Equity Overview 

The S&P 500 and the NASDAQ composite both reached new highs in May.  Mid-cap and small-cap indices lagged.

Market volatility reached a two-decade low at the beginning of the month, but spiked on May 10 when the firing of FBI Director James Comey caused prices to drop sharply.  However prices recovered within days, and markets were calm for the balance of the month.

Consistent with the recent trend, growth stocks outpaced value stocks, and earnings surprises continued to drive superior stock performance.  As was the case in April, energy stocks were weak along with the price of oil.

First quarter earnings reported in May continued the uptrend from April.  With 83% of S&P 500 companies reporting, the blended growth rate for Q1 earnings is now 13.5%, even better than the 12.5% rate at the end of April and the best result in six years.  In addition, 75% of companies reporting beat consensus earnings estimates, compared with the 70% one-year average, and 66% of companies reporting beat consensus revenue estimates, compared with the 53% one-year average.

Macro Overview

Economic data reported in May continued mixed.  Employment statistics were positive, as payroll growth rebounded and consumers stayed confident about job prospects.  And the Commerce Department raised its estimate of first quarter grow from 0.7% to 1.2%.  On the other hand, manufacturing growth slowed and housing was weak.

Domestic economic news focused on health care, as the House managed to pass its “repeal and replace” of Obamacare on a vote of 217-213.  The Congressional Budget Office estimated that the bill would cause 24-million Americans to lose their health care, which led to widespread criticism even among Republicans.  The bill’s future in the Senate remains uncertain.  In addition, the administration released its budget proposal, which projects a balanced budget in 10 years based on $3.6-trillion in spending cuts (including $1.7-trillion in entitlement cuts) and an increase in GDP to 3% per year.  The plan included a number of arithmetic errors and was widely dismissed as unrealistic.  Analysts described its prospects in Congress as dead on arrival.    The administration also released its long-awaited infrastructure plan which, as predicted, calls for minimal federal spending and relies primarily on private sector financing.  There was no meaningful progress on tax reform, except that the Treasury Secretary criticized House Speaker Ryan’s Border Adjustment Tax, leading Ryan to acknowledge that it was not likely to be enacted.

In international news, Emmanuel Macron won the French presidential election in a landslide with 65% of the vote, defeating the right-wing ultranationalist Marine Le Pen and striking a blow for European unity.  This theme was reinforced in Germany, where Angela Merkel’s party performed strongly in regional elections including in areas controlled by her opposition.  Analysts suggest that this bodes well for her reelection in September.  North Korea fired more missile tests and remains a conundrum, continuing to defy international norms with apparent impunity.