This is why the momentum will continue, expert says

Key Concepts

• AI Infrastructure Spending: The primary driver of current market momentum, focusing on cloud computing, data storage, and server hardware.
• Consumer Adaptability: The ability of the U.S. consumer to maintain spending levels despite inflationary pressures and rising credit card debt.
• Yield Curve: The relationship between interest rates and the maturity of debt; a "normally-shaped" curve is viewed as a catalyst for financial sector growth.
• Forward P/E (Price-to-Earnings) Ratio: A valuation metric used to assess if stock prices are "digestible" relative to projected future earnings.
• Energy Infrastructure: A defensive sector providing cash flow and embedded inflation protection.

---

1. Market Performance Overview

As of the end of May, the U.S. stock market reached record highs, defying the "sell in May and go away" adage.

• Index Gains (May):
  • NASDAQ: +8% (Tech-heavy index).
  • S&P 500: +5%.
  • Russell Mid-Cap: +4%.
  • Dow Jones Industrials: +2.6%.
• Standout Performers: Data Dog (+83%), Micron (+83%), and Dell (+98.5% in May, with 30% occurring on the final day due to strong AI server earnings).
• Underperformers: Zoetis (-32%), Trimble (-17%), and Dow (-17%).

2. The AI and Cloud Computing Boom

The "AI trade" continues to expand rapidly. The First Trust SKYY ETF (Cloud Computing) gained 20% in May. Key individual performers include:

• NetApp: Soared 26% (intraday high of $192) due to its transition into a cloud-first data infrastructure provider.
• Oracle & Nutanix: Significant contributors to the cloud sector's monthly gains.

3. Geopolitical Context: Iran-U.S. Relations

The market showed resilience despite geopolitical uncertainty.

• The Situation: President Trump posted on Truth Social regarding a potential cease-fire deal and a naval blockade lift, alongside threats to destroy Iran’s nuclear program.
• The Conflict: Iran’s Foreign Ministry denied any finalized agreement, stating their focus is on ending the war rather than negotiating nuclear programs.
• Market Reaction: Investors largely ignored the conflicting headlines, maintaining the bullish trend.

4. Economic Outlook and Expert Analysis

Eric Friedman (CIO, Northern Trust Wealth Management) provided a forecast for June, citing two pillars for continued growth:

• Corporate Spending: Markets are allowing companies to invest heavily in AI, cloud, and infrastructure.
• Consumer Resilience: Despite concerns, consumers continue to spend on services like restaurants and recreation.

Concerns regarding Consumer Debt:

• New York Fed Data: Credit card delinquencies are rising (approx. 13%).
• Expert Perspective: Friedman acknowledges that while credit provisions are increasing, the situation remains "manageable." However, he warns that if personal income remains flat while spending continues to rise, the current economic formula will become unsustainable.

5. Investment Strategy for June

Friedman identified three sectors for potential growth:

1. Energy Infrastructure: Offers current cash flow and protection against inflation.
2. Financials: Currently overlooked; expected to benefit from a more normally-shaped yield curve and expansion into high-margin businesses.
3. Private Healthcare: Viewed as a more viable opportunity than the public healthcare market.

6. Synthesis and Conclusion

The market is currently driven by a "glass half full" sentiment, relying on the assumption that AI-related capital expenditure will remain robust and that consumers will continue to adapt to economic pressures. While valuations are becoming more "digestible" due to projected 15-18% earnings growth over the next three years, the sustainability of this rally depends on two critical factors:

• Supply/Demand Balance: Companies must avoid over-spending on AI infrastructure; supply must eventually align with demand.
• Consumer Health: The "inventive" spending habits of consumers must not devolve into unsustainable debt-fueled desperation.

Note: The segment concluded with a teaser regarding a NASA launch pad explosion and its potential impact on space-related stocks.