Markets rebounded sharply to start May, with the S&P 500 gaining nearly 3% for the week and climbing close to 18% from its April lows. The rally was driven by strong technical momentum, bullish sentiment indicators, and a positive uptick in sectors like technology, financials, and industrials. Despite year-to-date losses in major indexes, sentiment remains contrarian bullish, especially as the AAII Investor Sentiment Survey shows widespread pessimism. Meanwhile, economic data offered mixed signals—investment activity showed unexpected strength with a 3.6% increase, while personal consumption remained soft at just 1.8%, suggesting a cautious consumer. However, no imminent recession signs were seen in the GDP report.

Looking ahead, attention turns to the Federal Reserve's upcoming meeting. While no rate changes are expected, market participants anticipate dovish commentary that aligns with growing calls for rate cuts. The current Fed Funds rate remains elevated compared to market yields, and mortgage-backed securities continue to trade at historically high spreads. This is putting pressure on the housing market, where existing home turnover has fallen 42% since 2020. Analysts suggest the Fed may soon ease quantitative tightening, potentially lowering mortgage rates and stabilizing housing. If the Fed shifts course, it could ignite broader market growth, especially in beaten-down sectors like real estate and homebuilders.

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