Tech stocks led the market in May once again. The Tech heavy Nasdaq was positive by 5.9% in May and is positive by 24% year-to-date. This tech rally was led largely by Nvidia, and others involved in Artificial Intelligence (AI) development. 2023 has mostly been a story of tech and mega-cap companies producing outsized performance. The S&P 500 was positive by 0.43% for the month while bonds trailed with the US Bloomberg Agg coming in at -1.1% and developed international trailed as well with the MSCI EAFE index negative by 4.1% for the month. When comparing sector performance, as we already mentioned technology was the standout and led the S&P 500 sectors with a positive total return of 9.5% for the month. Other top-performing sectors were communications services, positive 6.2% and consumer discretionary up 3.2%. Energy was the sector with the largest decline and was down 10% in May.

As already pointed out Nvidia has been the big market mover this month and this year. This huge runup has mainly been due to their involvement in the recent trendy investment trade of artificial intelligence. Their first-quarter revenue of $7.19 billion beat expectations and they increased their revenue forecast for the second quarter to around $11 billion. On May 30^th Nvidia hit a $1 Trillion market capitalization making it the 6^th company ever to do so. Year-to-date Nvidia stock is up 158.9% and on the day of their earnings report their stock was up 26.91% just that day. In 2020 and 2021 Nvidia also performed well benefiting from COVID-19 lockdowns as well as the rise of cryptocurrency and blockchain technology. In 2020 the stock was up 121.9% and in 2021 it was up 125.3%. But what went up came back down in 2022 as Nvidia was down 50.3% and the company was being written off as interest rates rose, COVID restrictions were lifted, and supply chain issues emerged. Nvidia’s earnings in Q1 and expected revenue for Q2 have set the bar when it comes to their stock price moving forward. It remains to be seen if they can live up to these high expectations of being the leader in the AI space.

As Nvidia drove the tech rally, the headlines were dominated by Congress and the president negotiating a deal to raise the debt ceiling. Republicans were looking to reign in federal deficit spending meanwhile Democrats were looking for a clean debt limit raise with no stipulations. As the market has been expecting, it appears the two sides have met somewhere in the middle and agreed on a deal to raise the debt ceiling just in the nick of time according to the treasury department, which had said somewhere the government would run out of money between June 1^st and June 5^th. The deal funds the government for about 2 years. Now that a deal has been reached investors can focus on other market-moving news.

The Fed’s fight against inflation is not over yet as CPI and PCE, the Fed’s preferred metric for measuring inflation, both appeared to flatline in their recent readings. PCE actually slightly increased for the April number that was released in May. The Federal Reserve raised its key interest rate by 25 basis points in May and many seemed to think the Fed signaled an upcoming pause in their rate hiking cycle. Predictions of no more rate hikes may have been premature as inflation’s deceleration seems to have flatlined, the labor market remains tight, and the banking crisis appears to be behind us for the time being. Throughout the month the probabilities of another rate increase have crept up and the expectation is no rate hike in June but another possible rate hike coming in July depending on the economic data. According to Federal Reserve Chairman, Jerome Powel, the Federal Reserve Board will remain data dependent as they asses future rate hikes.

We continue to watch with great interest as the overall market is positive for the year but has been led by a few select companies and economic sectors. Large Cap growth stocks, especially mega-cap tech, lead the market meanwhile Mid Cap and Small Cap stocks are both negative for the year. Furthermore, the S&P 500 equal weight is negative 0.63% through the end of May, further showing that the mega-caps are leading the market. Going forward, will the AI trend continue to lead tech higher? Will a pause in rate hikes allow Mid and Small Caps to rally as well? Or will continued rate hakes be the final straw that finally breaks something in the economy?

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