May 2025 Market Update
Stocks were broadly higher in May, extending their strong rebound from the previous month’s tariff-induced sell-off. According to FactSet, the S&P 500 rose 6.3%, and the Nasdaq Composite climbed more than 9%, as both benchmark indices posted their best single month return since November of 2023. De-escalation of trade and tariff tensions with China catalyzed the broad equity market strength, while better than expected 1st quarter earnings and profit margins helped to boost investor confidence and redirect attention away (at least for now!) from macroeconomic risks and accompanying uncertainty. Elsewhere, Treasury yields rose, and bond prices declined across the entire yield curve. Rate cut expectations have been dampened by increasingly muddled data and more hawkish Fed commentary, while long term yields came under pressure from mounting budget deficit concerns only exacerbated by the first draft of the tax bill.
Both the magnitude of the bounce off April’s lows and the breadth of participation at the individual stock level have been extremely impressive. The S&P 500 rose nearly 20% in the 27 days following the lows, the 15th best 27-day stretch for the index since 1950, according to FactSet. Notably, all but one of the 14 observations exceeding today’s rally have occurred at the beginning or initial stages of new bull markets (with the single outlier occurring at the onset of the Global Financial Crisis). We have talked at length on our podcasts and with clients about market behavior and how catalysts for various downturns may differ, but actual market patterns during and in response to similar pullbacks generally rhyme throughout history. Historical precedent suggests this sharp move in equity prices – when combined with improving market breadth signals – has consistently foreshadowed favorable forward 6- and 12-month returns. We certainly cannot rule out a revisitation of April’s lows, but the bottom line is recent price action is more of a bullish than bearish indicator – the market is telling us to be open to (and positioned for) possibly positive outcomes even if volatility remains elevated in the near term.
The speed at which the broad market has largely recovered its losses also provides yet another reminder of the perils of attempted market timing. The S&P 500 rallied over 10% in a single day on April 9th, driven exclusively by trade headlines and tweets. Missing just that one day, maybe “waiting for more clarity,” would have significantly lowered year-to-date returns.
Signs that peak tariff hawkishness may already be behind us served as a key driver of recent stock market gains. The Trump administration agreed to a 90-day reduction of previously announced tariffs on China (from 145% down to 30%), reached a trade agreement with the UK, extended the deadline for tariff escalation against the EU, and has signaled it is close to striking deals with trade partners like India, Japan and South Korea.
Despite the welcome reprieve for investors, the outlook around trade policy remains murky at best, in our view. Reporting suggests it will be difficult to reach numerous agreements before a July 9th deadline for the escalation of reciprocal tariffs. Meanwhile, recent court challenges to the legality of current tariff frameworks also create the potential for a delay in negotiating progress. Treasury Secretary Bessent noted that discussions with China “are a bit stalled,” a gentle reminder that it would not take much to prompt a resumption of hostile and escalatory rhetoric between the two sides. Accordingly, investors should still prepare for more of a “grinding” phase in the coming months, both in terms of portfolio positioning and emotional discipline. Policy uncertainty will undoubtedly build as the July deadlines approach, while economic data may soon begin to reflect the impact of new tariffs.
On that front, we have begun to see early signs of delayed business spending decisions and nascent weakness in consumer durables spending. However, broader consumer spending data is relatively firm, and labor markets have not reflected any concrete signs of weakness. History has shown that Americans will continue to spend as long as they have jobs, and recent data around credit card spending, travel, and restaurant traffic all suggest this remains the case today. It is certainly possible corporate spending plans are affected well before consumer data weakens, as the latter might come with a lag. It will take time for any price increases to filter through the economy, but this is more a matter of “when” and not “if”, given that 70% of companies are planning to pass on costs, according to recent Fed surveys.
We have written in past months about the gulf between deteriorating “soft data” and more resilient “hard data,” representing the difference between how people and businesses are feeling compared to what they are doing. Historically, big shifts in soft data have been more predictive of where the hard data eventually lands. Hard data continued to hang in there throughout May, and the soft data saw some slight improvement after trade tensions with China began to dissipate. Stay tuned to find out in which direction this gap will resolve!
The broader takeaway is that the de-escalatory actions taken over the past month have led many Wall Street strategists to reduce their forecasted odds for “worst case” recession outcomes. Consequently, earnings estimates have recovered some of the negative revisions absorbed after “Liberation Day” with additional help from strong aggregate S&P 500 1st quarter earnings growth of roughly 13% (compared to estimates for 7.2% at the beginning of the reporting cycle). Profit margins remain strong after entering the year at record levels, while the big names closely associated with Artificial Intelligence (AI) produced solid earnings and maintained or increased their forecasts for AI capital investment. This all lends credibility to continued calls for broader earnings growth in 2025 and suggests that corporate earnings may be somewhat more resilient than the underlying economy.
The fixed income markets have not been immune to all the drama. In addition to the recent rise in Treasury yields, we also note significant selling pressure in the Municipal Bond market. According to Morningstar, municipal governments are – generally speaking – in some of the best fiscal shape we’ve seen in a very long time, however, recent dislocations have left municipal bonds trading cheaper against other fixed income asset classes than at almost any point over the last 15 years. A longer term, federal tax-free municipal bond yielding 4.5%, for example, represents the taxable equivalent of a corporate bond yielding over 7% for investors in the top federal tax bracket! These kinds of yields are almost impossible to find in the taxable bond markets without incurring significant credit risk, and the returns currently available are likely to be more competitive with stocks than what we’ve experienced in the recent past.
We would love to hear from you! Please give us a call or reach out to your personal financial advisor to schedule a meeting with us if you would like to discuss your portfolio allocation, update your financial plan, or hear more about how recent market developments are affecting your portfolios.
Any opinions are those of The Wise Investor Group® and not necessarily those of Raymond James. Expressions of opinion are as of this date and are subject to change without notice. There is no guarantee that these statements, opinions or forecasts provided herein will prove to be correct. Investing involves risk and you may incur a profit or loss regardless of strategy selected, including diversification and asset allocation. Indices are not available for direct investment. Index performance does not include transaction costs or other fees, which will affect actual investment performance. Past performance is not indicative of future results.
S&P 500: This index is a broad-based measurement of changes in stock market conditions based on the average performance of 500 widely held common stocks.
NASDAQ Composite: Covers 4500 stocks traded over the counter. Represents many small Composite index company stocks but is heavily influenced by about 100 of the largest NASDAQ stocks. A value weighted index calculated on price change only and does not include income.
