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So far, the saying “Sell in May and go away” has not been true this year: the major US indices closed in positive territory for the third week in a row. The S&P 500 is within 1% of its all-time high now.
There are three main reasons for this:
1. Strong quarterly results. About 90% of S&P 500 companies reported earnings, and results beat analysts’ expectations by 8.5%, the most significant positive surprise since the third quarter of 2021.
But here’s the twist: cost-cutting measures have driven these upbeat numbers more than revenue growth. Moreover, companies are feeling less optimistic about their prospects.
2. Weak macroeconomic data. While the US economy remains stable but has lost some steam, lackluster labor market figures have raised hopes of a rate cut by the Federal Reserve this year.
Precisely, initial jobless claims hit an eight-month high of 231,000 and, coupled with last week’s weaker payrolls report, could signal a slowdown in the labor market.
3. The resurgence of buybacks. Companies have announced share buybacks totaling more than $383 billion in the past 13 weeks, up 30% from last year.
Goldman Sachs analysts predict that S&P 500 buybacks will reach $925 billion this year and $1.075 trillion by 2025, translating to annual growth rates of 13% and 16%, respectively.
Of course, apart from these factors, the economy and the financial system as a whole are not doing so well, but investors prefer to overlook the negatives and focus only on the positives.
As for what to expect, this week will depend mainly on the US inflation data to be released on Wednesday. A higher-than-expected rise of 0.4% month-on-month or 3.4% year-on-year could again put downward pressure on markets.
In addition, ahead of the US inflation report, Jerome Powell is scheduled to speak with Klaas Knot, an ECB member known for his hawkish stance. We will be watching for any interesting comments.
