The Month At-A-Glance
- After falling 4% in April, U.S. equities rebounded with a gain of 5% in May
- All three major U.S. equity indexes—the Dow Jones, Nasdaq, and S&P 500—hit new all-time highs
- Positive returns were widespread across different asset classes—with only commodities declining during the month
Market Recap
Global stock markets rebounded during the month after falling in April. MSCI ACWI jumped 4.6% in May. U.S. equities led the way with a gain of 5%, largely thanks to the continued strong performance of technology stocks. Developed international and emerging markets equities lagged their U.S. peers with gains of 3.9% and 0.6%, respectively.
The technology sector (S&P 500 Information Technology Index) continues to lead the way. The sector gained 10.1% in May—bringing its year-to-date gain to 17.3%. The theme of market narrowness and concentration was a popular narrative last year. This has continued into 2024. Through the end of May, just four stocks (NVIDIA, Microsoft, Meta Platforms and Amazon.com) have contributed half of the S&P 500’s total return this year. The leader is chipmaker, NVIDIA, which has soared over 120% this year. The company has increased its market capitalization by an astonishing $1.5 trillion this year alone. At over $2.8 trillion in value, NVIDIA now has roughly the same market capitalization as the entire French stock market!
Other equity markets also participated in the gains, however, foreign stocks failed to keep pace with the Ai-related enthusiasm with U.S. mega-cap growth. Developed international stocks returned a solid 3.9% in May. Emerging-market stocks were the laggard with a more modest gain of 0.6% over the month.
The 10-Year U.S. Treasury bond yield was volatile in the month and ended May at 4.51% down from 4.69% at the start of the month. The slight decline in interest rates resulted in a nice 1.7% gain for the Bloomberg US Aggregate Bond Index. Comparatively, investment-grade corporate bonds gained 1.9% while high-yield bonds gained 1.1%.
Economy
In May, economic data softened worries that the U.S. economy was overheating. For example, after higher-than-expected inflation reports in the first three months of the year, the lower April reading was a small step in the desired direction. However, inflation is still meaningfully above the Fed’s 2% desired target rate. Meanwhile, the labor market also showed signs of softening. After consistently beating official forecasts throughout 2023, economic forecasts have started to come in below market expectations.
That said, economic and corporate fundamentals remain relatively healthy, and the next move for U.S. interest rates is likely to be lower, even if interest rate cuts are taking longer than expected. The first quarter’s economic growth (GDP) was weaker than estimated (1.3% versus 1.6%), which was below the 3.4% in the fourth quarter of last year. Corporate earnings for the first quarter came in at 5.9% year-over-year, which was above expectations and will be one of the highest year-over-year results since 2022. With Q1 earnings season wrapping up, the Magnificent Seven stocks largely delivered on their high expectations (Tesla was the only member of the group with a negative surprise).
These factors have proven supportive of risk asset valuations. The stock market has reached new highs, and healthy corporate fundamentals have resulted in credit spreads remaining below average by historical standards, while absolute yields remain attractive.
Looking ahead, monetary policy and uncertainty around the path and magnitude of interest rates changes are likely to remain a source of volatility for government bonds until we get more clarity on inflation and the Fed’s next moves. Importantly, the higher reset in yields over the past two years has gotten bonds back to their primary roles in a portfolio—attractive income and diversification against a stock market decline.
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