Monthly Economic and Market Summary

• Stocks Refuse to Bend–Despite ongoing geopolitical tensions and the risk that higher oil prices could slow growth and accelerate inflation, equity markets have shown remarkable resilience. The rally continued through May, extending to eight consecutive weeks of positive returns. The S&P 500 index advanced 5.3% during the month; however, market breadth remains somewhat uneven, with only two of the eleven sectors at all-time highs. Small-cap stocks led the way, outperforming year-to-date, with gains of 15.5%.

• Bonds Volatile as Yields Swing–The bond market experienced significant volatility over the month. The 10-year Treasury yield surged as high as 4.67% mid-month before settling closer to the 4.46% range. Despite the turbulence, bonds ultimately finished the month modestly positive. Financial markets are increasingly pricing in the likelihood of a Federal Reserve rate increase, rather than a cut, by year end.

• Oil Prices Tumble Amid Negotiation Hopes–Oil prices declined sharply in May, falling nearly 20%—the steepest one-month drop since March 2020. Brent crude ended the month at $92 per barrel, while West Texas Intermediate (WTI) settled at $87 per barrel. The pullback halted a four-month upward trend, driven in part by a ceasefire agreement and a preliminary framework between the U.S. and Iran.

• Consumer Confidence Beats but Inflation a Concern–May Consumer Confidence of 93.1 modestly beat consensus estimates for 92.0, while April’s reading was revised higher to 93.8 (from 92.8). The report highlighted growing concerns around prices, particularly oil and gas, for a second consecutive month. Reflecting this pressure, roughly two-thirds of consumers indicated they have begun cutting back on spending in response to rising costs.

• Memory Stocks Soar–May was an extraordinary month for memory stocks. The world’s three largest chip makers – Samsung Electronics, SK Hynix and Micron Technology – now each carry market capitalization exceeding $1 trillion. Investor enthusiasm for AI infrastructure has helped pull the stock market out of its March slump and lift the S&P 500 and Nasdaq to record highs.

Q1 earnings recap: Robust growth reflects corporate resilience

The S&P 500 companies delivered impressive first quarter earnings growth, reflecting resiliency amid ongoing uncertainty surrounding interest rates, inflation and global growth. The blended earnings growth rate, which combines actual results from companies that have reported with estimates for those yet to report, stands at 28.4%, compared to expectations for 13% at the beginning of the quarter. This would mark the sixth straight quarter of double-digit earnings growth and the highest earnings growth rate reported by the index since Q4 2021 (32%). As indicated in the chart below, first quarter earnings progression far exceeded the 15-year average.

Over 84% of companies surpassed Wall Street earnings expectations, though positive results remained relatively concentrated in Technology, Communication Services, and AI-related sectors. “Magnificent 7” companies reported a momentous quarter, with growth of 63.2%, which is the highest earnings growth rate reported by these seven mega-cap companies since Q2 2021 (89.2%). Overall, four of the “Magnificent 7” companies are among the top five contributors to S&P 500 earnings growth in the first quarter: NVIDIA, Alphabet, Amazon.com and Meta Platforms. Micron Technology was the only company outside of the “Magnificent 7” companies that was a top five contributor to growth.

Stronger-than-expected earnings drove equity markets to record levels. Given first quarter results, full-year earnings growth expectations for S&P 500 companies now stand at 22%, up from a mid-teens percentage at the start of the year. The S&P 500 index is up 11.3% year-to-date and has recorded more than a dozen all-time closing highs for the year.

Source: FactSet and Harbor Capital Advisors