Following a chaotic week of earnings reports and further bank fallout, the S&P 500 is, remarkably, reaching a new high for the year. This juxtaposition speaks to a market increasingly split between winners and losers. Index heavyweights, Microsoft and Meta, reported results showcasing resilience among core customers and traction on long-awaited cost-cutting efforts. Other reports centered on downtrodden economic forecasts for the back half of the year. Fortunately for the index, its largest companies have received the biggest applause from participants. However, the fanfare over a select few is masking some of the underlying weakness and vulnerability in the equity market. Only 54% of companies in the S&P 500 are trading above their 200-day moving average.

U.S. economic growth for the first quarter came in well below expectations. The real economy grew at a 1.1% annualized rate vs. economists' expectations of 2%. A sharp inventory drain and decline in private investment partially offset another quarter of robust consumer spending. But, inflation remains sticky. The Fed's preferred inflation measure, core PCE, reaccelerated to a 4.9% YoY rate in Q1. Because inflation is still elevated, it is difficult to say that the Fed's rate hiking campaign has ended. Markets are pricing in at least one more 25 basis-point hike, and more may be on the horizon. As real interest rates rise, pressure on the consumer will increase. Additionally, there are ongoing efforts in Congress to reign in government spending as part of the debt ceiling negotiations.

Despite a better-than-expected earnings season at the halfway point, many companies have forewarned of a tougher period ahead. For example, UPS spoke extensively on looming volume pressure from a lower retail sales outlook. Economic headwinds are clearly on the minds of corporate executives. Still, there are pockets of strength in companies with defensive characteristics. Microsoft and Meta, for example, face the same economic pressures but have a built-in cushion in their ability to cut their way to earnings growth. Bloated mega cap enterprises are ripe for efficiency drives that can sustain earnings growth through a lull in sales. On the other end of the spectrum, Staples and Health Care companies are finding buyers as participants seek out companies selling the most essential goods and demonstrating pricing power. 

In our strategies, we are emphasizing quality. We are concentrated in companies selling goods and services the world cannot live without. In general, our companies have strong balance sheets, robust cash flows, are not overleveraged, and have strong and experienced management teams. We do not know exactly what lies ahead, but our portfolios are built to endure. 

Thanks, 
Preston May, CBE®
Research Analyst