May was a fantastic month for markets! The semiconductor index continued to pull the markets higher, with over a 20% return in the month. Keep in mind that the semi’s returned more than 30% in April! In previous commentaries and during our monthly webinars, we have highlighted how the capital investment around Artificial Intelligence (A.I.) is the biggest story right now that is driving markets. . .but it is a story worth repeating.
Also, the SpaceX IPO is coming up later this month, and that is proving to be quite a talking point for people and the investing world. Given the size of the IPO and the possible index effects it might have, it is important to know what is going on with this launch. Keep reading for my thoughts.
There have been some changes at the Federal Reserve and some economic numbers that have shifted the interest-rate discussion as well. As always, there is mixed news on the global conflict front. Some good things are happening, and some challenges remain floating out there. Let’s dive in!
The May Scoreboard
- S&P 500: Up 5.0%
- Nasdaq Composite: Up 7.5%
- MSCI All World Ex US: Up 4.9%
- Bloomberg Aggregate Bond Index: Up 0.2%
- PHLX Semiconductor Index: Up 21.1%
Source: ycharts.com
We need some context first. As we went into March, the biggest story was oil prices, following an attack in Iran and the start of a now three-month running conflict. But in April, earnings season started and the numbers were outstanding. In particular, there was clear confirmation that companies were ramping up the investment in A.I. compute. You had to look past the war and hone in on the capital expenditures if you wanted to participate in the huge gains we have seen since earnings season started.
It is also worth highlighting that earnings are what drive the markets, not politics or social media posts or any of the other things that flood our minds. Earnings are somewhat boring in nature, but they are where the focus needs to stay when investing. The constant news cycle continues to churn, but the bottom line is still “what is going on with earnings?!?!”
Q1 Earnings: The Arms Race Continues
According to the latest data from FactSet Research, the first-quarter earnings season was hotter than the Knicks post-season! Below are some basic statistics:
- 85% of S&P 500 companies reported actual Earnings Per Share (EPS) above estimates.
- 28.6% growth in EPS for the quarter, the highest growth rate since Q4 2021.
- 59 S&P 500 companies issued positive EPS guidance, the highest number since Q2 2021.
- 54% growth in EPS in the information and technology sector!!!!
Source: FactSet
If you read the tea leaves, the information technology sector has been doing the heavy lifting, with its earnings growth projections revised upward significantly since the start of the year (led by massive beats from infrastructure and chip giants). If you strip out the ongoing A.I. “arms race,” the earnings landscape for the rest of the market looks more like a normal healthy market.
It is important to recognize that this is a structural economic event, not a cyclical one. Structural events usually happen over multiple cycles and are estimated to last around 15 years. The capital expenditure (CapEx) we are seeing on cloud computing, artificial intelligence, and advanced hardware is preparing for next decade, not some short-term bump in needs or supply-side constraints lingering from Covid.
The Fed: An Uncertain Path for Interest Rates
At the beginning of the year, the market was expecting a couple interest rate cuts from the Federal Reserve. Things are looking a little different now due to the spike in oil prices, increased inflation risk, and mixed jobs numbers. Looking at the Fed Watch Tool from the CME, the market is now expecting a rate increase in October or December of this year. That’s a pretty big shift in market expectations.
A few updates on what caused that shift:
- The Job market showed strength in May ($172k vs $88k expectations); March and April numbers were also revised hire.
- Inflation has trended higher over the past three months
- February 2.4% YoY
- March 3.3% YoY
- April 3.8% YoY
Source: U.S. Bureau of Labor Statistics, Consumer Price Index
The question is how the new Federal Reserve Chairman Warsh will react to all of this; the jobs market looks good, GDP looks good, and inflation looks a little hot. He admitted that inflation is too high to cut interest rates right now, but he has also advocated for using a “trimmed mean” inflation index (which just happens to show inflation closer to 2%) as part of the inflation discussion.
Warsh is in a tough spot. Let’s not forget that Trump selected Warsh, and Trump has no problem blasting the Federal Reserve Chair on social media and publicly. Will Warsh stand up to the criticism if he keeps rates where they are or even raises them?
Economic Growth: The K-Shaped Disruption
Economic growth is holding steady at 2% for 2026, which is exactly in line with expectations. However, looking at the “2%” headline is like looking at a lake and assuming it’s four feet deep everywhere—you can still drown in the deep spots. We are seeing a “K-shaped economy” in its most aggressive form.
The top half of the economy—fueled by asset appreciation and high-skill tech employment—is thriving. The bottom half is struggling under the weight of “sticky” inflation at the grocery store and the gas pump. Disruption is inherently disruptive; there will be winners and losers. At Green Ridge, we look to win on the investing front. While the social implications are heavy, we must operate in the market we have, not the one we wish for.
Geopolitics: Is there Stabilization of the Energy Narrative?
Turning our attention overseas, the ongoing tensions involving Iran and the broader Middle East continue to dominate the evening news. I personally don’t find a lot of value in following the minute-by-minute coverage. It all sounds incredibly repetitive, and it does not seem the ball is moving meaningfully from week to week.
While the resolution is still unknown, the market seems comfortable with the apparent deadlock. Crude oil prices have stabilized for the time being in a firm bracket between $90 and $100 a barrel. We are skeptical that prices will remain this stable as we are heading into the heavy driving season of the summer and inventories remain low.
However, keep in mind that any volatility we see in oil prices will be more cyclical than that structural shift we talked about in the CapEx for A.I. Sell offs due to spikes in oil should be looked at as buying opportunities given the greater macro story of A.I.
Simple summary: oil spikes and associated declines in the market are good entry points for new capital to be invested, not reasons to be fearful of declines.
The SpaceX Filing: A Massive Launch and Celestial Impact
Finally, we must talk about the buzziest event in the private-turned-public markets: the SpaceX IPO. It has officially entered the record books as the most expensive (both market cap and revenue multiple) initial public offering in histoty, commanding a valuation that underscores the immense public and institutional appetite for Elon Musk’s next big thing.
But we are less interested in the fate of one company with less than $20 billion in revenue. The greater interest here is how the IPO is impacting the market in the here and now as well as the future market.
BNP Paribas had a research report claiming recent weakness in crypto markets and semiconductor selling was related to retail investors selling positions to help fund their SpaceX purchases this month. This is the first time I can remember hearing about selling across asset classes and sectors to fund an IPO. Of course, BNP may be wrong and just speculating, but this is the kind of gravity the SpaceX IPO seems to be exerting.
It is also important to recognize that index rules have recently changed. Previously a company had to be public for at least a year before being added to an index like the Nasdaq or S&P 500. The Nasdaq recently changed their rules to “fast-track” SpaceX to join their index. They argue that they are meant to capture the largest 100 companies, and the change helps them stay in line with the intent of the index. Meanwhile, the S&P 500 declined to fast-track SpaceX and any other mega-cap IPO. They said that there are trade offs to sticking with their existing guidelines, but they felt the current approach provides “substantial market coverage and sector balance.”
While everyone wants to weigh in on what they think about SpaceX, the change in the indexes is striking, especially as the Nasdaq seems more concerned about capturing the next wave of technology companies to IPO (think A.I. companies like Anthropic slated to IPO later this year). Meanwhile, it is evident that S&P has a different approach by the language they chose; the S&P indexes are looking to be more balanced and have coverage across the economy.
Source: https://apnews.com/article/sp-nasdaq-ipo-spacex-megacap-stocks-3fd4926daf9e3422e42f16b3f9975955
This may have significant importance down the line in distinguishing how index providers are viewed in the future. Indexes are generally considered low-cost ways to gain exposure to the “market,” but this discussion and the potential size of nonpublic companies going public in the future is something that is going to impact the narrative of which index to choose. This is what makes this stuff fun!
Conclusion: One Giant Leap for Mankind
Neil Armstrong uttered one of the most iconic quotes in July,1969 as the first man to step on the moon. As we think more about the structural shifts we see in the market, there are many reasons that a quote like that resonates in today’s world. We are all taking “one small step” experimenting with A.I. and seeing what it can do for us. However, the entire economy is taking “one giant leap” as it spends tremendous amounts of money anticipating the growth of A.I. as a tool for the economy and general consumers.
The market is betting that those making the giant leap, and those that build the infrastructure for those leaps, are going to win with returns and cash flows for investors. The most recent earnings season says that the hype around this build-out is real. Of course, any time a new disruptive technology emerges, expect markets to be disrupted and for some adjustment to the new environment.
Add uncertainty around global politics and Federal Reserve policy and you quickly appreciate why we have been warning about continued volatility in the markets. We see no reason to withdraw that warning at this time.
We also think that market dynamics will change as the constituents of indexes change and the rules on index creation adapt along with that. Some of these changes are one small step for index rules but may be a giant leap for how investors need to consider and adapt how they invest.
Chief Investment Officer
Green Ridge Wealth Planning
Disclosure:
Green Ridge Wealth Planning, LLC is a registered investment adviser. The information provided here is for general informational purposes only and should not be considered an individualized recommendation or personalized investment/tax advice. The investment/tax strategies mentioned here may not be suitable for everyone. Each investor needs to review an investment/tax strategy for his or her own particular situation before making any investment decision(s). You are responsible for consulting your own investment and/or tax advisor as to the consequences associated with any investment.
The opinions referenced are as of the date of publication and are subject to change due to changes in the market or economic conditions and may not necessarily come to pass. Any opinions, projections, or forward-looking statements expressed herein are solely those of the AUTHOR, may differ from the views or opinions expressed by other areas of Green Ridge Wealth Planning.