Positive economic news and a belief that the U.S. will avoid a default on its debt service, as well as program and operating obligations, contributed to positive stock market gains this past week and even led some Fed officials to indicate that more interest rate increases may be needed.
- Strong gains in retail sales and industrial production in April indicate the U.S. economy is off to a better second quarter start than many had expected.
- The housing market is also showing strength with homebuilder confidence rising to a 10-month high in May, despite its sensitivity to interest rate increases and cyclical economic pressures.
- Debt Limit discussions continue but without any sign that the significant differences have been resolved. In addition, once President Biden and Speaker McCarthy reach agreement, both must garner enough votes within their own parties to assure passage in both the House and the Senate.
- But even with the parties suspending discussion late last week, the S&P 500 was up 1.7% for the week, outpacing other developed markets and the All-Country World Equity Index which was up 1.4% for the week.
International equity markets continue to outperform the U.S., even with the U.S. tech sector dominating stock price performance in 2023, through last Friday, May 19.
- 2023 through May 19, the Nasdaq-100 is up 27.1%, followed by non-U.S. developed markets (“EAFE”) up 12.4%, the S&P 500 up 9.9%, and the broader ACWI up 9.5%.
- The principal driver in S&P 500 performance in 2023 has been the mega-cap companies, with the largest five stocks returning approximately 40% year-to-date — 80% of the S&P 500’s overall gains. How long this out-performance can continue is not clear, but recent breakthroughs in AI, lower bond yields and a view among some that these companies will be more resilient in a downturn have buoyed their prices.
- In the broader markets, the outlook for non-U.S. markets has become more positive. LPL reports that non-US markets trade at 13 times 12-month forward EPS (earnings per share) vs 18 times for U.S. equities, which is a significant discount to the historical international / U.S. P/E spreads. At the same time 2023 EPS growth currently is expected to be close to 4% for non-U.S. vs -1% for US equity.
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