos in the workplace, the stalking of a female staffer by a coworker, lewd comments targeting female staff, and verbally abusive behavior from FDIC Chairman Martin Gruenberg. 

Italy will send its army out to hunt wild boar, hoping to protect its EUR 8.2 billion ($8.8 million) cured meats industry from an outbreak of African swine fever. Lombardic farmers had to cull 34,000 pigs in September 2023, hurting production of beloved products from  prosciutto to salami. In recent years, Italy has also encountered problems with packs of wild boars causing havoc in some of its cities. 

And finally: Scientists reported this week their discovery that sperm whales communicate using a much broader array of clicks than they had previously realized, conveying messages of far greater complexity than they had appreciated before. In musical terms, the sperm whales appear to have a “phonetic alphabet” – sets of between three and 40 clicks, in various rhythms, and repeated with rubato-like tempo changes.