“The barriers are not erected which can say to aspiring talents and industry, 'Thus far and no farther.’” 
~ Ludwig van Beethoven

Good evening,

The S&P 500 ended its weekly winning streak at five with a decline after the Memorial Day holiday, but stocks still ended the month of May up roughly 4.8%. Nevertheless, the lackluster end to the month, with stocks falling 0.51% in a shortened trading week, had Fundstrat Head of Research Tom Lee suggesting that investors “buy the dip.” His constructiveness is driven by seasonality, low levels of leverage, high (and still rising) levels of cash on the sidelines, and a strong EPS season that shows that the AI transformation is, in his view, “still going strong.”

As Lee reminded us earlier in the week, historically – when stocks have seen a positive first quarter and a down April while the economy was not in a recession – June has turned out to be a positive month for equities 11 out of 11 times, with a median gain of 3.4%. “Seasonality alone thus implies that the S&P 500 could end June near 5,500, or >200 points higher,” he pointed out.

Head of Technical Strategy Mark Newton chimed in by highlighting another aspect of seasonality. “June is a much stronger month in an election year than really any other month outside of November,” he reminded us at our weekly research huddle.

Meanwhile, we saw two data releases this week that support his view of downward pressure on inflation. The latest Case-Schiller home price update, released Tuesday, showed home-price inflation slowing. “Not only was there a downward revision on the previous month’s MoM price reading,” Lee pointed out, “but also we see that the year-over-year reading is now decelerating.”

Of course, the major inflation data this week came in the form of PCE, the Federal Reserve’s preferred inflation indicator. Ahead of the data release on Friday, Lee pointed out that market movements after PCE data have generally been positive since 2023 – particularly when stocks have been down in the week leading up to the release. “Four out of four times, after PCE was released, stocks were higher a week later,” Lee pointed out, “and, interestingly, that was true even though, in three out of four of those instances, PCE came out worse than expected.” This can be seen in our Chart of the Week:

“Of course, it would help if it turns out to be a good PCE print,” Lee said on Thursday evening – and it did. Core PCE came in at the lowest levels of the year, and a dive into the details saw a slowdown in consumer spending (0.2% MoM, below expectations of 0.3% and also below the March figure of 0.7%). “Excluding housing, PCE inflation is on target,” Lee observed, with Core PCE ex-housing coming in at +0.22% MoM, down from +0.31% MoM in March. On a YoY basis, Core PCE ex-housing has been dripping lower to 2.15% vs 2.19% YoY in March. 

More importantly in the eyes of Lee and his team, the Housing PCE component’s contribution to growth (CTG) slowed to +0.07% CTG vs +0.08% last month. “We believe these improvements are sustainable,” Lee said. 

Friday’s PCE release was followed by what Newton described as a “sharp pullback in yields.” He added, “The cycle that I use for Treasury yields shows a pretty steep decline for yields between now and September. This could be related to weaker economic growth and/or a continuation of the disinflationary trend.”

Going deeper into his research, Newton noted that Friday’s move in yields “follows the playbook nicely thus far on an eventual large decline for yields heading into this fall,” though he warned that “initially, a break of 4.50% will be key. We could see that get underway next week and, if so, then 4.31% is very important.”

Elsewhere 

The hacker group known as ShinyHunters purportedly breached the systems of both Ticketmaster and Santander this week. The purported Ticketmaster breach, which the company has neither confirmed nor denied, reportedly involved the names, addresses, phone numbers and partial credit card details from approximately 560 million Ticketmaster users around the world. The hackers are reportedly demanding $500,000 to keep them from selling the information to cybercriminals. Santander confirmed that the breach of its systems involved the personal data of all 200,000 global employees, as well as roughly 30 million customers in Spain, Chile, and Uruguay. 

OpenAI announced that it was creating a new Safety and Security Committee, seeking to address criticism from some – including board members and former executives – who assert that the company has stopped caring about the risks that ever-improving AIs might pose to humanity. Some questioned the company’s move, given that the committee will be led entirely by insiders that include CEO Sam Altman, Chairman Bret Taylor, and directors Adam D’Angelo and Nicole Seligman. Simultaneously, the company announced that it had begun training the next version of its generative AI, which will succeed the GPT-4 model currently powering ChatGPT.

The International Monetary Fund adjusted its China economic forecast upwards, estimating that China’s GDP will grow 5% this year rather than the 4.6% it had previously expected. The IMF said that it expects this rate to slow to 4.5% in 2025 and possibly to 3.3% by 2029, due to the country’s aging population and slowing productivity growth. 

U.S. securities trading now settles in one day, after a rule change finalized in February 2023 by the SEC. The new T+1 standard has also been implemented by markets in India, China, Canada, Mexico, and Argentina. It covers equities, corporate bonds, ETFs, mutual funds, and options. 

Senior Boeing executives will be required to meet weekly with officials at the Federal Aviation Authority (FAA) to update them on the company’s efforts to improve aircraft safety and quality control. Boeing submitted its improvement plans to the FAA this week. Those plans include  7,500 new tools and types of equipment, 400 improved work instructions, 300 hours of employee training material, additional employee coaching, and closer supervision.

Bill Ackman is planning an IPO for his hedge fund Pershing Square Capital, per a Wall Street Journal article citing anonymous sources. In preparation, Ackman will reportedly sell a 10% stake at a price that values the firm at roughly $10.5 billion.

And finally: Chey Tae-won, chairman of South Korean conglomerate SK Group, has been ordered by a court to pay his ex-wife KRW 1.38 trillion (USD $1 billion), the largest divorce settlement in South Korea’s history. The court found that Roh Soh-yeong, daughter of former South Korean President Roh Tae-woo, was entitled to roughly 35% of her ex-husband’s fortune because she had “played a role in increasing the value of SK Group and Chey's business activity." Chey has said he plans to appeal the ruling.