Markets rallied in May, with U.S. stocks up mid-single digits for the month. This was an encouraging rebound following the declines we saw in April, and both the S&P 500 and Nasdaq Composite rose to new record highs during the month. International markets were also positive in May, with developed and emerging markets ending the month with gains. Even fixed income did well, as falling interest rates supported bond prices in May.
Hiring and inflation slow. The economic data releases in May largely pointed toward slowing economic growth, with job growth and consumer inflation cooling in April. These reports helped calm investor concerns about an overheating economy that previously caused the sell-offs in April. While there is a long way to go to get inflation back to the Fed’s 2 percent target, the May reports were an encouraging sign that we’re heading in the right direction.
Earnings impress. Aside from economic updates, market fundamentals also showed signs of improvement during the month. With 98 percent of companies having reported results by the end of May, the average earnings growth rate for the S&P 500 came in at 7.8 percent for the first quarter. This result was well above analyst estimates for a more modest 3.8 percent increase at the start of earnings season, indicating solid growth for businesses to start the year. Fundamentals drive long-term performance, so this was a positive sign for investors.
Continued earnings growth. The first quarter earnings growth was impressive, and it may be the start of a strong year for earnings. Analysts expect to see continued earnings growth throughout the rest of the year, with high-single-digit growth expected. If estimates prove accurate, this would mark the first year with four quarters of earnings growth since 2021, which would be a tailwind for stocks in the second half of the year.
Slower growth ahead. May’s major economic reports pointed toward slower growth in April, but there were also signs that growth may remain muted in the months ahead. Business and consumer confidence fell during the month, which has historically signaled that spending growth could slow. As we saw in May, however, slower growth could be a welcome development for markets if it helps drive further improvements on the inflation front.
Risks to watch. Despite the rebound in May, markets still face various risks as we kick off the summer months. The most pressing risk is inflation, as a potential increase would likely serve as a headwind for markets. Additionally, we face a large degree of political uncertainty, which is expected to rise as we approach the November elections. International risks remain, with the conflicts in Ukraine and the Middle East serving as potential sources of uncertainty, while the continued slowdown in China is also worth watching.
Ultimately, we remain in a good place as we finish out the first half of the year. The market rebound in May was encouraging for investors and indicated that markets remain resilient despite the risks. Economic updates signaled that we may face a period of slowing but sustainable growth in the months ahead. And companies continue to grow earnings impressively.
While we may face short-term setbacks along the way, the most likely path forward is continued growth and market appreciation in the months ahead.