Stocks are entering a limbo period—the gap between the end of one earnings season and the beginning of the next. They’ll need other catalysts to keep rising.
For the stock market, the end of earnings season is the pause that might not refresh.
It has been a May to remember, with all three major indexes on track to end the month at record highs. After another week of gains, the Dow Jones Industrial Average was set to increase 2.6%; the S&P 500 index was up 5.2%; and the Nasdaq Composite was rising 8.4%. The S&P 500 has now rallied for nine consecutive weeks, the kind of run investors can take a moment to celebrate.
But just a moment. While stocks have risen on hopes of a peace deal between the U.S. and Iran, earnings have been the real story. S&P 500 companies posted 28.6% earnings growth in the first quarter compared with the year before, the best result since 2021, according to FactSet.
Now stocks are entering a limbo period—the gap between the end of one earnings season and the beginning of the next. They’ll need other catalysts to keep rising.
A formal end to the Iran war could be one, though the market is already pricing in a rosy geopolitical scenario. Otherwise, traders will have to ride whatever sector has the momentum. That proved to be a good strategy in May, as the Invesco S&P 500 Momentum exchange-traded gained 13%.
For most of May, the momentum swung to chip stocks·. But space stocks seized it this past week. Michael O’Rourke, chief market strategist at JonesTrading, says it’s dangerous for the broader market when hot money starts pouring into a group of small-cap stocks with speculative business models. That momentum could very well be set to end, with the SpaceX IPO being the catalyst. As if on cue, space stocks slipped on Friday, with the Procure Space ETF—ticker UFO—dropping 6%.
“As one bubble blows off and breaks, the next picks up the baton,” warns O’Rourke. “Fevered enthusiasm to pay 75x to 100x revenues for a trillion-dollar company signals the type of event that ends bull markets.”
With no earnings to pore over, investors will be focused on the economic data—and what they have seen recently looks troublesome. Incomes stagnated in April, new data showed this past week, and personal savings rates fell to 2.6%. Americans are struggling with rising prices, which rose 3.8% in April, as measured by the Personal Consumption Expenditures Price Index, or PCE, the Fed’s preferred inflation gauge. It’s more than just oil prices. The core PCE, which strips out food and energy, rose 3.3%, its highest reading in nearly three years.
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Rising inflation only makes incoming Federal Reserve Chairman Kevin Warsh’s job harder. Warsh had been expected to push for interest rate cuts, on the assumption that artificial intelligence will boost productivity and calm inflation. But Emily Bowersock Hill, CEO of investment firm Bowersock Capital Partners, thinks the rush of spending on the AI buildout is having the opposite effect. Rate hikes may end up looking more appropriate than cuts.
“At this rate, we would not be surprised to end the year at 4% inflation,” she writes. “We expect Warsh’s hopes for shrinking the Fed’s balance sheet and lowering rates to fade as inflationary pressure persists and restricts the Fed’s room for maneuvering.”
If that is the case, the start of second-quarter earnings season in July can’t come soon enough.
Write to Avi Salzman at avi.salzman@barrons.com