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Equity Focus - May 2024

Sell in May and go away? Not this year


Earnings Season in Focus

Key Points

The Big Picture: Q1 earnings season is well underway, with 60-75% of companies having reported in Europe and in the US. Encouragingly, the spread between US and European EPS growth is narrowing, consistent with the rollover in their relative PMI momentum. This is supportive of our positive view of European equities vs the US. Additionally, US vs Europe sales beats seem to have turned lower, in line with the move in FX.

78% of S&P 500 companies that have reported beat EPS estimates. EPS growth for these companies is at +4% y/y, surprising positively by 9%. Commodity sectors and Healthcare are down on a yoy basis, while Discretionary, Tech and Communications Services are seeing robust earnings growth. Topline growth is printing at +4% y/y, surprising positively by 1%.

Of the STOXX 600 companies that have reported so far, 56% beat EPS estimates, rising above its historical median. Q1 EPS growth is at -10% y/y, surprising positively by 4%. Commodity sectors and Cyclicals are a drag on overall growth, where ex-Energy EPS growth stands at -3% y/y.

56% of Topix companies beat EPS estimates, with overall EPS growth at +5% y/y. Revenue growth is at +1% y/y.


Main recommendations

Buy the dip in copper mining stocks. A combination of stronger global end-demand and restricted supply has fueled the surge in the copper price. According to the Blackrock World Mining Fund, the copper price would need to rise further to $12,000/ton in order to trigger large-scale investment in new mines. Since those would become operative only after 5-10 years, supply remains inelastic. Thus, the outlook remains bright for copper producers.

We upgraded EU Small Caps to positive on the back of appealing valuations and an improving economic backdrop.

Remain selective within Chemicals: the sector should benefit if the uptick in the  manufacturing cycle in Europe proves to be sustainable. But  although demand could be  picking up, supply from China is for sure in many areas. We prefer Industrial Gases within the sector

The key risks are that the US Federal Reserve or the ECB could be forced to further push out rate cuts or even shift back to a hawkish rhetoric should inflation surprisingly pick up again


Sell in May and go away?

Debunking the most common seasonality Wisdom

Sell in May and go away is probably the most commonly know wisdom about investing. Its origins are going back to the Georgian Era in England, recommending that British investors, aristocrats, and bankers should sell their shares in May, relax and enjoy the summer months while escaping the London heat, and return to the stock market in the autumn. Thus, the second, less know part of the phrase goes “come back on St. Ledger´s Day”, a referral to a widely popular horse race which usually takes place in September.

So much for the history. But is this centuries old advice still valid? Looking at data on the S&P 500 since 1966 we can conclude that the period between May and September indeed shows below average returns. In fact, it even includes the only month showing on average a negative monthly performance. However, showing sub-par returns is still different to negative returns, which would indeed justify to sell a position. As we can see from the chart though, returns may not be stellar during summertime. However, the overall performance during that period is till positive. If at all, investors would rather want to sell in September. Ironically though, this would be exactly the time the old wisdom advises to come back.

Just a fairy tale? Looking at what we saw so far it´s indeed fair to conclude that, generally speaking, selling in may is not the best advice. However, if we distinguish the market in bull (year was positive) and bear (year was negative) markets, an interesting pattern can be observed. During bear markets, summertime seems indeed a particularly bad time to hold equities since the drawn down often accelerated during this period. Luckily, this year locks to be none of those years, though.