As we flip the calendar page to June, it’s easy to feel a sense of whiplash. Despite a barrage of negative headlines, the stock market defied gravity in May, with the Nasdaq soaring nearly 7% and the S&P 500 climbing a respectable 5%. However, with a fresh month upon us, it’s crucial to acknowledge the storm clouds gathering on the horizon. Here, I delve into three major concerns that could disrupt the market’s newfound calm.
1. The AI Narrative Loses Steam
The once-unstoppable march of Artificial Intelligence (AI) appears to be hitting a snag. While Nvidia (NVDA) continues to be a market leader, extending its impressive 2023 gains with a further 120% surge in May, cracks are starting to show elsewhere. Super Micro Computer (SMCI) stumbled, posting losses in the low teens, while Dell Technologies (DELL) took a nosedive last week after revealing that AI demand failed to meet investor expectations for increased server orders.
AI has been a major driver of the market rally this year, but its recent sputtering performance warrants close observation. A multi-month pause for the sector could be in the cards, potentially triggering a broader market correction.
2. Consumer Fatigue Reaches a Tipping Point
The cracks in consumer confidence are becoming increasingly evident. Major consumer brands like McDonald’s (MCD), Starbucks (SBUX), and Target (TGT) all painted a concerning picture in their Q1 reports, highlighting a noticeable decline in consumer spending. Since the beginning of 2021, inflation has eroded purchasing power across most income brackets, forcing a record number of Americans to juggle two or even three jobs to make ends meet.
While sticker shock on big-ticket items like cars may be easing slightly, inflation remains stubbornly entrenched in essential categories like groceries, energy, eating out, and insurance. This weakening consumer spending was the primary culprit behind the downward revision of first-quarter GDP growth from 1.6% to 1.3% last week. It also prompted Goldman Sachs (GS) to slash its projection for second-quarter GDP growth from 3.2% to 2.8%.
The confluence of falling consumer demand and persistent inflation raises the specter of stagflation – a stagnant economy coupled with high inflation – in the coming months. This scenario merits close attention from investors.
3. The Looming Shadow of Geopolitical Conflict
The simmering conflict in Ukraine deserves far more attention than it’s currently receiving. The situation appears to be escalating, with Western powers giving Ukraine the green light to strike targets deep within Russia using U.S. and European-supplied weapons. Additionally, France and other countries seem poised to send military advisors into Ukrainian territory.
A troubling historical parallel comes to mind: the escalation of the Vietnam War from a deployment of military advisors to a full-blown conflict in the 1960s. That intervention did not end well for anyone involved. The prospect of an escalating proxy war with a nuclear-armed adversary, where diplomacy seems nonexistent, requires serious consideration given the potentially catastrophic consequences of a spiraling conflict.
Conclusion:
While the stock market enjoyed a surprising rally in May, the underlying fundamentals remain fraught with risk. The fading luster of the AI narrative, coupled with a growing consumer spending fatigue and an escalating geopolitical conflict, paints a picture of potential turbulence ahead. Investors would be wise to remain vigilant and adjust their strategies accordingly as these concerns evolve.
