US Stock Market Analysis: Is “Sell a May and Go Away” Nearing?

Regardless of how Q1 earnings shake out, bears believe there is still a mountain of obstacles ahead for stock prices, including inflation that remains somewhat hot, tighter credit conditions, high borrowing costs, and over-stretched consumer budgets. That’s on top of a looming debt ceiling crisis in the US, Russia’s ongoing war in Ukraine, and an accelerating technology war between the US and China.

Recession Fear

Most of these worries have been around for months, and are also coupled with concerns about a US recession. A majority of investors expect the economy will enter recession in the second half of the year but as bears point out, analyst are still forecasting earnings growth in the last two quarters.

Forward guidance issued by companies during their Q1 reports will likely have a big impact on those forecasts. As bears see it, they need to be revised down substantially, which could in turn have a negative impact on investor sentiment.

Some bulls argue that many of the ongoing concerns hanging over Wall Street have already been priced in, pointing to the market selloff last year. While stocks have recovered some in 2023, the S&P 500 is still down more than -13% from its most recent record high of 4793.06, which was set way back in December of 2021. Bulls of course are also still betting stock prices will get a healthy boost from a pause in Fed rate hikes which many think will happen at the June policy meeting.

There is a minority that believes a pause could come at the upcoming May 2-3 meeting amid accumulating economic data that indicates the economy is slowing and inflation continues to decline.

Fed’s Beige Book: Slowing Growth, Credit Tightening & Inflation Control

The Fed’s Beige Book yesterday revealed several districts reporting slower growth as well as a slower pace of price increases. Notably, several districts also reported declining bank lending volumes across consumer and business loans, as well as tightened lending standards.

Many economists as well as Fed officials believe that tightening credit conditions might actually better slow the economy and bring inflation back to the Fed’s target rate. Fed Chair Jerome Powell said in March that tightening credit standards could have the same slowing effect on inflation that a Fed hike can.

Data to Watch

At the same time, tightening credit conditions risk dealing a severe blow to the economy if the crunch ends up being too severe. Data today includes Existing Home Sales and the Philadelphia Fed Manufacturing Index. Earnings highlights include American Express, AT&T, Blackstone, CSX, D.R. Horton, Nokia, Nucor, PPG Industries, SnapOn, Taiwan Semiconductor, and Union Pacific. If Taiwan Semiconductor reports good earnings it should work to keep the overall tech sector supported.

As I’ve pointed out on several occasions, with the current weighting, how the big tech sector goes is how the overall market goes… tough to pencil in a market crash if you don’t see Apple, Microsoft, Nvidia, Alphabet, Tesla, etc… rolling over and getting hit hard.