Stocks rebounded after a mild selloff in April, with the S&P 500 rising 4.8% in May. Technology stocks led the charge, causing the Russell 1000 Growth to gain 5.8% while the Russell 1000 Value rose 3.3%. International stocks participated but lagged their U.S. peers as the MSCI ACWI Ex USA gained 4.0%. Interest rates were essentially unchanged in May, leading to mixed returns in fixed income. For the month, the Bloomberg US Aggregate Bond rose 1.6% and the Bloomberg Municipal Bond fell 0.3%.
The first quarter earnings season wrapped up this month, with results by-and-large surpassing expectations. Earnings growth came in at 6.0% year-over-year (y/y) in Q1, handily beating expectations of 3.4%. 78% of companies surpassed earnings estimates, which is above the long-term average of 74%.
Earnings growth was supported by the booming artificial intelligence industry as technology companies reported 25% y/y earnings growth. Another winner from this trend was electric and gas utilities that are experiencing rising demand for their energy due to increased data center activity. These companies reported an impressive 33% y/y earnings growth rate in Q1. Energy and materials companies were on the flip side of the coin this quarter as lower commodities prices weighed on these companies. Year-over-year growth for these two sectors came in at -26% and -21%, respectively.
Earnings growth is anticipated to remain robust in the second quarter, with analysts anticipating 9.3% y/y growth. For the 2024 calendar year, analysts are expecting a healthy 11.4% y/y growth rate. Communication Services, Technology, and Financials are expected to report the strongest earnings growth in 2024, while Real Estate, Materials, and Energy are expected to report the weakest results.
With 11% earnings growth expected this year, the earning-per-share (EPS) for the S&P 500 should finish 2024 around $250. Given the S&P 500’s current level of roughly 5,200, the market is trading at a P/E ratio of 21x 2024 earnings. This is elevated compared to the market’s long-term historical average of 17x and leaves little room for error should earnings growth soften, or a recession occur. In this environment, we favor companies with strong business models in resilient industries and possess clean balance sheets, attractive shareholder returns, and competent leadership. These companies should provide offense if the economy continues to expand, and protection should a recession materialize.
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Important Disclosures
Advisory services are offered through Aurdan Capital Management, an Investment Adviser registered with the U.S. Securities & Exchange Commission. The information presented in this piece is the opinion of Aurdan Capital Management and does not reflect the view of any other person or entity. The information provided is believed to be from reliable sources, but no liability is accepted for any inaccuracies. This is for information purposes and should not be construed as an investment recommendation. Past performance is not indicative of future results.
Use of the Russell 1000® Value Index
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