This month is on track for the best May since 2009, disproving the old adage “Sell in May and Go Away.” Although political and geopolitical worries continue to weigh on markets, power-packed earnings, rise in oil price and easing U.S.-china trade fears have lead to a rally.
Below we discuss some of the events that dominated the headlines in May and influenced the stock market:
About 94.8% of the S&P 500 index market capitalization that has reported so far is up 24.2% on 8.5% revenue growth, with 77.6% beating EPS estimates and 74.5% coming ahead of top-line expectations. Though earnings and revenue beat ratios are in line with the prior quarter for the same group of companies, growth rates are tracking above the historical periods. Overall, Q1 earnings growth is on pace to be the strongest in seven years, with growth of 24% from the same period last year on 8.5% higher revenues.
As many as 13 out of the 16 Zacks sectors recorded double-digit earnings growth with energy leading the way. The auto sector has the weakest earnings growth of just 0.3%. The transportation sector has gained the most with an average of 2.1% versus 0.35% loss for the S&P 500 in response to earnings announcements. As such, YRC Worldwide (YRCW - Free Report) is the winner of Q1 earnings, climbing 29.1%. It has a Zacks Rank #3 (Hold) and a VGM Score of A.
Oil Price Peak & Retreat
Oil price had a great run through mid-month, with Brent climbing to $80.50 per barrel for the first time since 2014 and U.S. crude spiking to $73 per barrel. The potential U.S. sanction against Iran, which has threatened Iranian oil exports as well as falling output in Venezuela was the biggest catalyst to the oil price rise.
The impressive rally fizzled this week on anticipation that the two major players – Saudi Arabia and Russia – are looking to boost supply for the second half of the year at the meeting in Vienna on Jun 22. As per sources, producers are considering pumping up as much as 1 million more barrels of oil a day. Based on this news, Brent crude has fallen back to near $75 per barrel, losing more than 7%, while crude has plunged 10% from its peak. However, oil price rebounded slightly from this level in the latest trading session, with Brent and U.S. crude currently hovering near $77 per barrel and $68 per barrel, respectively.
Investors could tap the beaten down prices with energy stocks having a better Zacks Rank and a double-digit earnings growth rate for this year. Additionally, the Oils And Energy sector still poses a solid Zacks Rank in the top 25%. CNOOC Limited (CEO - Free Report) has a Zacks Rank #1 (Strong Buy) and a Momentum Score of A, with an estimated earnings growth rate of 83.3% for this year. It has lost about 11.1% in the past week. You can seethe complete list of today’s Zacks #1 Rank stocks here.
The deepening political crisis in Italy has sent shockwaves across the global markets with fresh concerns over the fate of the European financial system and its common currency. Italy, which is without a government since inconclusive national election on Mar 4, faced another roadblock after an effort to form the first populist government in coalition with anti-establishment Five Star Movement and the far-right League collapsed.
President Sergio Mattarella rejected the choice of a euro-skeptic as finance minister, which could provoke "Italy's exiting of the euro.” The move has led to calls for Mattarella’s impeachment and thus, a former International Monetary Fund economist Carlo Cottarelli was officially appointed as an interim prime minister in a bid to restore political order and end an 11-week deadlock. This has raised the likelihood of another election, reigniting fears of referendum on its euro membership. The rout has led to a bloodbath especially in financial stocks, providing investors’ opportunity to cash in on with the value picks. Mitsubishi UFJ Financial Group , which shed 2.4% on May 29, has a Zacks Rank #2 (Buy) and a Value Score of A.
Strong Run in Dollar and Yields
The U.S. dollar is heading for the best monthly performance against the basket of currencies since 2015. With just a day left to end the month, the U.S. Dollar Index has gained 1.4%. Meanwhile, the 10-year Treasury yields, which are a key driver of global borrowing costs, jumped to 3.12% on May 18 -- the highest level since July 2011. With Italy’s political drama weighing on the markets, the yields declined on flight to safety and are currently trading near 2.83%.
Financial stocks are the major beneficiaries of rising yields and Federated National Holding Company (FNHC - Free Report) has climbed 34.4% this month. The stock has a Zacks Rank #1 and a VGM Score of A. Its earnings are estimated to grow 275% for this year. On the other hand, real estate has been worst hit from higher rates. Equinix, Inc. (EQIX), having a Zacks Rank #3 and a VGM Score of C, dropped 6.4% in May. The stock has an estimated earnings growth rate of 12.14% for this year.
Small Cap Outperforms
Small-cap stocks are outperformers as these are well protected from any political instability, geopolitical tension and a stronger greenback. This is because these stocks are closely tied to the U.S. economy and do not have much exposure to the international market. While there have been winners in several corners of the small cap space, Turtle Beach Corporation (HEAR - Free Report) has climbed the most with nearly 216% gains. The Zacks Consensus Estimate for 2018 was revised up from 37 cents to 97 cents over the last 30 days, representing a whopping year-over-year earnings growth of 504.17%. The stock has a Zacks Rank #1 and a VGM Score of A.
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