What’s Driving Equities Higher?
A summary of May’s rally, an unwind of tactical positions, a new trade on the radar, and a prediction for the Stanley Cup.
May Summary
As we close the books on May, it is clear the market is pricing in an imminent deal with Iran. Oil is falling, bond yields are reversing lower, and equities are hitting all-time highs. As the old saying goes, “Buy to the sound of cannons, sell to the sound of trumpets,” suggesting the greater opportunity may lie in identifying what has not yet been priced in rather than chasing the obvious post-deal moves.
One of the biggest movers in May, unrelated to the Iran war, was the recovery in software stocks. Software stocks were under significant pressure earlier in the year with concerns over the impact of AI. Investors were convinced that many would go out of business and that their equity and debt would be worthless. That may be the case for some, but the equity rally last month in many of the stocks suggests these fears were overblown. IGV, the iShares Expanded Software ETF, was up 20.3% in May.
Take Snowflake, for example. It suffered a more than 50% drawdown from its peak late last year, but has since regained most of those losses following an incredible earnings beat. SNOW’s earnings helped alleviate recent anxiety about the sector and supported the idea that AI spending is translating into tangible demand.
According to Morgan Stanley, product revenue accelerated to +34% YoY, coming in at $1.33B and 5.2% ahead of consensus, while FY27 product revenue guidance moved to $5.84B, implying +31% growth versus +27% prior. Those results reflect GROWTH, not DECLINE.
Software was not the only part of the tech complex to rally. Memory stocks resumed their parabolic move higher, with shares of Micron Technology climbing to a new all-time high, pushing the memory chipmaker’s market capitalization above $1 trillion. Korean memory stock SK Hynix jumped more than 80% in May, helping the iShares Korean ETF, EWY, hit another record high.
Looking at sector performance, technology was the clear winner. XLK rose 20% in May. Energy and Utilities were the laggards, falling 4.6% and 2.8%, respectively.
There were some other interesting moves in the market as well. Recent IPOs outperformed the S&P 500 by 10.9%, and momentum stocks outpaced the broader market by 7%. Low volatility stocks trailed the index by 3.2% and mid-cap value equities lagged by 4.5%.
Another notable trend this year is the underperformance of companies known for share buybacks. Invesco Buyback Achievers ETF, PKW, has lagged SPY by 8.4% so far this year. Some of this can be explained by the ETF’s near-50% weight to financials and consumer discretionary stocks, both of which have struggled this year relative to the broader market.
According to Goldman Sachs, buyback growth has slowed alongside the AI capex boom, rising just 4% year over year in Q1 2026. Because market values have continued to rise, the S&P 500 buyback yield has declined to 1.9%, near the lowest level since 2021. Still, the magnitude of repurchases remains large and continues to grow, with GS forecasting gross corporate buybacks of $1.3 trillion this year.
Tactical Trade Update
In my last Substack post, I suggested a set of trades that I thought would perform well if the sound of trumpets triggered a profit-taking fade in momentum. The idea was to buy ITB (home builders), RSP (equal-weight S&P 500), SHLD (defense stocks), and BRK (value-focused conglomerate), and sell the notional equivalent of S&P 500 futures against the longs.
I unwound the trade on Friday. The trade worked, but not for the reasons I anticipated. I thought it would perform well in a down tape. Still, all the stocks (except for BRK) rallied more than the S&P 500, despite the resurgence in momentum stocks that would normally power the market-cap-weighted index higher relative to everything else. One thing I have learned over the years is that when a trade you have on works for reasons that you don’t expect, it’s never a bad decision to book profits.
The homebuilders benefited from a rally from oversold levels as interest rates moved lower. Similarly, defense stocks benefited from expectations of munitions restocking over the next several years. Finally, the equal-weight S&P outperformed, as the S&P 500 rally was led by a rotation into cyclical sectors such as financials, industrials, and materials, which carry much larger weights in RSP than in SPY.
Trade Radar
One trade on the radar for the next couple of weeks is a tactical long in INDA, the iShares MSCI India ETF. INDA’s total return is -10.2% YTD vs. 11.4% for VWO, Vanguard’s Emerging Markets ETF.
INDA and Indian equities have lagged other emerging markets this year because foreign investors have aggressively reduced exposure to what was deemed an expensive market, just as the oil shock undermined sentiment. At the same time, global capital has rotated toward cheaper, AI‑levered Asian markets like Korea and Taiwan, leaving India’s financial and consumer discretionary heavy INDA structurally out of favor despite a still‑solid long‑term growth story.
Assuming we get a deal with Iran that opens the Straight of Hormuz, the macro headwinds that have hurt Indian equities should dissipate, and I would expect some catch-up in performance to follow.
NHL Stanley Cup Finals
Another mispricing in the market could be the Vegas Golden Knights’ odds of winning the Stanley Cup. They face off against the Carolina Hurricanes next Tuesday. I’ll admit, I’ve been a Vegas fan for several years now, even though they crushed my home Florida Panthers in the 2023 Cup finals. I went to one of the Cup finals games that year, all decked out in my Panthers’ gear. The fans could not have been nicer. Nobody threw beer at me or gave me a hard time whatsoever. The arena environment was spectacular.
As for the team itself, I like the fact that they do not have a single superstar around whom the team is built. They obviously have talent, especially with the addition of Mitch Marner, who is a candidate for the MVP these playoffs, but they roll four relatively balanced lines— any of which can score. Everybody contributes. Everybody sacrifices. I picked up Golden Knight Cup Win exposure at +600 before the Avalanche series. I would add at current +130 levels.
That’s it for this week. Please feel free to share the post with anybody you think would enjoy it.