Sell in May and go away is not working; Dr Doom Roubini is bullish

Stock investors who followed the popular ‘sell in May and go away’ mantra are suffering significant losses as the market has continued surging ahead. The Dow Jones index has rallied by over 6% since May 1st while the Nasdaq 100 and S&P 500 indices have jumped by over 10%. 

These indices have erased all the losses they made earlier this month when the fear of the unwinding of the Japanese yen carry trade escalated. The Dow Jones is a few points below its all-time high of $41,418 while the S&P 500 needs to rise by 2.32% to get to its all-time high of $5,668. 

The sell in May and go away mantra has, nonetheless, worked well in the crypto industry, where most tokens have crashed hard in the past few months. Bitcoin and Ethereum prices have dropped by over 20% from their highest point in May.

Corporate earnings have been good

The first reason why the sell in May and go away theme has not worked well is that corporate earnings have been good. 

While companies like Intel, Home Depot,  and AMD had a bad second quarter, most of the S&P 500 index have done well.

Data by FactSet shows that 91% of all companies in the S&P 500 index have published their financial results. Of these companies, 78% published results that had a positive earnings-per-share (EPS) element in the second quarter while 50% of them had a positive revenue surprise.

Most importantly, there are signs that revenue growth has accelerated, with the revenue growth coming in at 10.8%, the highest point since Q4’21. These numbers mean that, despite challenges, companies are doing well. 

Most companies have also issued positive forward guidance, with just 47% members of the S&P 500 index issuing a negative EPS guidance. 

Analysts are still bullish on stocks

The S&P 500 index has also done well because Wall Street analysts are still bullish on American equities. 

In a note, analysts at Goldman Sachs said that the S&P 500 index could rise to $6,000 this year, meaning that it could jump by over 8% this year. Another Goldman Sachs estimate was that it could rise marginally to $5,600.

Oppenheimer, on the other hand, has placed a target of $5,900 while Deutsche Bank’s target stands at $5,600. UBS also sees the index continuing rising. Morgan Stanley sees the S&P 500 index moving closer to $6,000.

Most notably, Nouriel Roubini, a highly popular Wall Street analyst, popularly known as Dr. Doom, recently advocated for higher stock prices. He sees the popular S&P 500 index continuing soaring to a record high.

Still, not everyone is bullish on US stocks. Warren Buffett has dumped substantial stocks in the past few months. He has sold Apple shares worth over $54 billion, bringing the total cash pile to over $277 billion. 

The Fed is your friend

US stocks are also doing well because of the ongoing hopes that the Fed is now moving to a dovish tone. 

Most economists now expect the Federal Reserve to provide a backstop to the stock market. Recent economic numbers mean that the Fed will start cutting interest rates in its September meeting since the unemployment rate has risen in the past few months.

By cutting rates, the Fed will be joining other central banks like the European Central Bank (ECB), Bank of England (BoE), and Swiss National Bank (SNB), which have started slashing rates in the past few months.

Fed rate cuts are important for the S&P 500, Dow Jones, and Nasdaq 100 indices because of the vast sums of money that have been stored in money market funds. Investors have plowed over $6.1 trillion in money market funds.

Some of these funds will likely rotate to stocks as yields start falling. In fact, the bond market has started softening, with the 10-year yield moving to 3.9% while the 30-year has moved to 4.16%, respectively. 

US elections as a catalyst

The other major catalyst to have in mind is the upcoming US election, which will happen in November. Polls show that Kamala Harris has a lead against Donald Trump in key states. 

US stocks will likely do well as the uncertainty of the campaign period ends. We believe that fears of President Kamala among investors is unwarranted.

Besides, US equities have jumped to a record high during Joe Biden’s presidency. Over the years, data shows that the stock market does well regardless of who is in the White House.

Also, while some investors love Trump for his pledge to cut taxes and lower regulations, his administration would not be good. Tax cuts would exacerbate the ongoing debt crisis, with the public debt sitting at over $35 trillion. His trade wars would also affect the country’s growth and tensions with China.