During the month of May, the SPX rose 1.17%, Technology (XLK) soared 3.9% while Energy (XLE) faltered 3.5%. Large Cap growth names have led this year while many economically sensitive sectors have languished for the past 4 months. With the SPX, up 7% in 2017 and the Trump agenda on hold, some expect the market to stall in the summer months.   

  

While many averages are now touching new highs, 40% of SPX stocks are below their 50-day moving average. A handful of technology stocks have been responsible for a quarter of the SPX gain year to date.

U.S. 10-year Treasury bonds closed May with a 2.20% yield. The iShares U.S. Aggregate Bond ETF (AGG) gained 2.3% year to date. The headline unemployment level in May fell to 4.3 %, with U-6 unemployment at 8.4 %. Inflation is expected to range around 2% for the year, while average hourly earnings rose 2.5% year over year.

The Fed is set to meet on June 13-14 and will likely raise its short-term benchmark by one quarter point, to a range between 1-1.25%. Notably spreads between low quality and high-quality debt have narrowed, signaling greater confidence in the economy. Long term Treasury and Investment grade bond yields have declined in 2017 contrary to most expectations.

Markets around the world are in rally mode, with the French election easing fears of EU and Euro breakup. Japan while mired in a 27-year deflationary mind set, is trying to reach 2% inflation and its market is finally going up. China is managing 6.5% GDP growth and many other emerging markets have picked up.

With 98% of SPX companies reporting, the blended earnings growth rate is 13.9% the best year over year growth since Q3 2011.The forward 12-month P/E ratio for the index is 17.6. This is above the 5-year (15.2) and 10-year (14.0) average according to FACTSET.

We see a tailwind for earnings from a weaker dollar and a stronger global economy. If we get tax reform by 2018, earnings growth will further improve. Rising earnings which typically lead to higher stock prices continue nonetheless. Stocks while rich, appear to be climbing a wall of worry and bonds are signaling neither inflation nor recession.

Best Wishes for a Pleasant Summer!

Doug Coppola

John Coppola

June 2, 2017

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