Nervousness on financial markets persisted in May. After initial heavy losses, global stock markets launched a significant recovery at the end of the month. Inflation concerns, which had dominated until then, gave way to growth worries. Expectations of tighter U.S. monetary policy remained, but leveled off with growth concerns. Increasingly, global economic data point to weaker growth in the coming months. The Economic Surprise Indices compiled by Citigroup clearly underline this - for Europe or the USA, these are increasingly pointing south, which means that actual economic development is diverging from forecasts. Despite these more pronounced weakening signals in the macroeconomic outlook, which are further accompanied by poor retail results from the leading U.S. retailers, analyst consensus for the U.S. equity market still sees earnings growth of over 10% (!) and hardly any margin erosion (see FOCUS). Not surprisingly, the strongest growth is expected in the energy sector (+106%), while the weakest is expected in financials (-11%). A record number of U.S. companies also cite Ukraine in earnings reports, even though the market itself is hardly relevant to the companies. This shows that the suffering of inflation is gladly attributed mainly to the war or it is generally a welcome justification for a more cautious outlook for CEOs. Even before the war started, higher commodity prices and rising wages were a burdening factor. Furthermore, a much-needed easing in energy or food prices is still not in sight. The ongoing war in Ukraine is causing shortages and increased supply difficulties for wheat as well as higher energy prices. The restrictive COVID policy of the Chinese is further fueling the supply chain problem. The U.S. Federal Reserve raised the federal funds rate by 50 basis points in May, as expected, in one of the most aggressive hike cycles since 2000.
The Swiss stock market SMI lost significantly more in the global context for once (-4%). Nestlé shares came under pressure following disappointing earnings reports from Target Corp. and Walmart Inc. Roche's non-voting equity securities lost around -10% due to disappointing trial results for their new lung cancer therapy. The set of figures released by the dominant U.S. retailers was a reflection of the U.S. consumer, plagued by high inflation, who has less to spend on more profitable categories such as clothing or home furnishings due to higher prices for food and gasoline. Likewise, retailers struggled to pass on higher energy and transportation costs to customers more quickly, which weighed on margins. Shares of Walmart lost more than -11% in one day, and those of Target lost nearly a quarter. In contrast, low-cost retailers Dollar Tree or Dollar General benefited from the new thriftiness of the US consumer, both of which exceeded profit expectations. The U.S. equity markets closed mixed (S&P 500 +0.01%, Nasdaq -1.65%) thanks to a recovery after a rarely seen tightrope walk. The Dow Jones Industrials Index posted its best day of the year ahead of the Federal Reserve's interest rate decision, only to post its biggest loss of the year the following day. The small cap segment in Switzerland measured by the SPI Extra reduced the at times extreme monthly loss of -8% to -3.8%. For the recovery towards the end of the month, the rebalancing of funds and pension funds in the U.S. may have helped - JP Morgan estimates a volume of between $34 to $56 billion, which had to be reinvested in the U.S. towards the end of the month.
Owing to the change of guard between the two main concerns - inflation through growth - the majority of interest rates fell significantly from their highs, which certainly also contributed to the recovery in equities. With bad news on the economic front, inflation expectations also fell back somewhat. However, it is still too early to speak of a FED pivot - the Fed will stick to its historically fast tightening cycle as long as there are no increasing signs of a slowdown in inflation or an increased risk of recession. Further interest rate hikes of 50 basis points each are therefore to be expected in June and July.
After showing relentless strength over the course of the year, the USD depreciated significantly due to growth concerns and the resulting lowered expectations for monetary policy. Earlier, the USD reached parity with the Swiss franc for the first time since 2019, before significant declines pushed the exchange rate back below 96 centimes at the end of the month. However, prices for oil and gas continued to climb (WTI +9.5%, Nat Gas+11%). The bushel of wheat gained at times up to 11%.
Investor sentiment is still pessimistic. However, survey data diverge with positioning. Despite the sell-off on the financial markets, we note that speculators in the U.S.A. hardly hold any hedging positions (see FOCUS). Overall, therefore, the sentiment and positioning data do not paint a clear picture. We deduce that the recovery already underway is likely to be only temporary in nature, insofar as we do not observe any substantial calming of the leading interlocking themes of inflation, monetary policy and supply chains. Furthermore, valuations are only moderately attractive, provided that analysts' optimistic growth estimates can be achieved - which we are currently judging with caution.