Summary
- Consumer sentiment dropped in May due to concerns about the potential for rising unemployment, elevated interest rates, and worrisome business conditions.
- Despite the weak sentiment, the stock and bond market rebounded in May because weaker-than-expected labor growth and lower wages signaled that the Federal Reserve might lower interest rates sooner than later.
- Strong earnings growth, particularly from large technology companies, was another factor in the May stock market rebound. While overall S&P 500 earnings are on track for a surprising 7.77% gain in Q1, it's important to understand that this growth isn't evenly distributed.
- For the market to continue its ascent higher, the rest of the stock market cohort will have to recover and drive earnings higher.
During April, the world was shaken—literally and figuratively—by devastating earthquakes that rocked Taiwan and sent ripples of anxiety all the way to New York City. Not much relief occurred in May. Closer to home, tornadoes unleashed their fury across the Midwest and South, tearing through states such as Missouri, Nebraska, Oklahoma, and Texas.
Mirroring the natural disasters, risk assets—such as U.S. and international stocks and bonds—were rattled in April as a consequence of inflation coming in higher-than-expected, rising bond yields, and reduced expectations for interest rate cuts in 2024. This trifecta of sobering news drove down prices and dampened consumer sentiment.
How Are We Feeling
One way to gauge consumer sentiment is the University of Michigan Consumer Confidence Index. This survey collects data on consumer attitudes and expectations in order to evaluate changes in customers' desire to buy and forecast their future discretionary spending.1 Given that consumer spending drives earnings growth at corporations, this survey can be important to market participants.
Source: University of Michigan. YCharts. Data from 5/31/2019 to 5/31/2024.
The latest reading in May dropped by roughly 10%, bringing the index to its lowest level in five months. Why such a significant decline, given that real GDP growth is tracking close to trend and the U.S. stock market hovers near all-time highs?
According to the most recent release, the cause for the deterioration was a decline in the year-ahead outlook for business conditions, concern over the prospect of rising unemployment, and elevated interest rates. These answers make perfect sense as to why sentiment is in the dumps, but we believe it goes a bit deeper and relates back to wages.
For example, according to Eric Basmajian, head of EPB Research, real private sector income grew at a 2.9% annualized rate from 2009-2020. Since 2020, real private income has only risen at a 1.3% rate.2 Sure, it doesn’t sound like too big of a difference, but it is. The gap between today’s income level and the pre-Covid trend is greater than $1 trillion.
Source: EPB Research. Data from 1/1/2009 to 4/30/2024.
Put more simply, wages can’t buy what they used to, and it could be a while before earnings catch up to the price increases that have already taken place for goods and services.
May Flowers
Despite softening consumer sentiment, April's market downturn gave way to a May rebound, with some assets blooming more brightly than others. The old adage, 'Sell in May and go away,' did not apply this year.
Source: Morningstar Direct. Nova R Wealth. April data is from 4/1/2024 to 4/30/2024 and May data is from 5/1/2024 to 5/31/2024. See important disclosures at the end of this material.
The bounce back in May for both stocks and bonds alike started early in the month. And the reason? Less job growth. According to the Bureau of Labor Statistics, nonfarm payrolls increased 175,000 for the month of April, which was the smallest gain in six months. On top of that, average hourly earnings only jumped 0.2% from March, the slowest pace since June 2021.3
Why would less jobs and lower wages, which signal a weaker economy, increase the prices for stocks and bonds? Well, in this particular case, the market is sniffing for any news that will bring down interest rates. Higher unemployment, lower wages, and lower inflation act as indicators that interest rates may come down sooner rather than later. The objective for the Federal Reserve, however, is to achieve a careful balance between a weaker-than-expected labor market and lower inflation versus massive job losses and deflation. This delicate balance seems to be moving in the Fed’s favor for now.
Earnings Update
Strong earnings growth for businesses doesn’t hurt asset prices either. As we write this, 98% of companies within the S&P 500 have reported earnings for Q1. Astonishingly, profit growth continues to surpass forecasts and is on pace for a 7.77% gain, over double the estimate of 3.75%.4
Source: Bloomberg. Data estimates from 9/30/2022 to 6/30/2025.
Up and to the right. That’s what net profit margins are expected to look like after recovering from the COVID hangover. Should these estimates materialize, weak seasonality during the fall may not even be able to stop the train that is U.S. large cap stocks.
Nevertheless, it’s important to note that the largest stocks—mostly technology driven—have garnered and driven most of the earnings growth and profit margin expansion. For the stock market to hold its strength, the rest of the cohort needs to step up. The back half of this year will be our first glimpse into whether this will materialize.
- University of Michigan.
- EPB Research.
- Bureau of Labor Statistics.
- Bloomberg.
The S&P Global REIT Index measures the performance of publicly traded equity REITs listed in both developed and emerging markets. It is a member of the S&P Global Property Index Series.
The Bloomberg US Aggregate Bond TR Index measures the performance of investment grade, U.S. dollar-denominated, fixed-rate taxable bond market, including Treasuries, government-related and corporate securities, MBS (agency fixed-rate and hybrid ARM passthroughs), ABS, and CMBS.
The Bloomberg US Corporate High Yield Index measures the USD-denominated, high yield, fixed-rate corporate bond market. Securities are classified as high yield if the middle rating of Moody’s, Fitch and S&P is Ba1/BB+/BB+ or below.
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