Stock Market Shrugs Off Myriad Concerns

The stock market continued to shrug off an ongoing war, rising inflation fueled by soaring oil prices, higher bond yields, and some frothy valuations to close May at a new all-time high level.  It was the ninth straight week of gains, the longest such streak since 2023.  As we noted last month, the primary reason for the market advance is what economist Ed Yardeni refers to as fabulous earnings momentum (FEMO).

In fact, earnings have risen faster than stock prices this year.  Estimates for S&P 500 forward earnings are at a record high. The latest analysts' consensus has S&P 500 operating EPS at $339.24 for 2026 and $394.52 for 2027, year-over-year gains of 20% and 16% respectively.

As always, there are things to worry about in addition to those mentioned in the opening paragraph: margin debt is at an all-time high, and equity positioning is aggressive.  Investor confidence is very bullish.  All of these have been contrarian indicators in the past.  As a result, we would not be surprised to see a market pullback now that the first quarter earnings season is essentially over. Corrections in midterm election years tend to be a bit deeper.  However, once second quarter earnings reports begin in mid-July, stocks are likely to react to that fundamental news.

Corrections are pretty much an annual event (the average intra-year decline over the past 45 years is 14%), and no significant portfolio changes should be made as a result of them.  Having an appropriate asset allocation that allows you to avoid taking actions contrary to your long-term goals and objectives is a key to financial success.

-The LVM Team