Corporate profit resilience overwhelms war worries! Under the narrative of the AI bull market, US stocks may break the "May curse"

Morgan Stanley strategists say that the strong earnings of US companies, particularly in the rapidly growing technology sector, are outweighing concerns about potential drag on the stock market from the conflict in the Middle East. Led by Michael Wilson, the Morgan Stanley strategist team wrote in a report that the first quarter earnings season showed strong results, with a median earnings per share for S&P 500 index companies coming in 6% higher than market expectations, the strongest performance in four years. Additionally, over the past month, earnings expectations for the S&P 500 index have been raised on multiple time frames - second quarter earnings expectations up by 2%, and full year 2026 and next 12 months earnings expectations each up by 3% and 4% respectively. Wilson stated that cloud computing giants and semiconductor companies are the primary contributors to the resilience of earnings growth for enterprises, benefiting from accelerating cloud demand and strong order backlogs. However, earnings growth is not limited to these industries alone, with earnings expectations being raised for financial, industrial, and consumer cyclical industries as well, showing that profit growth expansion is more sustainable. Wilson also added that the impact of the Middle East conflict is expected to be uneven rather than systemic, with cost pressures affecting individual companies rather than the entire industry. Energy companies are seen as a tailwind for overall earnings, as rising oil prices will boost their profit growth. Despite strong corporate earnings resilience and multiple record highs in the US stock market, concentrated risks remain a concern for investors. Data shows that this year, seven stocks in the S&P 500 index contributed to approximately 80% of the returns. However, strategists at Goldman Sachs Group, Inc. say that the spending spree on artificial intelligence (AI) infrastructure shows no signs of slowing down, with analysts raising their expectations for spending on cloud computing giants further since the earnings season began. Strategists stated, "The surge in spending expectations has lifted similar growth in earnings expectations for AI infrastructure companies, helping to improve the overall market's earnings outlook and skewing our risk for S&P 500 earnings per share expectations to the upside." Against the backdrop of growing demand for AI, rising costs of chips and data centers, four of the "big seven" technology giants that reported earnings last week did not signal a cut in investments, but rather further raised their capital spending expectations. Data shows that Microsoft Corporation, Amazon.com, Inc., Meta, and Alphabet Inc. Class C have increased their capital spending estimates to $725 billion this year - mainly for AI data center equipment, higher than the market's expectation of $670 billion before the earnings announcements. The Middle East conflicts are giving way to the main theme of profitability, with the AI bull market narrative regaining prominence on Wall Street. Despite the ongoing political turmoil in the Middle East, investors seem to be ignoring the war-related noise after the initial phase of intense selling turbulence, shifting their focus to strong earnings expansions driven by the AI infrastructure boom underpinning expectations. Market participants believe that negotiations for a peaceful resolution in the Middle East are on track, as top Wall Street institutions like BlackRock, Inc., Goldman Sachs Group, Inc., and Morgan Stanley are becoming more optimistic about the future of the stock market. In April, the S&P 500 index rose by 10.4%, marking its best monthly performance since November 2020; while the Nasdaq rose by 15.3%, its largest increase since April 2020. Both indices reached new all-time highs last Friday. Several major financial institutions on Wall Street attribute the current resilience in the stock market to the ongoing upward revisions in corporate earnings expectations, especially in the technology sector companies whose strong profit outlooks remain intact despite the risks posed by the conflict. While corporate profits remain robust overall, some investors are expressing concerns about the AI spending frenzy among tech giants. Questions about the sustainability of some software business models are also starting to surface, prompting some investors who were relatively cautious about the AI computing power investment theme to reassess their portfolios. A portfolio manager at ClearBridge Investments said, "The disruptive potential of AI in software, services, finance, and other industries has raised uncertainties about the durability and terminal value of certain business models." In the short term, the recent upward momentum in the US stock market is expected to continue, and investors following the ancient Wall Street saying "Sell in May and go away" may incur losses as a result. As expectations for optimistic outcomes in US-Iran peace talks rise, and strong earnings boosted by AI computing power overshadow risks from oil prices and the GEO Group Inc, alongside Wall Street's anticipation of the US stock market to continue the strong uptrend after recording the strongest monthly gains in years in April. Seasonal factors have also not been effective in recent times. According to CFRA data, dating back to 1945, the S&P 500 index has shown modest performance during the period of May to October, with an average increase of 2% - much lower than the nearly 7% increase from November to April of the following year. However, the performance during this period in the past decade has been much stronger, with an average increase of 7%, including a 22.1% increase last year. Ryan Detrick, Chief Market Strategist at Carson Group, said, "You really don't want to say 'ignore the adage 'Sell in May, go away'... but over the past decade, it just hasn't worked." Referring to market performance over the past 10 years, he said, "If investors actually blindly sold in May, went to cash, or even shifted to defensive allocations, they would actually hurt themselves." Several seasoned strategists suggest that there are several factors this year painting a more optimistic picture for the stock market, indicating that being excessively bearish due to calendar factors alone is not appropriate. With concerns about a major escalation in US-Iran conflict easing, the stock market has robustly rebounded from a sharp sell-off. Strong corporate earnings are supporting market sentiment, and the US economy has shown resilience amid the energy shock triggered by the Iran war. Jim Carroll, Portfolio Manager at Ballast Rock Private Wealth, said, "If there was ever a year where you might want to throw seasonality factors out the window, it might be this year."