Stocks just had a big earnings season rally. History shows June could be a rough one

Evercore ISI reports that the first-quarter earnings season was exceptionally strong, with S&P 500 earnings growing 13.1% and sales increasing 5.0%, driving a nearly 6.2% rally in May. However, historical data suggests that this strong performance may be followed by increased market volatility in June, with the VIX potentially rising significantly, as seen after similar rallies in the past. Despite the anticipated volatility, Evercore ISI does not foresee a return to market lows or a recession, expecting continued, albeit potentially choppy, gains.

Analysis

The first-quarter earnings season, culminating with Nvidia's strong performance, has been characterized by Evercore ISI as a "blowout," with S&P 500 companies reporting substantial earnings and sales growth of 13.1% and 5.0% respectively, significantly exceeding expectations by 8.1% and 0.8%. This robust performance propelled the S&P 500 to a nearly 6.2% advance in May, its best monthly gain since November 2023, and is interpreted by Evercore ISI as a resumption of an artificial intelligence-driven structural bull market, even amidst uncertainty surrounding potential tax policy changes. However, historical precedent following such pronounced earnings-driven rallies—one of the largest since 1992—points towards a subsequent period of heightened market choppiness and volatility. Evercore ISI's Julian Emanuel highlights that the CBOE Volatility Index (VIX) has, on average, increased by 19% in the month following comparable earnings-fueled rallies, citing a VIX surge exceeding 17% in 2022 after a similar market jump. Despite the anticipation of near-term turbulence, Evercore ISI maintains a constructive long-term outlook, projecting further market runway without a recession or a revisit to previous market lows, anticipating instead a "healthier period" as policy clarity improves.

Key Decisions for Investors

• Investors should acknowledge the strong underlying fundamentals confirmed by the Q1 earnings season, particularly the AI-driven momentum, which has supported recent market strength.
• It is prudent to prepare for increased market volatility and potentially choppy trading conditions in June, as historical data and Evercore ISI's analysis suggest a higher VIX is probable following the recent significant rally.
• Despite expectations of short-term turbulence, a wholesale defensive shift may not be warranted, as the longer-term outlook presented by Evercore ISI remains constructive, anticipating continued gains without a recession or a return to market lows, pending greater policy clarity.