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Five for Friday - May 10, 2024

Earnings, Seasonality, Wage Growth, Leverage, and Trains

1. Profits

If there has been any unease associated with the market’s historically strong rally (S&P 500 is up 27% since the Oct. 2023 lows), it’s been the idea that the move was fueled by anticipation of Fed rate cuts rather than underlying fundamentals. This unease has been heightened by the fact that most of the rally was from valuation expansion rather than earnings growth, putting pressure on the Q1 2024 earnings season to deliver evidence of corporate strength. Luckily, it has delivered. As of writing, over 85% of S&P 500 companies have reported results and earnings growth has been +4.0% so far, according to Evercore ISI. This beats consensus expectations by a staggering 7.9% and puts growth on pace for a +6.0% quarter (the best since at least 2022). Every sector—from Technology to Utilities—is beating estimates, and the percentage of companies issuing negative earnings guidance for future quarters is below 5- and 10-year averages. Profitability is on the upswing, and that’s a good thing for stock owners.

2. Trading

Despite scant evidence that “Sell in May and Go Away” (exit stocks in May and re-buy in November) works as a strategy, the rhyme remains in the market’s zeitgeist year after year. This means I write a piece questioning its wisdom year after year, but this time I’ll turn to our partners at Strategas. They wrote recently that the idea is “a very incomplete understanding of seasonality, or worse, flat out wrong.” Strategas goes on to explain that the calendar’s impact on markets is influenced by the prevailing trend, and that “beginning May with the S&P in an uptrend (as is the case today) has historically produced above average performance through July.” There you have it. “Sell in May” is not just a misreading of the data, but a potentially counterproductive one—for this year, in particular.

3. Wages

Last week’s jobs report showed a deceleration in the pace of jobs added to the U.S. economy (only 175,000 in April, missing consensus expectations and down from 315,000 in March) and the lowest average hourly wage growth in nearly 3 years. Counterintuitively, however, markets celebrated the data. To investors, this was evidence of a cooling—but not shrinking—economy that would allow the Fed to lower interest rates without also implying that a recession is looming. Solid-but-slowing wage growth is especially important; although businesses often pass higher wage costs on to the consumer in the form of price inflation, our economy relies on a solid labor market to spur consumer spending.

4. No News

This week was a rare quiet week on the macro front, with no GDP, CPI, PMI, NFP, FOMC, or retail sales data for investors to parse (that’s economic growth, inflation, manufacturing/services activity, employment data, Federal Reserve meeting, or retail sales, respectively; investing folks sure love their acronyms). Interestingly, however, these quiet weeks have historically been better for the market. Per Bank of America, the average return in “uneventful” weeks is 0.6%, versus 0.3% or worse for weeks where one or more key data series came out. Sure enough, as of writing, the S&P 500 is up over 1.5% and within a hair’s breadth of its all-time high. It often seems like the world is getting noisier by the day, so I will not complain about the opportunity for a low-news week—especially if the market likes it, too.

5. On This Day

In 1869, the first transcontinental railroad was completed when Leland Stanford drove a golden spike into the tracks at Promontory Summit, Utah. According to PBS program “American Experience,” the railroad was annually shipping $50 million (that’s a few billion in 2024 dollars) of freight coast to coast only 15 years after completion and was a key building block in both America’s economic expansion and today’s globally connected trade environment.


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