Equity Overview

Stock market performance was mixed in May.  Energy stocks were dramatically higher, followed by utilities and financials.  Consumer discretionary stocks lost the most ground.  Value stocks significantly outperformed growth stocks.

Market volatility continued, as the S&P 500 moved by 1% or more on 10 of 22 trading days, 7 of which were moves of 2% or more.

1^st quarter 2022 earnings reported in May continued to exceed expectations.  With 95% of S&P 500 companies reporting, 77% have beaten consensus earnings estimates and 73% have beaten consensus revenue estimates.  These percentages are lower than the one-year averages but equal to or better than the five-year averages.  However, the market did not reward earnings beats as it has in the past.  Companies exceeding expectations sustained an average price decrease of 0.5% during the period from two days before to two days after the earnings release, well below the 5-year average of a 0.8% increase.

The S&P 500 forward price earnings ratio dipped to 16.4, below the five-year average of 18.6 and the 10-year average of 16.9.

Macro Overview

Economic data reported in May was not impressive.  Retail sales were higher but key retailers such as Walmart and Target reported disappointing earnings and their stock prices sank.  Manufacturing and housing were weak.  Employment concerns have largely shifted away from unemployment—which remains historically low—to the scarcity of workers, as employers struggle to fill positions.  Sourcing materials continues to be problematic, as 73% of S&P 500 companies cited supply chain issues in their earnings calls.

Inflation continued unabated, as consumer prices reported in May rose 8.3% over the previous year. In response, the Fed raised short-term interest rates by 0.50%, its most aggressive increase since May 2000.  It also announced specifics for its “quantitative tightening” plan:  reductions in its $9-trillion balance sheet of $37.5-billion per month through August and $95-billion per month thereafter.  The Fed projects that by year’s end the inflation rate should be in the 4-5% range.