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May Economic Update

Market Summary

The stock market traded within a narrow range last month as economic data waned, earnings reports were mixed, and banking sector woes once again came to the forefront. The major market averages posted mostly modest gains with the large cap S&P 500 Index advancing +1.46%, the Nasdaq 100 gaining +0.49%, and the small cap Russell 2000 Index declining -1.86%. (1)

Earnings Season & Economic Data

By the end of last week, 84.8% of S&P 500 companies had reported earnings for the previous quarter. While earnings reports exceeded analysts’ estimates, actual earnings contracted for the 10th month in a row with year-over-year (YoY) growth declining -2.8% for the index. Notably, company revenues actually increased YoY by +3.9%, which is below the current annual inflation rate of 5%. (2)

This implies business revenue has not kept pace with the rate of inflation while rising expenses and declining profit margins have decreased actual earnings on an annualized basis. This is a potential sign of stagflation, which is defined as slowing growth with persistently high inflation. This will be closely monitored into next quarter’s earnings reports as some analysts are predicting a continuation of this trend, while other analysts foresee profit margins beginning to finally reverse higher into the middle to end of this year.

On the inflation front, the monthly CPI report released on April 12th revealed a sharp drop -1% for headline inflation, down to 5.0%. Core CPI, which is the inflation metric closely observed by the Federal Reserve and excludes food and energy prices, rose higher for the first time in six months, with a YoY rate of change of 5.6%. This implies services and real estate inflation is becoming “sticky” with little progress being made in spite of the sharp interest rate increases. (3)

The Federal Reserve

Around mid-month, the Federal Reserve released their meeting minutes from last March’s interest rate decision. In this release, FOMC members acknowledged the tightening of credit standards stemming from stressors within the banking system. A notable shift from the previous report was the acknowledgment by the Federal Reserve that a “modest” recession was likely at some point this year. (3)

Last week, the Federal Reserve announced another +0.25% interest rate increase, bringing the target rate above 5.0% for the first time in 16 years. Just days earlier, another large regional bank, First Republic, became insolvent and was acquired by J.P. Morgan which was followed by Pacific Western Bank issuing a statement concerning its financial well-being only hours after the Federal Reserve’s press conference. While the Fed has stated they are monitoring the banking sector, they were unwilling to pause interest rate hikes at this time, leaving many to speculate whether they will raise another 25bps at their next meeting in June. (4)

What to Expect in May...

After a relatively subdued month in April, the U.S. debt ceiling deadline will take center stage in May as politicians jokey for leverage ahead of passing a new funding bill. Treasury Secretary Janet Yellen has stated the U.S. budget will be depleted by (or around) June 1st. In the past, these deadlines are met with last minute negotiations and temporary debt extensions which typically cause market gyrations. While a failure for the U.S. to meet its debt obligations has never occurred and is unlikely again this time, the political theater will be in full swing toward the end of the month. (4)


Monthly Financial Tip:

Disregard any email or phone call from someone claiming they are from the IRS as it is a scam. The IRS will never contract you via phone or email and will only send correspondence via U.S. mail.



1., April 27, 2023

2., May 5, 2023

3., April 12, 2023

4., May 3, 2023

5., May 2, 2023


This post has been derived from sources believed to be accurate. Please note - investing involves risk, and past performance is no guarantee of future results. Bob Lawson is not engaged in rendering legal or accounting services. If assistance is needed, the reader is advised to engage the services of a competent professional. This information should not be construed as investment, tax or legal advice and may not be relied on for the purpose of avoiding any Federal tax penalty. This is neither a solicitation nor recommendation to purchase or sell any investment or insurance product or service, and should not be relied upon as such. All indices are unmanaged and are not illustrative of any particular investment.


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