A rapidly rising market has caught a lot of investors off-guard. Tim Anderson from MND Partners has spent many years on the floor of the NYSE. He loves to watch what he calls the “pain trade,” the move in the markets that would catch the largest number of active investors off-guard. Surveying Monday’s late-day rally on the floor, Anderson looked up at the NYSE boards and said, “the pain trade is up.” Who would have thought? Three weeks ago, the market seemed willing to accept that a 5%-10% pullback was in the cards thanks to higher for longer interest rates and a small chance the Fed might even hike rates before it began cutting. That all turned around with Friday’s jobs report, which showed slower job growth and less aggressive wage increases than was anticipated. Combine that with Fed Chair Powell’s comment that it is unlikely the next move would be to raise rates, and you have all the elements for a modest melt-up. The S & P 500 is now within 1.4% of its old closing high of 5,254 from March 28th. The Nasdaq is 0.6% away from its historic closing high from April 11. It’s not just the U.S. either. The STOXX Europe 600, essentially the S & P 500 of Europe, is also less than 1% below an historic high. It’s certainly true that Fed expectations drove the pullback, and as those expectations go back to dovish it makes sense the market would rally. However, while it’s tempting to give a more dovish Fed and weaker data all the credit for the rally, that would be a mistake. “Without investors being fundamentally confident in future economic growth, Fed policy alone would not be enough to be pushing U.S. stocks near new highs and European small caps/Emerging markets past their 1-year highs,” Nicholas Colas from DataTrek noted in a recent report to clients. It’s earnings that are continuing to underpin the markets. Forward earnings estimates for the S & P 500’s second quarter rose in April, unusual because estimates usually decline in the first month of the quarter because analysts are overly optimistic. Not this time. Earnings are expected to rise every quarter this year, into record territory, and only slightly decline in the first quarter of 2025. S & P 500 earnings estimates Q1 24 $55.78 Q2 $59.64 Q3 $63.60 Q4 $65.25 Q1 25: $64.76 Source: LSEG The AI story is boosting utilities Another major factor in the rally is the artificial intelligence story is broadening out, moving into other sectors. Utilities are sitting right at 52-week highs, pushed up roughly 9% in the past few weeks on a raft of stories that utilities will benefit from rising power demand due to heavy utilization of AI by data centers. For example, Reuters reported that Southern Company expects data centers to expand its electricity sales growth to 6% each year from 2025 to 2028, up from predicted growth of 1% to 2% annually through next year. I have no doubt this is true, but switching the story around seems more interesting to me. It seems obvious that training AI on the utility business would enhance the management of power grids. There’s all sorts of issues that AI could help manage, starting with managing peak power demands more efficiently to analyzing potential points of failure to improve maintenance. There are other ways to play the AI game besides utilities. In industrials, Ingersoll Rand and Parker- Hannifin have become investment darlings, partly on an AI thesis. Ingersoll Rand is the world’s second-largest industrial compressor manufacturer and a leading play on industrial automation. EatoN Corp. does power management for factories; the increasing emphasis on automation and increasing labor productivity means even more reliance on their power management solutions. Vertiv is another AI darling that also helps manage power. Put this all together, and it’s suddenly tough to argue for a major selloff, even in the seasonally weak month of May. “You’re not going to get some huge selloff to get back into the markets,” Alec Young, chief investment strategist, MAPsignals.com, told me. “The Fed always says we are data dependent,” he added. “If we get more data that is inflation friendly, we are going to be at new highs fast.”
