Keeping Perspective

Although the S&P 500 sits just below its all-time high, recent market gains have not been as widespread over the last two weeks. First-quarter earnings propelled a wide range of stocks and sectors to new highs, but momentum slowed as the season wrapped up. Increasing concerns about the overall economy have impacted stocks of companies selling non-essential items, while companies involved in artificial intelligence (AI) have become the top performers in the market. Nvidia has been in the spotlight since posting a 262% increase in Q1, and since it makes up a significant part of the S&P 500, its strong performance is boosting the overall index, creating a gap between average stocks. Excluding Nvidia, the index has seen a more modest rise of 7.8%, compared to 11.3% when its performance is factored in. While compelling investment opportunities exist beyond the biggest names, selecting stocks wisely becomes increasingly important. 

Since May began, the U.S. Economic Surprise Index has declined, indicating that economic data releases haven't met market expectations. Oddly enough, this has been good news for a market still concerned about a second wave of inflation. While the economy seems to be slowing down, inflation has subdued. However, not everyone is happy about this trend. Some market sectors, like companies selling non-essential items like Target, Home Depot, and Nike, have been struggling. Even though overall consumer spending is holding up, there are worries about those who aren’t spending as much. We remain cautious in this area of the market. 

Companies developing new technologies and those providing support services have fared far better. Tech, communications, and utilities industries have led the way in recent weeks. These companies benefit from AI and the increased power required to fuel its development. Their success is less affected by day-to-day changes in economic conditions or concerns about inflation. Long-term growth plans are driving their leadership, creating a stark contrast between their earnings and the overall economy. Despite signs of economic slowdown, expectations for earnings growth this year and next remain strong, exceeding 12%. If progress continues at a steady pace, the market could keep moving higher. 

As we enter the election season, it’s natural to anticipate some uncertainties ahead. However, it is crucial not to lose sight of the forest through the trees. While the development of AI and its potential for boosting productivity offer significant growth opportunities, it's important to recognize that this isn't the sole driver of economic progress. Many companies are demonstrating impressive strategic visions beyond AI. We focus on maintaining a portfolio of companies with strong management teams capable of executing their strategic plans effectively.

Thanks,
Preston May, CBE®
Research Analyst