Five for Friday

Bearishness, Compounding, Rally Check-In, Inflation, and Outer Space

1. Bears

In early April, both retail investors and professional money managers were as down on US stocks as they’d been in decades. Since then, perhaps ironically, the S&P 500 has seen one of its best 25-day stretches since 1950, returning ~20% off the Apr 8 market low. And while the speed and magnitude of the rally are perhaps a surprise, strong returns from periods of excess bearishness are common across history. Just ask Warren Buffett, who recently announced that he’d be stepping down as the CEO of Berkshire Hathaway after 60 years and wrote the following in 1986: “occasional outbreaks of those two super-contagious diseases, fear and greed, will forever occur in the investment community. The timing of these epidemics will be unpredictable. And the market aberrations produced by them will be equally unpredictable, both as to duration and degree. Therefore, we never try to anticipate the arrival or departure of either disease. Our goal is more modest: we simply attempt to be fearful when others are greedy and to be greedy only when others are fearful.”

2. Compound

One more thing on Buffett: from 1964 – 2024, Berkshire Hathaway returned 19.9% a year compared to the S&P 500’s 10.4%. In total, however, Berkshire returned 5,502,284% to the S&P 500’s 39,054%. That’s the power of compounding – not even double the annual return, but over 140x in total across six decades. What a powerful concept.  

3. Rally

Underneath the hood of the market’s recovery, things are looking pretty good. The recent rally has been broad, with ~60% of stocks in the S&P 500 trading to a 20-day high on Monday – most since 2023 and a bullish signpost for the durability of the rally. The market’s leadership is also decidedly risk-on, with more cyclical and economically-sensitive sectors outperforming (see right). Further, with tariffs now taking up slightly less of the oxygen in the room, investors have seized on opportunity to redirect focus towards the still-burgeoning AI theme; companies spent a lot of time on the Q1 earnings calls talking up the benefits of their AI adoption efforts, while the big-spending tech infrastructure companies reiterated their confidence in AI’s long-term growth opportunity. Since the lows, the Magnificent 7 has handily outperformed “the other 493,” reversing a trend of AI-adjacent weakness seen to begin the year. The market is likely overbought in the near-term and in need of a pause / consolidation period to cool down a bit, but on the whole, positive momentum is building.

4. Inflation

Data out this week showed inflation fell to 2.3% year-over-year in April, its lowest level since February 2021. From March to April, prices outright fell for everything from gasoline to apparel to groceries, while most of the upside pressure came from housing costs. However, even in that arena, shelter inflation sits at its lowest level since 2021 and is in an obvious downtrend, with asking rents actually negative year-over-year. A cooling inflation backdrop helps gives the Federal Reserve the breathing room it needs to cut rates should the economy weaken, and the about-face on tariffs removes one of the major (potentially) inflationary catalysts that keeps them up at night. Rates may not even go lower from here, but the Fed has more arrows in its quiver today than it did a week ago, and that’s a big positive for stocks.

5. Happy birthday

to Nancy Roman, who would have turned 100 years old today. The native Tennessean is often called the “Mother of Hubble,” for her critical role in planning and championing the Hubble Space Telescope. In addition to the Hubble’s massive astronomical and cultural impact, it’s also catalyzed countless technological innovations that have trickled into everyday life. My favorite? The technology behind the specialized filters created for the Hubble to get ultra high-quality images went on to form the foundation for the paint-matching devices used in hardware stores. Pretty cool!  

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This is not a complete analysis of every material fact regarding any company, industry or security. The opinions expressed here reflect our judgment at this date and are subject to change. The information has been obtained from sources we consider to be reliable, but we cannot guarantee the accuracy. Market and economic statistics, unless otherwise cited, are from data provider FactSet.

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