US equity markets clawed back all of April’s losses and continued to reach new record highs, before giving up some of those gains in the final days of the month. Reassuring comments from the Fed at the beginning of the month had set markets on their way, while NVIDIA remained one of the biggest catalysts at the stock level. For the month, the S&P 500 and Nasdaq-100 indices rose 4.9% and 6.4% respectively. The domination by a handful of the largest stocks limited the return of the S&P 500 Equal Weight index to 2.8%, meaning it underperformed its market-cap-weighted parent.
As widely expected by the market, the Fed left interest rates unchanged when the FOMC concluded its meeting at the first of the month. Chair Powell gave some reassurance to a market that had grown increasingly unsettled by recent inflation numbers by saying “it’s unlikely that the next policy rate move will be a hike.” He also downplayed any concerns that the US economy could be entering stagflation. The equity market reacted with strong gains to kickstart the month.
The latest CPI print released mid-month relaxed some of the recent inflation pressure. Despite shelter and gasoline prices remaining elevated, the pace of price rises overall was slightly slower than expected. Additional market support came towards the end of May with the Consumer Confidence Index rising for the first time in four months. Both the Present Situation and Expectations components showed improvements from the previous month’s readings, although the Expectations Index remains in the level usually indicating that consumers predict recession.
Source: Bloomberg, Invesco, as at 30 April 2024
1M |
3M |
6M |
1Y |
|
|---|---|---|---|---|
S&P 500 NTR |
4.9% |
3.8% |
16.1% |
27.6% |
Nasdaq 100 NTR |
6.4% |
2.9% |
16.5% |
30.8% |
S&P 500 Equal Weight NTR |
2.8% |
2.0% |
12.5% |
20.2% |
Source: Bloomberg, Invesco, as at 31 May 2024
Sector composition benefited the performance of the Nasdaq-100 compared to the S&P 500, particularly the largest weightings being in two of the three best-performing sectors (Information Technology and Communication Services). Underweights in some of the weaker sectors (Energy, Financials, Health Care and Industrials) also benefited its performance versus S&P 500. The biggest detractors for the Nasdaq-100 at the sector level were its underweight Utilities and overweight Consumer Discretionary.
GICS[1] sector |
Nasdaq-100 ending weight |
S&P 500 weight* |
Weight in Nasdaq-100 rel. to S&P 500 |
|---|---|---|---|
Information Technology |
50.4% |
29.7% |
20.7% |
Communication Services |
15.5% |
9.3% |
6.2% |
Consumer Discretionary |
12.6% |
10.3% |
2.3% |
Consumer Staples |
6.4% |
5.9% |
0.5% |
Utilities |
1.3% |
2.2% |
-0.9% |
Materials |
1.5% |
2.4% |
-0.9% |
Real Estate |
0.0% |
2.1% |
-2.1% |
Energy |
0.5% |
4.1% |
-3.6% |
Industrials |
5.1% |
9.0% |
-3.9% |
Health Care |
6.2% |
12.1% |
-5.9% |
Financials |
0.5% |
12.9% |
-12.4% |
Source: Bloomberg, Invesco, as at 31 May 2024. *S&P 500 weights as at 16 April 2024 (the latest available data) due to licensing restrictions applied by the index provider.
Source: Bloomberg, Invesco, as at 31 May 2024
All but one GICS sector (Energy) registered a positive return in May. Information Technology (+10.0%) once again took the lead, driven by NVIDIA and other mega-cap stocks. Utilities (+8.5%) also steamed ahead and are seen as beneficiaries of the increased power demand from data centres. The Energy sector (-1.0%) was dragged down by a lower oil price, while Consumer Discretionary (+0.2%) stocks suffered from concerns over a slowdown in consumer spending being flagged by retail sales data and forward guidance provided on corporate earnings calls.
At the stock level, NVIDIA (+26.9%) issued another consensus-topping set of earnings, accompanied by a 150% increase in its quarterly dividend and announcement of a 10:1 stock split on 7 June. Guidance for the current quarter was also ahead of market expectations, driven largely by its AI data centre, which accounted for 86% of NVIDIA’s Q1 revenues.
Apple (+12.9%) is currently the second-largest company in the US, but the gap to the third-placed company, NVIDIA, has been narrowing quickly, in part because of the difference in exposure to AI. News that Apple is working on its own AI chips and will incorporate AI in its iPhone lifted the stock ahead of its Worldwide Developer Conference in June.
Investors are looking beyond the most obvious sectors to other areas that could benefit from the growth of AI. Examples include Vistra Energy (+30.6%) and First Solar (+54.2%), companies that are well-positioned for the projected increase in power demand from the new data centres.
Away from the AI theme, online streaming giant Netflix (+16.5%) is seeing positive results and subscriber feedback in recent initiatives, including tiered advertising and live events.
Interestingly, the Technology sector was also home to some of the market’s worst performers, but MongoDB (-35.4%), Unity Software (-24.7%), EPAM Systems (-24.4%) and Cloudflare (-22.6%) are in segments related to software, cloud and internet services seeing more challenging conditions.
Source: Bloomberg and Invesco, net new assets to 31 May 2024.
Source: Bloomberg and Invesco, net new assets to 31 May 2024.
Core index exposures gathered most of the US equity inflows in May but with a more representative spread between S&P 500 (+$2.56 billion), Nasdaq-100 (+$0.93 billion) and MSCI USA (+$0.48 billion). S&P 500 trackers have now surpassed $20 billion in net new assets for the year to end-May. ESG ETFs returned to positive territory following recent outflows, with $0.67 billion captured by these funds in May. Technology continued to dominate sector flows, although all 11 sector categories saw positive inflows in the month.
Economic growth and inflation seem finely poised. This past month has seen a slight cooling in pricing pressure, as well as employment data, but the Fed will want to see stronger evidence of a more sustained trend back towards target before making any policy change. Consensus now is for either one or two rate cuts by the end of the year – welcome news for indebted companies as well as homeowners and consumers in general. It would also be a boost to a slowing economy. In May, we had the second estimate for real GDP in Q1, revised down to a 1.3% annualised growth rate.
Slowing economic growth could be a challenging environment for companies and equity investors alike, which helps explain the momentum of AI stocks, with investors paying a premium for the likes of NVIDIA and Microsoft. Interest has spread most recently to stocks with less obvious AI-related revenue potential, including those in unloved sectors with more attractive valuations. Tech-heavy exposures are likely to remain in demand, at least for the time being, while those investors wanting to reduce concentration risk may consider equal-weighted index strategies.
On a final note, election outcomes historically have made little impact on the US equity market, and the run-up to the election is often positive for equity returns, but 2024 has different factors. The controversial ruling against the former President – and main opponent to the current President – will paint the political landscape from now till November. It remains to be seen what, if any, impact this will have on economic activity, consumer and business sentiment, the dollar and US asset markets.
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1Global Industry Classification Standard (GICS)
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Data source Invesco/ Bloomberg as at 31 May 2024 unless otherwise stated
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