May In Review: Inflation Spoils The ASX Party

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Overseas markets rallied in May on lower bond yields and stabilising inflation prints, but the Australian market couldn't sustain the early May up-swing, weighed down by a surprisingly high April CPI reading and some negative earnings updates.

-NASDAQ and S&P500 gained the most since May 2003, and the Dow topped 40,000
-Australian stocks were mixed, with some stand out beats and surprise earnings misses
-Domestics banks continued to shine in May, only to be beaten by Technology stocks
-June could prove to be a real downer

By Danielle Ecuyer

US markets go risk on in May

Just in case we had forgotten; markets, traders and investors remain fixated on inflation readings and where central banks are in the interest rate cycle.

May was no different. US equity markets responded positively to a more subdued April inflation print, which took the possibility of further rate hikes off the table.

US government bonds rallied 18bps, showcasing the biggest monthly decline in yields since December 2023, according to CommSec, which created the positive backdrop for a risk-on equities rally.

The Dow topped 40,000, its best performance since 2020, and Apple rallied 13% over May on the back of better-than-expected quarterly earnings, plus a record-breaking US$110bn stock buyback.

The S&P500 lifted 4.8% in May with NASDAQ up 6.9%;  both indices registering their best May performances since 2003.

Semiconductor stocks ("chips"), riding the wave of artificial intelligence, saw the poster child of growth, Nvidia, report another quarterly earnings result that surpassed even the whispers on the street. Management upgraded guidance, sending the stock up to over US$1000 (up 26.9%). 

Qualcomm also reported strong results as a major supplier to smart phones and that stock lifted 23.5%.

Australian shares skip a beat post the April CPI print

The Australian market experienced the return of heightened volatility with no less than six +/-1% daily moves for the ASX200 index, according to Morgan Stanley.

The ASX gained 0.9% (total return) over the month compared to the MSCI global index which lifted 3.8% in US dollar terms.

In contrast to the US, the domestic April CPI print brought the prospect of further rate hikes back into focus and trimmed the ASX rally ro less than 1% from 3.2% at the high. The ASX200 closed out at 7702 points.

The RBA remained on hold in May, although this did not stop traders moving around the ASX Cash Futures which priced in a 3% chance of another hike ahead of the meeting. Futures have since moved to expectations of a -25bps cut in June, albeit at a 5% chance only, notes Morgan Stanley.

The Consumer Discretionary, Real Estate and Communication Services sectors retreated the most in response to the higher-than-expected April inflation reading of 3.6% versus expectations of 3.4%-3.5%.

A series of guidance downgrades and weak corporate trading updates did not help investor sentiment. 

Information Technology was the standout sector in Australia throughout the month, up 5.42%, boosted by the better-than-expected results from Xero ((XRO)) and TechnologyOne ((TNE)), shares rallying 10.6% and 9.7%, respectively.

Macquarie is quick to point out technology stocks have managed to grow profits in the face of inflation-cost based headwinds and some 80% of the price appreciation was due to earnings upgrades and not PER expansion (an increase in valuation).

Banks rose 3.6%, with UBS commenting the bank share prices have surged by around 30% in the past six months, driven by strong capital returns, while the underlying earnings trends show sustained competitive pressures and cost inflation.

Utilities also rallied in May, up 3.4%, which Macquarie attributes to the Gen Ai narrative around increased power demand for data centres, leading to multiple expansion, rather than upgraded earnings forecasts.

Earnings results over May proved a mixed bag, along with the upside surprises from Xero and TechnologyOne, Aristocrat Leisure ((ALL)) shares rose 13.5%, making it the top star performer in the ASX50.

It was a case of bigger is better in May. The ASX20 rallied the most, rising just over 2%, with more subdued performance form the ASX50 to ASX300 indices.

Commonwealth Bank ((CBA)) and BHP Group ((BHP)) did some heavy lifting, contributing 37bps and 32bps to the ASX20's gain, even as BHP walked away from the US$49bn Anglo American takeover.

The Telecommunications Services sector fell -5.5% in May, dragged down by Telstra's market update which included -$250m in cost outs from a -9% reduction in the workforce and the removal of the CPI-linked mobile price increases in FY25. Telstra Group ((TLS)) contributed -10bps to the ASX20, followed by James Hardie Industries ((JHX)) at -14bps, and Fortescue ((FMG)) at -10bps.

Looking at the year-to-date movements thus far in 2024, Financials have been the standout sector in terms of contribution to ASX200 returns at 314bps, with Technology at 63bps, followed by Real Estate at 35bps, Discretionary at 47bps, down to Industrials at 7bps.

Materials have been a noticeable laggard with a -151bps drag on the index, followed by Communication Services at -24bps.

Small caps were yet again out of favour in May, and that index declined- 0.1%. Some standouts were Paladin Energy ((PDN)) up 14%, Telix Pharmaceuticals ((TLX)) up 20.6%. Pexa Group ((PXA)) up 19.3%, and Life360 ((360)) up 11%. 

Small cap losers included Audinate Group ((AD8)) down -16.7%, Imugene ((IMU)) down -23%, and Bapcor ((BAP)) down -26.5%.

Aggregate IBES FY24 Consensus EPS continued to trend down in May to 450.3 from recent levels of 460 in December 2023 or a -1.1% decline month-on-month, Morgan Stanley notes. The FY24, FY25 and FY26 trends have all been downward in April and into May, with the broker highlighting aggregate consensus EPS growth for FY25 stands at 4.5%, with FY24 at a negative -6.9%.

Australian share valuations remain elevated. Morgan Stanley highlights the forward multiple of 16.3x at May end is above the historical 10-year average of 15.8x since June 2014.

The Macquarie FOMO meter of market sentiment rose to 1.21 to May end from 0.68 in April. This broker notes that forward equity returns err to below average trends for the year ahead when its FOMO meter reading exceeds 1.

Forget sell in May, June is usually the real downer

Since 1980, Bell Potter's the Coppo Report highlights, the month of June tends to be a negative month for Australian shares. Over the last 44 years, the All Ords in June has performed negatively in 28 of those years, or some 64% of the time.

Over this time frame, June has on average seen the index retreat by -0.67%, followed by September at -0.18%, October -0.13% and November at -0.13%.

With only 36% of positive performances, June is historically the year's worst performing month in Australia, with April up 78% of the time (the best) and September the second worst up only 45% of the time.

The Coppo Report also points to institutional selling for tax losses as having already started in May and continuing into June, when the retail investors are likely to participate. In recent years, June's performance doesn't look too bad, reports Richard Coppleson, maybe that's because institutions have pulled foward the timing of their selling?

Research by Macquarie Quant analysts suggest tax loss selling is usually reversed in July, and Coppo's data analsysis points in the same direction; after a weak June, on average, a much stronger July can be expected (all else remaining equal).

ASX100 Best and Worst Performers of the month (in %)

ASX200 Best and Worst Performers of the month (in %)

ASX300 Best and Worst Performers of the month (in %)

ALL-TECH Best and Worst Performers of the month (in %)

All index data are ex dividends. Commodities are in USD.

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