Can the market move higher in May?

Key Concepts

• Earnings Growth: The primary driver of equity market appreciation, currently projected at 28.8% for the S&P 500.
• CAPEX (Capital Expenditure): Massive investment (approx. $700 billion) by hyperscalers (Amazon, Alphabet, Microsoft, etc.) into data centers and AI infrastructure.
• Hyperscalers: Large-scale cloud computing providers driving the demand for AI compute power.
• AI Trade: The market momentum surrounding Artificial Intelligence, which remains the cornerstone of current equity rallies.
• Market Breadth: The number of stocks participating in a market move; currently, the rally is heavily concentrated in technology.
• Momentum vs. Overbought: The tension between strong upward price trends and technical indicators suggesting stocks are stretched relative to moving averages.

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1. The "Buy in May" Debate

The panel addresses the traditional market adage "Sell in May and go away." Despite historical trends suggesting May and June can be soft months following a strong April, the consensus is to buy. The argument is that the current market is fundamentally supported by robust earnings growth rather than speculative hype. The speakers emphasize that trying to "fade" (bet against) such powerful momentum has historically been a losing strategy.

2. The Role of Earnings and CAPEX

• Earnings Validation: The market has moved from "hope" to "validation." S&P 500 earnings growth projections have risen from 15% at the start of the year to 28.8% currently, with technology sector growth exceeding 40%.
• The CAPEX Cycle: A massive $700 billion in capital expenditure is being funneled into AI infrastructure. This spending is not just benefiting chipmakers; it is creating a "trickle-down" effect that impacts construction, energy, and infrastructure sectors.
• Supply vs. Demand: The demand for compute power is currently outstripping supply. Hyperscalers are aggressively building data centers, which is driving demand for everything from specialized chips to power turbines.

3. Market Breadth and Sector Performance

While there is concern regarding "sharply narrowing breadth"—where a few stocks drive the majority of the gains—the panel argues this is a unique scenario.

• Broadening Growth: While tech leads, other sectors like Energy, Materials, Industrials, and Financials are showing signs of growth.
• Stock Picking: The market is described as a "stock picker’s market." Investors are encouraged to look for companies where the earnings growth rate justifies the valuation multiple (e.g., Micron, Qualcomm, NVIDIA).

4. Technical Perspectives and Risks

• Overbought Conditions: Analysts like Michael Hartnett (BofA) have noted that sectors like semiconductors and AI-related stocks are "vulnerably overbought" relative to their 50-day and 200-day moving averages.
• The "Wall" Ahead: The panel acknowledges that the current trajectory cannot last forever. Potential risks include:
  • Energy/Power Constraints: The physical limitation of power availability for data centers.
  • Inflation and Interest Rates: These remain the primary macroeconomic "looming" threats to the market's upward path.
  • Competition: The rise of internal chip development (e.g., Alphabet’s TPUs, Amazon’s Trainium) poses a long-term competitive challenge to dominant players like NVIDIA.

5. Notable Quotes

• "We went from hope to true validation." — On the transition of the market during the April earnings season.
• "Trying to fade this type of powerful momentum has been extremely painful." — Regarding the futility of betting against the current AI-driven rally.
• "It’s a stock picker’s market... pick those stocks where the earnings growth rate versus their multiple looks attractive." — On navigating the current market environment.

Synthesis and Conclusion

The overarching takeaway is that the current equity market rally is fundamentally anchored in unprecedented earnings growth and a massive, multi-year CAPEX cycle driven by AI. While technical indicators suggest that many stocks are overbought and the market is extended, the sheer strength of the earnings data and the insatiable demand for compute power suggest that the "Buy in May" strategy is superior to "Selling." Investors are advised to focus on companies with strong earnings growth trajectories while remaining mindful of long-term risks like energy constraints and macroeconomic shifts in interest rates.