Don't get tricked by the S&P 500's relatively flat performance in May: There were major moves higher and lower for numerous high-profile stocks across multiple market sectors.
Analyzing these market movers can tell us which trends are impacting capital markets right now. Consider these four major trends seen in May before making any big changes to your investment account or retirement plan.
1. Nvidia
Nvidia (NVDA 3.65%) share prices surged 36% last month, pushing its market cap briefly above $1 trillion (it currently sits at $951 billion). The semiconductor giant reported quarterly earnings that excited investors about the company's near-term growth opportunities.
While Nvidia's revenue dropped year over year in its most recent quarter, it accelerated over the past quarter. Its forward-looking commentary also suggested that sales would continue growing, thanks in large part to high demand from artificial intelligence (AI) applications.
Image source: Getty Images.
AI is a hot topic for Wall Street right now, and tech investors are gaining optimism that much of the post-pandemic macroeconomic slowdown has been overcome. Nvidia's stock is up over 150% over the past 12 months, and its forward P/E ratio has climbed to nearly 40.
That might seem a bit rich with a potential recession looming and signs of consumer weakness. Investors are still willing to pay a premium for high-growth stocks that have the stability to overcome periodic weakness. Other semiconductor powerhouses like Advanced Micro Devices, Broadcom, and Taiwan Semiconductor Manufacturing delivered huge gains in May. Investors clearly think that the microchip industry is entering a cyclical boom period.
2. Estée Lauder
Estée Lauder (EL 1.06%) share prices dropped 25% following a disappointing quarterly earnings report early in the month. The company is struggling with economic weakness in the Asian region, driving a 12% year-over-year sales decline and a 72% drop in earnings per share.
The company's gross margin continued to sag, hitting the lowest level in years, excluding the height of pandemic lockdowns. These factors forced Estée Lauder to revise its forecasts downward, citing difficult conditions in key markets.
EL Gross Profit Margin (Quarterly) data by YCharts
This was an extreme example of a key trend that influenced the market last month. The corporate sector struggled with slowing growth and economic weakness over the past year, as businesses cut back on spending. However, consumer spending held up relatively well during that period, despite surging inflation and high-profile corporate layoffs.
That finally appears to be shifting -- consumer debt is reaching high levels, and retail stocks published financial results that reflected the weakness seen in other parts of the economy a few quarters back. Weaker results triggered sell-offs across the consumer sector, with Ulta Beauty, Nike, Target, and Starbucks among the high-profile businesses that are suffering. These companies are facing weak sales, along with pressures on profit margins.
3. Disney
Walt Disney (DIS 1.54%) was one of several stocks in the entertainment industry that suffered serious losses last month. The company reported quarterly earnings in May, and investors were particularly discouraged by results in the streaming business.
Disney+ lost subscribers, and that segment still operates at a loss. The rapid evolution of content delivery severely disrupted the media business, and the major streaming providers are still learning how much to charge subscribers. They are also trying to more accurately determine how much to pay for content.
The competitive landscape for streaming platforms has rapidly changed, and the industry will endure growing pains as the major players adjust. That's creating uncertainty, and stocks tend to be volatile when the future is uncertain.
Even if certain aspects of Disney's business are still promising, investors are still focused on this major narrative. A handful of Disney's industry peers, including Warner Music Group, Warner Bros. Discovery, and Fox, also endured significant losses in May.
Netflix was a noteworthy exception from the trend, posting a 22% gain in May after a promising earnings report suggested that the company is overcoming prior issues that hit the stock hard. Netflix may also have benefited from its reputation as a growth tech stock -- that sector enjoyed a strong month.
4. Zscaler
Cybersecurity stock Zscaler (ZS 3.48%) rose a stunning 50% last month after it preannounced earnings that were higher than expectations and increased forecasts for the full year. Zscaler has been highly volatile over the past few years, taking investors on a wild ride. It's 60% below its all-time high around $370, but it's 64% above its recent low around $90.
Investors have struggled to find a suitable valuation for Zscaler and other cybersecurity stocks – they are all delivering exceptional growth rates in one of the most promising industries right now, but they've also struggled with slowing growth amid high interest rates and economic weakness. These factors have driven enormous surges and sell-offs for these stocks whenever major company or industry news is published. May was one of those boom months, with Cloudflare, CrowdStrike, Okta, and Palo Alto Networks all delivering huge gains.
This trend was especially strong among the cybersecurity stocks, but it wasn't limited to that industry. High-growth software and cloud stocks such as DataDog, Splunk, and MongoDB were also among the month's biggest gainers.
The mega-cap tech giants were stronger earlier this year, but optimism is moving down the chain to smaller companies with higher growth rates and more aggressive valuations. These stocks were hit hard by rising interest rates and slowing growth, as investor risk appetite dissipated. Now that the Federal Reserve looks likely to stop hiking rates, investors are looking to get ahead of the next wave of potential economic recovery.
