SPY and QQQ ETFs: Don’t sell in May and go away

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on May 17, 2024
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  • US equities have jumped to their highest level on record.
  • The average earnings growth for stocks in the S&P 500 index rose to 5.4%.
  • The Fed may start cutting interest rates later this year.

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The SPDR S&P 500 (SPY) and Invesco QQQ (QQQ) ETFs are doing well as they sit at their all-time highs. SPY has risen for three straight weeks and is trading at a record high of $530 while QQQ has soared to $452.

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Fed rate cuts and earnings growth

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There are three main reasons why US equities are in an unstoppable bull run. First, they are thriving as investors cheer the recent earnings. Data by FactSet shows that the blended earnings growth by S&P 500 companies stands at 5.4%, its highest level since Q2’22. 

Most companies – about 78% of them – reported results that beat the consensus EPS estimate while 59% beat on their revenues. Some of the companies that reported strong results were the likes of Walmart, Microsoft, Amazon, and Alphabet. Analysts believe that this earnings growth will continue doing well as the global economy recovers. 

Second, there are chances that most central banks will start cutting interest rates soon. The Swiss National Bank (SNB) slashed rates in March and the Bank of England (BoE) and European Central Banks (ECB) are expected to slash in June.

The recent weak US economic numbers like retail sales, manufacturing, industrial, and consumer confidence have confirmed that the economy was softening. There are also signs that the recent reflation trend is ending.

Therefore, the consensus is that the Fed will deliver at least one rate cut this year. The implication of this is that investors will start scaling back their bond investments to equities, a notable situation since investors have over $6 trillion packed in money market funds.

Finally, analysts are highly optimistic about equities, with most Wall Street banks like Citigroup, Morgan Stanley, and Goldman Sachs having a positive outlook for stocks.

SPY vs QQQ

SPY vs QQQ ETFs

Selling in May and going away is risky

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A common phrase in the investment world is on selling in May and going away. The view is that stocks tend to do well in the first half of the year and then trade lower through November. Historically, the concept of selling in May has generated mixed returns.

A case can be made for exiting US equities. For one, there are signs that stocks are not cheap. The S&P 500 index has a forward PE ratio of 20.4, higher than the five-year average of 19. 

Also, the Buffett indicator, which looks at the equity market valuation in relation to the US GDP has jumped to a record high.

However, selling in May and moving into cash or bonds has its risks. First, history shows that the SPY and QQQ ETFs always rises. Sure, there have been several major drawdowns like during the dot com bubble or the Global Financial Crisis. These indices have always bounced back from these events.

Second, several bullish catalysts will push equities higher. Earnings will likely do well, the Fed will start cutting interest rates, while the dysfunction in Washington will continue.

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