Market Overview: Economic Indicators and Fed Meeting

Despite the old adage "sell in May and go away," investors might want to consider remaining in the market with strategic positions. Recent economic indicators suggest the U.S. economy is cooling but not crashing. The first-quarter GDP report was heavily distorted by companies front-running imports before potential tariffs took effect, artificially lowering the number. Similarly, second-quarter GDP may be artificially boosted as inventory is sold.

Looking ahead to the May Fed meeting, no rate cut is expected. The futures market has reduced the probability of a June rate cut from 60% to just 30%, indicating that significant negative economic data would be needed to prompt Fed action.

Breaking News: Warren Buffett to Step Down as Berkshire Hathaway CEO

In a surprise announcement at Berkshire Hathaway's annual meeting this weekend, Warren Buffett revealed plans to step down as CEO at the end of this year, while remaining as chairman. Greg Abel, who has been overseeing non-insurance businesses since 2018, will take the reins as CEO.

The transition may bring operational changes to Berkshire's historically decentralized management approach. Analysts note that Abel might take a more active role in driving operational changes within Berkshire's businesses and addressing the company's overcapitalized balance sheet.

Berkshire reported solid quarterly earnings, though insurance results, which had been a ballast for the business over the past two years, came back down to earth somewhat. The company faces potential headwinds from tariffs, particularly in its railroad business, where shipments from Asia-Pacific into California ports are already declining significantly.

Currently trading at a 10% premium to Morningstar's fair value estimate, Berkshire stock is considered somewhat overvalued, though a strong hold for existing investors.

Tech Earnings Roundup

Apple (AAPL)

Apple stock slipped after reporting good earnings but warning about tariff costs in the next quarter. The margin guidance came in weaker than expected due to higher costs from tariffs, particularly in the accessories business (iPhones remain exempt from tariffs). While Apple is moving iPhone production from China to India, which would help offset potential tariff risks, the company faces significant downside if it were to lose its current tariff exemptions. Currently, the stock is a few dollars above Morningstar's fair value estimate.

Microsoft (MSFT)

Microsoft stock rallied after reporting better-than-expected results across all business lines. Azure, Microsoft's AI hosting platform, grew 35% despite capacity constraints, with management expecting acceleration in the second half of the year as more capacity comes online. Morningstar raised its fair value estimate by $15 to $505, making the stock one of its top picks with a 14% discount to fair value.

Meta Platforms (META)

Meta reported strong quarterly results with good operating margin expansion and solid ad spending. The company's ability to monetize its AI investments is driving higher ad engagement and revenue. Trading at a 22% discount to Morningstar's fair value estimate, Meta is seen as an attractive play on the expected market rotation from AI hardware stocks to companies that can effectively utilize AI to boost revenue and margins.

Amazon (AMZN)

Amazon beat expectations on both top and bottom lines, though AWS growth was slower than Microsoft's Azure. Operating margin guidance was below expectations due to one-time costs including satellite launch expenses. However, as these investments come online, they should contribute to future revenue and earnings growth. The stock remains attractive at a 21% discount to Morningstar's fair value estimate.

Eli Lilly (LLY)

Despite solid results, Eli Lilly stock fell about 10% after reporting earnings. While growth for its weight loss drugs remains exceptional, the market had expected even more, and competition is intensifying. Competitor Novo Nordisk's Wegovy has gained preferred status with CVS, suggesting increased price competition that may limit margin growth. Despite the pullback, the stock still trades at a 27% premium to Morningstar's fair value estimate.

5 Stocks to Buy in May and Hold for the Long Term

Looking for stocks to weather potential market turbulence, Kodiak's investment team recommends companies that:

• Have already reported earnings (removing that risk factor)
• Maintained or increased their fair value estimates
• Showed stable or positive price action after earnings
• Feature narrow or wide economic moats
• Offer attractive dividends
• Are positioned in defensive sectors
• Trade at significant discounts to fair value

Here are our five picks:

1. Kraft Heinz (KHC)

• 5-star rated at a 46% discount to fair value
• 5.6% dividend yield
• Narrow economic moat
• Medium uncertainty rating
• Despite slightly disappointing top-line results, the company generated positive operating margin expansion
• Expected to benefit from rotation into value stocks and its defensive positioning in a slowing economy

2. Bristol-Myers Squibb (BMY)

• 4-star rated at a 23% discount to fair value
• 4.9% dividend yield
• Wide economic moat
• Medium uncertainty rating
• Trading at approximately 8x projected 2025 earnings
• Market appears to be underestimating the strength of next-generation drugs in the pipeline
• Defensive pharmaceutical sector positioning benefits the stock in a slowing economy

3. U.S. Bancorp (USB)

• 4-star rated at a 22% discount to fair value
• 4.8% dividend yield
• Wide economic moat
• Medium uncertainty rating
• Not directly subject to Trump tariffs
• Strong revenue from corporate trust fees and solid deposit franchise
• Industry-leading operating efficiency with strong returns on tangible equity

4. PepsiCo (PEP)

• 4-star rated at a 21% discount to fair value
• 4.0% dividend yield
• Wide economic moat
• Low uncertainty rating
• Down 24% over the past 52 weeks, suggesting excessive pessimism
• Financial model only projecting 4% top-line growth and 6.7% net income growth over the next five years
• Defensive positioning with reliable cash flow and attractive dividend

5. Constellation Brands (STZ)

• 5-star rated at a 32% discount to fair value
• 2.2% dividend yield (offset by stock buybacks)
• Wide economic moat
• Medium uncertainty rating
• Beer business should be exempt from additional tariffs due to USMCA compliance
• Trading at under 14x adjusted earnings estimates
• Value stock in a defensive sector

Investors looking to navigate the potentially volatile summer months ahead might consider these value-oriented, defensive stocks with strong moats and attractive dividends.