Is the Market Setting Up for a Summer Rally or a Summer Slump?
Key Points
AI stocks are expensive, and they're not necessarily responding positively to great earnings results.
First-quarter earnings show a resilient U.S. consumer.
Walmart said some consumers are starting to show signs of distress.
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The S&P 500 (SNPINDEX: ^GSPC) is up nearly 10% as we get closer to the second half of the year. First-quarter earnings are out, and they tell a story of a resilient U.S. consumer and exciting developments in artificial intelligence (AI).
However, the big news last week was that Nvidia's excellent results didn't move the needle; in fact, it's down about 4% since the report came out.
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Is the market starting to get nervous about high-priced AI stocks? And does this bode well for a summer rally or a summer slump?
Image source: Getty Images.
Just about halfway
We're about a month away from the half-year mark, and the market's rebound from its April drop actually bodes well for the rest of the year. Historically, it's not uncommon for the market to take a tentative drop early in the year. The years it has recovered from the drop by the halfway point, it has gone on to post a solid gain for the year.
These are the midway (through May) and full-year S&P 500 gains over the past 10 years, not including dividends.
| Metric | 2025 | 2024 | 2023 | 2022 | 2021 | 2020 | 2019 | 2018 | 2017 |
|---|---|---|---|---|---|---|---|---|---|
| Gain through May | 0.5% | 10.1% | 8.9% | (13.3)% | 12% | (5.8)% | 9.8% | 1.2% | 7.8% |
| Annual gain | 16.4% | 23.3% | 24.3% | (19.4)% | 26.9% | 16.3% | 28.9% | (6.3)% | 19.4% |
Data source: yCharts.
At least for the past 10 years, the nearly halfway mark, where the market is today, was a fairly good indicator of what would happen for the rest of the year. In every case where it had gained about 10% through May, it finished with a strong double-digit gain. It's not scientific, and it's not a guarantee, but it's a pattern.
Summer rally?
A market rally heading into the summer indicates investor satisfaction and confidence in the market. After a strong earnings season, investors don't see the need for a correction at this time. If anything, the data implies that the AI opportunity is vast and compelling. AI companies are guiding for high growth and investing to benefit from the opportunity. Nvidia CEO Jensen Huang said, "The build-out of AI factories -- the largest infrastructure expansion in human history -- is accelerating at extraordinary speed," and Amazon CEO Andy Jassy said, "We do view this as truly a once-in-a-lifetime opportunity."
Amazon's e-commerce business is up double digits, and Walmart, Costco Wholesale, and even the struggling Target are all demonstrating momentum. That indicates a resilient U.S. consumer.
Summer slump?
There are concerns about an AI bubble, and with a new Federal Reserve chairman coming in, monetary policy could change things in the markets. Inflation is still high, and although Walmart is performing well, management did signal that some of its consumers are starting to show some distress.
The likelihood is that these seeds are still small, and changing policy or expanding bubbles won't end in a summer slump. However, they may lead to market pressure further out.
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Jennifer Saibil has positions in Walmart. The Motley Fool has positions in and recommends Amazon, Costco Wholesale, Nvidia, Target, and Walmart. The Motley Fool has a disclosure policy.
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