As Thomas Lee has so eloquently stated throughout this year, “This is one of the most hated V-shaped recoveries the equity markets have ever seen.” Turmoil (according to the media) virtually everywhere you turn. Pick your poison, the Iran conflict, the Ukraine / Russia conflict, Maduro in Venezuela, Greenland, Tariffs, should I stop now! In the end, this is classic media doing everything in their power to keep everyone on edge continuously. This week it is the drum roll up to the meeting between President Trump and China’s Xi.
As a result, the recovery in many indicators using the S&P 500 Index as the universe for analysis, should clearly be surprising considering the index soared 10.4% in April, its best month since November 2020 and the second-best April in the last 90 years. Calling upon statistics, after the S&P 500 has gained at least 5% in April, over the final eight months of the year, the index has risen 86% of the time by a median of 19.0%. Since 1950, the S&P 500 has risen eight out of 10 times by a median of 14.1%. The median drawdown has been 7.3%, and it has tended to start in late July/early August and end in mid/late September. The worst case was in 2001, in the aftermath of the dotcom bubble. The other was in 1978, the only other midterm year in the study. Here is the chart curtesy of Ned Davis Research:
Harkening back to the Dot Com days is the fact that the S&P 500 is hitting new highs while less than 60% of its constituents are above the 50- and 200-day moving averages. According to Bespoke Investment Group, that has only happened a handful of times since 1990 and – you guessed it – those all occurred during the 1998-2000 Tech Bubble period. Again, that doesn't mean we are guaranteed a repeat of that legendary boom/bust cycle, and, even if we are, it could mean we're in "1998" rather than "2000." Ordinarily, though, the current percentage of stocks above the 50- and 200-day moving average is more consistent with an S&P 500 down at least 4% from its highs, not hitting historical extremes. The worst total drawdown from a high at any point since the S&P 500 gapped higher on April 8th has only been 1.41%. To put that into perspective, going back to the start of last year there have been 25 single sessions that have closed down more than that. Only eight down days have occurred since March 30th, and the average loss in those sessions was a miniscule -0.25%.
With almost 90% of the S&P 500 having now reported earnings, though, the day-to-day catalysts in individual names might be going away soon. The market may not care, but it is something to keep in mind. As for any short-term "call," the line of least resistance remains higher. Until that changes, stocks can obviously keep going up. So the whole “Sell in May and Go Away” concept seems to be a fear that many still seem to be holding onto. The reason being that March was so negative that the stage seemed to be aptly set for the sell in May, during a midterm year decline to be in the offing. To take a very close look at this year overlayed on the historical midterm year going back to 1928, this is what we are currently doing vs. what is “normally” the case:
As I think (nervously) about how well the markets are doing and how negative the financial press is, I keep going back to the economy and corporate earnings. The prospect for slower economic growth, especially outside the U.S., has reinforced the multi-year theme of AI-driven U.S. Growth stock leadership. When economic growth has been decelerating, Growth stocks have tended to outperform Value stocks. AI-driven capex accounted for nearly two-thirds of GDP growth in the first quarter. Economic growth is likely to moderate throughout 2026 as the sugar-rush from AI fades and the impact of higher oil prices ripples through the economy, so AI investment could account for an even higher percentage moving forward.
Looking at earnings, earnings are beating by a staggering 19%. This is like two years of earnings growth. It is like an emerging market situation, yet it is the most developed economy of the world! This is probably the official effect of AI. Here is the table:
Now I want to address a couple of more points concerning the markets in general and exactly what is making them move as they are. By this I mean which sectors are performing and which are detracting from the performance. This should create a clear visual on what to pay attention to for possible turns in direction. To address the market (the S&P 500) from a general perspective, given the abrupt moves off the lows during the Tariff Tantrum in 2025 and the Iran conflict of 2026, this is what the technicians are forecasting. Notice that in this very small slice of time the markets seem to be acting very similarly even though the reason for the pullbacks are entirely different:
This advance is being tentatively measured as an advance that should take some level of a rest around the 19th May. This does not imply a decline, but rather a possible sideways move to catch its breath. Is there a catalyst for this? Not really, just based on the similarity of a move this could be a consideration. This is not my opinion but rather some yardsticks from super technical guys. And one of the most amazing readings that I am seeing is that of consumer sentiment. It is literally the lowest it has ever been in statistical history! Economy raging, earnings beating handily, and employment full, and sentiment the worst ever. See below:
Next I want to share the broad S&P 500 as the world follows it compared to the Equal Weighted S&P. The Equal Weighted holds the same names, but with the same voting power of each of the 500 vs. the normal or Capitalization Weighted S&P that is followed in the financial press. Please see below, first the Capitalization Weighted, followed by the Equal Weighted. Note the strong uptrend by the Cap Weighted, whereas the Equal is having a very difficult time moving to higher highs.
The logical question is why? What is it that is making one look so strong and the other so tired? To answer this one needs to look at the components. It can be noticed that if one is to look at the upper right side of these two that the first one broke out very strongly, where the lower one has not been able to better its February / March peak. This brings me to one of my most important tenants in investing. When exhaustion points are hit, And the broad market reverses-either from a high point down or a low point up, the move will show leadership in different sectors. In the case where the market comes up from a low point- as was the case in the beginning of April, it is important to recognize where leadership came from. To do this, I look at the collection of all sectors (of which there are 11 broad sectors).
In looking at the 12 charts below, the one on the upper left is the S&P 500. I have noted with a yellow highlight the virtually straight up move from the March low. Then I have input a yellow highlight on the others that show the internal trend. It should be noticed that technology and real estate are really the only ones that have broken to new highs to any consequence. I have put a box around these two so they can be easily recognized and compared.
In closing, it is clear that the markets have been very strong even though sentiment is poor and there is a very contentious conflict still alive in the Middle East. At the same time, it is our responsibility to separate the wheat from the chaff and manage portfolios based on earnings and market analysis. Currently the uptrend is still in full force. There are some sectors that are having a dreadful time of it and others that are still in a very aggressive advance. Will this run out of gas? I’m sure it will at some point, but at present, interest rates, the US Dollar, and overall commodity prices remain firm and in a consistent direction. When this changes, we will consider changes. Until then, as the saying goes, “The trend is your friend, until the trend ends.”
-Ken South, Tower 68 Financial Advisors, Newport Beach
-
Get Ken's Weekly Market Commentary Delivered To Your Inbox!
Important Disclosures:
The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual. To determine which investment(s) may be appropriate for you, consult your financial professional prior to investing. All performance referenced is historical and is no guarantee of future results. All indices are unmanaged and cannot be invested into directly.
All information is believed to be from reliable sources; however LPL Financial makes no representation as to its completeness or accuracy.
Investing involves risks including possible loss of principal.
The Standard & Poor's 500 Index is a capitalization weighted index of 500 stocks designed to measure performance of the broad domestic economy through changes in the aggregate market value of 500 stocks representing all major industries. The S&P 500 is a stock market index tracking the stock performance of 500 of the largest companies listed on stock exchanges in the United States. Indexes are unmanaged and cannot be invested in directly.
The Dow Jones Industrial Average is comprised of 30 stocks that are major factors in their industries and widely held by individuals and institutional investors.
The Nasdaq-100 is a large-cap growth index. It includes 100 of the largest domestic and international non-financial companies listed on the Nasdaq Stock Market based on market capitalization.
The NASDAQ Composite Index measures all NASDAQ domestic and non-U.S. based common stocks listed on The NASDAQ Stock Market. The market value, the last sale price multiplied by total shares outstanding, is calculated throughout the trading day, and is related to the total value of the Index. Indexes are unmanaged and cannot be invested in directly.
The Russell 2000 Index is an unmanaged index generally representative of the 2,000 smallest companies in the Russell 3000 index, which represents approximately 10% of the total market capitalization of the Russell 3000 Index.
Data sourced from Bloomberg (2025).
Stock investing includes risks, including fluctuating prices and loss of principal.
Bonds are subject to market and interest rate risk if sold prior to maturity. Bond values will decline as interest rates rise. Bonds are subject to availability, change in price, call features and credit risk.
Government bonds are guaranteed by the US government as to the timely payment of principal and interest and, if held to maturity, offer a fixed rate of return and fixed principal value.
Bond yields are subject to change. Certain call or special redemption features may exist which could impact yield.
International investing involves special risks such as currency fluctuation and political instability and may not be suitable for all investors.
Alternative investments may not be suitable for all investors and should be considered as an investment for the risk capital portion of the investor’s portfolio. The strategies employed in the management of alternative investments may accelerate the velocity of potential losses.
This information is not intended to be a substitute for specific individualized tax advice. We suggest that you discuss your specific tax issues with a qualified tax advisor.
The economic forecasts set forth in this material may not develop as predicted and there can be no guarantee that strategies promoted will be successful.
LPL Tracking #1103339