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Despite an AI-fueled equity rally, an imminent liquidity reduction and ongoing bank-credit tightening are serious headwinds for risky assets in the near term.

Liquidity and lending conditions have tightened significantly over the course of the current tightening cycle, but they are likely to get worse before they get better.

This note continues our practice of summarizing the latest earnings season by analyzing the composite results of the S&P 500 member companies, as if the SPY ETF represented a share in a single company with 500 subsidiaries.

While sentiment on the potential for a recession by year-end is split, there is little dispute that it’s an important question for cyclical sectors. Consumer Discretionary is most exposed to the business cycle, and we are interested in understanding its prospects as we head toward a potential economic slowdown.

A late-month rally propelled the S&P 500 to a very modest gain for May. The last two months have been awfully quiet as far as volatility, with the index’s daily closing levels sitting in a range of just 149 points since the start of April—some kind of Spring doldrums, perhaps. 

Exposure to commodities (and defense) has fallen rapidly within Select Industries. The primary beneficiaries of that reduction are growth-oriented groups.

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Earnings Almanac is a new research product where we dive into quarterly reporting for the S&P 500. The report is released the first week of the last two months of the calendar quarter.

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The May Green Book, published a short three weeks ago, included an article titled “Market Narrowness in 2023” discussing the Big Tech theme’s market leadership this year.  We noted that 77% of the S&P 500’s year-to-date return through April 30^th was produced by the nine S&P 500 members of the NYSE FANG+^® Index, itself a collection of just ten large companies that dominate the Social/Cloud/Innovators cohort.  (As for which FANG+ company is not also in the S&P 500, that is your puzzle challenge for this long weekend.)

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The S&P 500 posted a 7.7% price gain for the six months ended April 30^th, although this advance has been a hard-fought battle as gains have resulted from a narrow list of drivers. Style leadership has been concentrated in mega-cap tech names, such that the ten members of the NYSE FANG+^® Index have produced 77% of the S&P 500’s YTD gain. Furthermore, gains over recent months have resulted solely from expanding multiples. Narrowness in either thematic leadership or price drivers is concerning because breadth is a useful concept in evaluating the staying power of a market advance. In light of this year’s market action, we are intrigued by the notion of measuring breadth not simply by price moves alone but by examining each of these two important sub-components individually. Does today’s environment, where price gains are driven by valuation increases alone, tell us anything about future market returns?

Read this week's Major Trend. 

The Core Fund was up 0.7% in April as the equity, fixed income, and alternative allocations all turned in positive performance for the month.

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The preference for defensive industries and sectors in April led to the outperformance of low volatility stocks, while growth lagged. YTD factor results have been poor, with negative spreads for momentum, profitability, value, and low-vol.

The index’s trading range spanned only 120 points in April—or a bit less than 3% of the previous month’s close. The S&P 500 has a monthly trading range average of a little over 9% since the start of the pandemic and, to find a month calmer than April, you’d have to go all the way back to July 2019.

Large Caps—both Growth and Value—were the only winners in April. The S&P 500 has outperformed the Russell 2000 by nearly 12% in just the last two months.

Our Ratio of Ratios is kind of getting out of hand. The latest reading matches the March-2020 pandemic low. A recession—which only small caps seem to be priced for—will probably be needed to see a turning point in this relationship.

Our latest Up/Down ratio is 1.17. Given the optimistic tone of the earnings season and lower hurdles of 2022, that reading is disappointing. This wide-view vignette is telling us that few firms are growing their EPS.