Sabco® Investment's Monthly Market Report - May, 2023

Sabco® Investment's Monthly Market Report - May, 2023

Nvidia exceeded expectations with its end-of-month results, generating excitement in the artificial intelligence sector. The company's revenue outlook surpassed predictions, driven by heightened demand for its cutting-edge semiconductors crucial for advancing AI technology. Nvidia forecasts a second-quarter revenue of $11 billion, compared to the consensus estimate of $7.2 billion. As a result, Nvidia's share price soared by 41% in euros this month.

The semiconductor industry also experienced a 21% increase in euro terms throughout the month. This investor enthusiasm benefited the Nasdaq, which outperformed the S&P 500 with an 11% gain. However, European stocks dipped by 3%, and Chinese stocks experienced a 5% decline due to disappointing economic data. In the United States, the energy sector plummeted by 10%, the commodities sector by 7%, and banks declined by nearly 5%. Defensive sectors like pharmaceuticals and consumer staples also ended the month with losses.

Interestingly, the entire performance of the index this year can be attributed to just seven stocks. In fact, an equally weighted index among S&P 500 companies has been negative since the beginning of the year, highlighting the limited nature of the recent rise seen in AI-focused companies. Additionally, discussions about the federal debt crisis received considerable attention this month. To mitigate the risk of defaults starting June 5, the White House and GOP Chairman McCarthy announced a principle agreement on May 27 to suspend the debt ceiling until January 2025, keeping non-military spending largely unchanged for the next two fiscal years.

The first-quarter earnings season concluded with results surpassing initial expectations. According to FactSet data, overall EPS growth for S&P 500 companies was -2.1%, better than the anticipated -6.7% at the beginning of the reporting season.

While long-term U.S. bond rates increased in May, euro zone rates remained relatively stable. The decline in euro zone interest rates towards the end of the month can be attributed to weak confidence indicators and inflation data. Both corporate and government bonds delivered slightly positive performances throughout the month.

As expected, the Federal Reserve raised its key rate by 25 basis points on May 3 and indicated that it was nearing the end of its rate hike campaign. However, Chairman Powell emphasized that future actions would depend on forthcoming data. Although expectations for a June rate hike diminished after the meeting, minutes from the May FOMC meeting revealed ongoing divisions among Fed members.

Similarly, the European Central Bank (ECB) increased its key rates by 25 basis points, marking the seventh consecutive increase in its tightening cycle and totalling a cumulative

375 basis points of tightening. The ECB also announced the cessation of bond reinvestment under its asset purchase program starting in July.

The Bank of England raised its interest rate by 25 basis points to 4.5% and hinted at potential further actions due to the risk of higher inflation. The unexpected rise in core UK inflation prompted a revision of the interest rate outlook. The Norwegian central bank also raised its base rate by 25 basis points to 3.25% and announced the possibility of another increase in June if inflation remains at the current level.

The dollar's appreciation against the euro throughout the month can be attributed to better economic data in the United States compared to the euro zone, along with strong inflows into U.S. technology stocks. The British pound strengthened following the surprise increase in inflation, which led to a reassessment of the outlook for interest rate hikes. Meanwhile, the Norwegian krone continued to depreciate primarily due to the decline in oil prices during the month.

Uncertainty surrounding Chinese demand caused a significant 11% drop (in dollar terms) in oil prices last month. The price of crude oil fell below $70 per barrel, a level that triggered a previous response from OPEC+. Industrial metal prices also suffered due to uncertainties about Chinese demand, ending the month with a 7% decline. Chinese imports hit a 12-month low in April, and signs of slowing construction and manufacturing activity further added to the concerns.