May was a rough time in the stock market, but investors can learn a lot from last month’s major themes. If we understand the forces that influenced stocks last month, then we can make informed predictions about where the market is going. Here are some of the top stocks and industries that moved the market last month, and they illustrate important trends moving forward.
Shares of Snap (NYSE: SNAP) dropped 50% in May. The social media stock started out poorly along with other growth stocks, but things tumbled far further after CEO Evan Spiegel sent a downbeat memo to employees about Snap’s deteriorating outlook for the full year. Just a few weeks after the company reported disappointing first-quarter earnings, Spiegel warned employees that it was likely to miss its forecasts for revenue and earnings. With growth challenged, the company is pulling back on hiring plans. The reduced expectations were attributed to a poor macroeconomic environment.
Growth stocks are bearing the brunt of this year’s market downturn. Not only are stocks reflecting declining corporate outlooks, but waning investor risk tolerance is driving valuations lower. This has a compounding effect that is hitting share prices for businesses like Snap. The stock’s forward P/E (price to earnings) has fallen to 65, and its price-to-sales ratio is down to 5.2.
Snap has a tough road ahead for the next few months. However, the social media company’s long-term prospects haven’t changed much. The new valuation might reflect a simple return to rational expectations, or it could represent a major discount. Either way, the stock’s price is a lot more attractive than it was six months ago for investors who like the business. There could easily be more room to slide down, but the balance of risk and reward has clearly shifted. This was a common theme across growth stocks in the tech sector.
Shares of Coinbase (NASDAQ: COIN) fell 30% in May after a poorly received earnings report. The company’s quarterly revenue fell 27% relative to the prior year, and that sales figure came in roughly 20% below Wall Street’s expectations. Coinbase’s financial results are being impacted by lower cryptocurrency prices along with lower trading volumes. Bitcoin dropped 20% in May, and investor interest has declined after last year’s fervor.
Coinbase stock is simultaneously struggling against downward pressure on both cryptocurrencies and growth stocks as riskier assets fall out of favor in capital markets. That’s likely to continue with interest rates rising, so Coinbase stock isn’t out of the woods yet, despite falling roughly 70% from last year.
May was an especially bad month for cybersecurity stocks. Industry leaders Cloudflare (NYSE: NET), Okta, Zscaler, and CrowdStrike all moved closely together throughout the month, and they all wound up 20%-35% lower.
Cloudflare reported better-than-expected results on May 5th. It saw sales grow 54%, achieved phenomenal net-dollar-retention of 127%, and increased its full-year revenue forecast. Despite this, Cloudflare experienced a sell-off that coincided with other growth stocks, and the other cybersecurity stocks got pulled down with it.
The cybersecurity stocks are a perfect illustration of growth tech over the past two years. The pandemic bull market sent high-potential stocks to incredibly high valuations, and those prices have since tumbled dramatically. The long-term growth potential is still exceptionally high for this industry, but prices are much more attractive for investors today.
Energy stocks were the market’s savings grace last month. The list of May’s big gainers is dominated by stocks in that sector, along with a handful of stable dividend stocks. The Energy Select Sector SPDR ETF was up 16%. Crude oil continued to climb, rising above $100 per barrel due to supply constraints in both domestic and international markets.
Even after last month’s strong performance, the energy sector still only accounts for about 4% of the S&P 500. Crude oil has continued to climb so far in June, and it seems unlikely to drop drastically in the near term. That might not be enough to continue propelling energy stocks higher, but there should be decent support for the sector. Still, it might not be enough to offset trouble in other industries in major indexes.
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Ryan Downie has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Bitcoin, Cloudflare, Inc., Coinbase Global, Inc., CrowdStrike Holdings, Inc., Okta, and Zscaler. The Motley Fool has a disclosure policy.