My favorite economist, Ed Yardeni, has reported that with 97% of the first quarter earnings now in, S&P 500 earnings are up a stunning 29.3% versus a year ago, with eight of 11 S&P sectors sporting double-digit earnings increases. Among the 3% of stocks left to report (about 15 names), Micron Technology (MU) has yet to announce its latest quarterly results, and the analyst community expects an astounding 910% surge in earnings, as well as 264% sales growth. If so, that will cap a stunning earnings announcement season.
Despite these strong earnings reports, we saw the inevitable correction from this overbought market last Friday. This may be the “June swoon” many feared, as the S&P 500 fell 2.6% and the NASDAQ was off 4.7%, even though the Dow only lost 0.3%. Most of the decline came on Friday. Even gold fell by $138 (down 3%) on Friday, as the whole world seemed to get out on the wrong side of the bed.
June will likely be strong, despite last Friday’s dip. First, there will be a big Russell index realignment this June, and that could boost many of the fast-growing stocks in our portfolio that are being added to the Russell 1,000 and 2,000 indices. The final Russell reconstitution happens Monday, June 29th, but Russell will keep announcing its preliminary lists of stocks for each of its respective indices every Friday in June. Due to this index realignment, June has historically been a strong month for small-to-mid capitalization stocks.
Here are the most important developments recently and what they mean:
- There is no doubt that, in the wake of strong payroll growth in the past three months, the fears of “demand push” inflation are brewing. This week, the Consumer Price Index (CPI) and Producer Price Index (PPI) will be pivotal, since it will be interesting to see if falling crude oil prices in May will provide some inflation relief via the CPI and PPI.
- The correction in AI-related stocks is merely profit-taking and a healthy rotation into other stocks, so money is not leaving the stock market, which is broadening out. Essentially, the breadth and power of the overall stock market are expanding, which is a good sign of robust economic growth.
- The Atlanta Fed is currently estimating 3% GDP growth for the second quarter, but I am expecting upward revisions in the wake of positive ISM manufacturing and service sector surveys, as well as robust retail sales. Costco (COST) announced that its same-store sales rose 8% in May, while its online sales surged 20%, so consumers are still spending up a storm, despite higher prices at the pump, which are now moderating. In fact, I was in Houston this week and very encouraged that both gasoline and diesel prices have declined significantly.
- SpaceX will begin trading on Friday, so it will be interesting how the stock reacts after its IPO. Even if SpaceX gaps up on Friday, the typically IPO stalls within a few months as insider stock lockups expire and insider selling picks up. As an example, Rocket Lab (RKLB) has been under selling pressure recently on reports of significant insider selling. There is a theory that some of the recent AI selling pressure was due to investors raising money to buy SpaceX, but I should add that there is a lot of cash on the sidelines. Frankly, I think the Anthropic IPO will be even more successful than SpaceX, since the excitement over the company’s Grok AI has explosive growth.
In the end, the IPO boom this year will be an all-time record, so underwriters, like Goldman Sachs, will prosper from record underwriting revenue. An IPO boom is great for investor confidence and will help to boost the entire stock market. There is no doubt that we remain in the midst of a FOMO (Fear of Missing Out) market, so the investor stampede is expected to persist.
