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Energy leads S&P 500 to biggest May drop since 2010 as trade trumps earnings

Energy stocks were the biggest losers on the S&P 500 in May as the benchmark index posted an 11.1% decline, the largest monthly drop since December and the worst May since 2010.

The gauge declined amid an escalation of U.S. President Donald Trump's trade war with China and an unexpected increase of tariffs on Mexican imports in late May, even as first-quarter earnings continued to look strong with 72.9% of companies reporting financial results that beat their reduced estimates.

The energy sector dropped 11.1%, while information technology shares fell 8.7%. Financials were near the middle of the pack with a 7.2% decline. The only gainer was real estate, which added 1.2%. WTI crude, the U.S. benchmark, fell 16.3% in May to $53.50, while natural gas prices remained depressed. Apache Corp., one of the worst-performing energy companies on the S&P 500 in May, declined 20.4% after reporting financial results that missed analyst expectations.

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Trump ramped up his trade war with China, doubling tariffs on $200 billion of Chinese goods on May 10, sparking retaliation from China, which said May 13 that it would raise levies to as much as 25% on $60 billion of U.S. imports. On May 31, Trump unexpectedly said he would impose escalating tariffs of up to 25% on Mexican imports unless Mexico helped to curb illegal immigration into the U.S., reportedly going against the advice of top economic advisers, including Trade Representative Robert Lighthizer.

"The key drivers have really been macro, specifically trade wars and geopolitics, and the potential for a slowing economy, either caused by the trade wars or magnified by them," Tortoise Capital Advisor Managing Director James Mick said May 28. Mick oversees the energy portfolio for Tortoise, which manages $21 billion of assets. "It's a classic rotation out of risky assets, i.e., stocks."

On May 16, the U.S. added Huawei Culture Co. Ltd. to a trade blacklist, making it difficult for the Chinese company to do business with U.S. companies. This forced Alphabet Inc.'s Google, Intel Corp., Quallcomm Inc. and others to withdraw products or services from Huawei. In response, China said it would create a list of “unreliable” foreign entities that harm Chinese businesses.

Only eight of the 61 stocks in the S&P 500 Information Technology index rose in May. Among the gainers was Motorola Solutions Inc. and Advanced Micro Devices Inc., while losers included cyber security company Symantec Corp., which experienced a 21.5% decline in the month as President and CEO Greg Clark unexpectedly resigned.

Semiconductor manufacturer Broadcom Inc. slid 20.2% after Huawei, a major buyer of its chips, was blacklisted. Semiconductor demand has been weak, and U.S. antitrust officials are investigating Broadcom's dominance in some markets.

May market the S&P 500 posting four consecutive weeks of losses, the first time since October 2014, after closing April at a record for a month-end. That helped trim its year-to-date advance to 9.8%, or 10.7% with dividends, still the best first five months of a year since 2013. The VIX, an index monitoring market volatility — also known as the "fear gauge" — ended May at 18.7, still low by historical standards.

"The split on the trade situation shifted, as more saw a real potential for tariffs and escalation, and less saw the current rhetoric and maneuvering as Trump-style negotiations," Howard Silverblatt, a senior index analyst at S&P Dow Jones Indices, wrote in an emailed note. "As a result, the market repriced issues based on potential impacts. However, if more tariffs go into play (such as Mexico), and stay in play for an extended time, the market will have significantly more repricing to do, as U.S. consumers would pay more and exported goods would decline."

S&P Dow Jones Indices and S&P Global Market Intelligence are part of S&P Global Inc.