May 2025 Market Commentary

As spring turned to summer, markets staged a powerful rebound, demonstrating resilience in the face of recent trade-policy turbulence. The S&P 500 surged 6.2% in May—its strongest May performance since 1997—while the Nasdaq Composite jumped 9.6%, and the Dow climbed 3.9%, its best month since January. All three major indices exited correction territory, buoyed by stronger-than-expected earnings and renewed investor optimism.

Despite the market’s strength, questions remain. The 90-day tariff relief window, set to expire in early July, casts a shadow of uncertainty over trade-sensitive sectors. Meanwhile, the Federal Reserve has held firm on rates, citing persistent inflation risks—particularly from tariffs, AI-driven demand shifts, and a complex labor market. However, many market observers question the Fed’s logic. Inflation has fallen meaningfully since the last rate cut in December 2024, yet policy remains tight. The Fed’s balance sheet actions only add to the confusion: while securities held outright declined by $6.1 billion in May as part of ongoing quantitative tightening, reserve balances have ballooned by $309 billion over the past two quarters. In effect, the Fed is pressing the brake and the accelerator simultaneously—tightening on paper while adding liquidity to the system.

Chair Powell defended the Fed’s stance at the May FOMC meeting, citing inflationary risks tied to new tariffs and AI adoption. However, many analysts argue that productivity gains from AI will be deflationary in the long run, and that the inflationary impact of tariffs is modest—estimated between 50 to 75 basis points. These inconsistencies have raised concerns about the politicization of monetary policy, especially as inflation now sits well below pre-election levels.

Trade policy continues to be the market’s wild card. While sentiment has recovered substantially since the early April “Day of Liberation,” the lack of clarity around upcoming trade deals and their sector-specific impacts is clouding both corporate guidance and analyst forecasts. Still, investors found reassurance in President Trump’s historic Middle East trip, which secured over $2 trillion in long-term investment agreements across Saudi Arabia, Qatar, and the UAE. These deals—spanning cloud computing, defense, and critical resources—signal deeper trade partnerships and lay a foundation for long-term economic stability.

In May 2025, the U.S. Treasury collected approximately $23 billion in tariff revenue, marking a significant increase from previous months. This surge is largely attributed to the implementation of new tariff policies under the Trump administration, which have expanded the scope and rates of tariffs on various imports. The heightened tariff revenue reflects the administration's strategy to leverage trade policies for economic and fiscal objectives. Year-to-date, as of May 28, the total tariff revenue has reached $68.23 billion, representing a 78% increase compared to the same period in the previous year. Despite the record-breaking tariff collections, the impact on the national debt remains minimal as it approaches $37 trillion, highlighting the need for significant spending cuts and effective monetary policy to eliminate the annual $2 trillion US Federal budget deficit.

The Q1 2025 earnings season delivered a second consecutive quarter of double-digit earnings growth, reinforcing investor confidence. S&P 500 earnings rose 13.3% year-over-year, beating expectations of 7.2%, while revenue increased 4.9%. Net profit margins also improved, climbing to 12.7% from 11.8% a year ago. Technology led the charge, with a 10.79% return in May, as investors reentered mega cap names like Nvidia at more attractive valuations. Communication Services and Consumer Discretionary followed closely, driven by AI infrastructure demand, easing trade pressures, and inventory normalization.

Healthcare delivered the strongest earnings growth of any sector—up 43.0%—yet underperformed due to regulatory overhang from President Trump’s proposed “One Big Beautiful Bill,” which remains under Congressional negotiation.

In May, U.S. consumer sentiment showed signs of recovery after a prolonged decline. The Conference Board's Consumer Confidence Index rose to 98.0 from April's 85.7, marking the first increase in six months. This uptick was largely attributed to a temporary reduction in tariffs on Chinese imports announced on May 12, which alleviated some inflationary concerns and boosted consumer outlook. The Expectations Index, reflecting consumers' short-term outlook on income, business, and labor market conditions, increased to 72.8 from 55.4 in April, indicating improved optimism about the near-term economic environment.

Despite positive developments in consumer sentiment, geopolitical tensions continue to present significant risks to the market. The U.S.-China relationship remains strained, with ongoing trade disputes and China's increased military presence in the South China Sea contributing to global uncertainty. Additionally, the U.S. has imposed higher tariffs on steel and aluminum, leading to concerns about potential retaliatory measures and their impact on global economic growth. These geopolitical factors, coupled with the Federal Reserve's cautious stance on interest rate adjustments, underscore the importance of closely monitoring international developments and their potential implications for market stability.

The U.S. labor market remained a source of stability in May with new jobs beating expectations, stable unemployment and rising wages. According to the Bureau of Labor Statistics, the US economy added 177,000 nonfarm payroll jobs—surpassing economists' expectations of approximately 130,000 and exceeding the 12-month average of 152,000. The trend of private sector jobs continued for the April figures reported in May. Health care led with 51,000 new jobs, with significant contributions from hospitals (+22,000) and ambulatory health care services (+21,000). Transportation and warehousing saw an increase of 29,000 positions, driven by gains in warehousing and storage (+10,000), couriers and messengers (+8,000), and air transportation (+3,000). The Federal Government saw another consecutive month of declines, with 9,000 less jobs.

The unemployment rate held steady at 4.2%, with a slight uptick in labor force participation, from 62.5% to 62.6%, indicating modest growth in workforce engagement. However, May marks many college graduations and an emerging trend of recent-graduate unemployment and under-employment may have broad reaching effects in the long term. Recent college graduates are entering a challenging job market, with an unemployment rate of 5.8% for this group in the first quarter of 2025, higher than the national average. Factors such as economic uncertainty and the increasing role of AI in the workplace are contributing to limited entry-level opportunities. According to a study conducted by the Strada Institute for the Future of Work, 52% of recent four-year college graduates are underemployed a year after they graduate. Considering how collections on defaulted student loans began again after a Biden-administration pause resumed in early May, this may have a long-term effect on consumer spending.

In May 2025, U.S. average hourly earnings increased by 0.4% to $36.24, marking a 3.9% year-over-year rise. This wage growth outpaced the annual inflation rate of 2.3%, indicating real wage gains for workers. Such sustained wage increases suggest a tight labor market, compelling employers to offer higher pay to attract and retain talent. However, the Federal Reserve may interpret this continued wage growth as a potential inflationary pressure, possibly influencing decisions to maintain current interest rates in the near term.

In April 2025, U.S. inflation data indicated continued moderation, offering potential relief for consumers and policymakers. The Consumer Price Index (CPI) rose by 0.2% in April, following a 0.1% decline in March. On an annual basis, headline CPI increased by 2.3%, marking its lowest level since February 2021 and edging closer to the Federal Reserve's 2% target. Core CPI, which excludes volatile food and energy prices, also rose by 0.2% month-over-month, maintaining a 12-month increase of 2.8%. The moderation in inflation was driven by declines in food and apparel prices, as well as used vehicle costs, which fell by 0.5%. Energy prices saw a modest rebound, with a 0.7% increase, while shelter costs continued to rise, up 0.3% for the month and 4.0% over the past year.

Producer prices experienced an unexpected decline in April, with the Producer Price Index (PPI) for final demand falling by 0.5%, the largest monthly drop since 2009. This decrease was primarily due to a 0.7% reduction in service costs, notably in trade services, hotel and motel rates, airline fares, and portfolio management fees. Year-over-year, the PPI increased by 2.4%, down from 2.7% in March, while the core PPI, excluding food, energy, and trade services, rose by 2.9% over the same period.

The cooling inflation figures suggest that price pressures are easing, potentially providing the Federal Reserve with greater flexibility in monetary policy decisions. However, economists caution that recent data collection challenges at the Bureau of Labor Statistics, stemming from staffing shortages and reduced survey samples, may affect the precision of these inflation measures. Additionally, the full impact of newly implemented tariffs has yet to materialize in the data, indicating that future inflation readings may be subject to upward pressure.

U.S. consumer sentiment deteriorated sharply in April 2025, highlighting deepening concerns about the near-term economic outlook. The University of Michigan’s Consumer Sentiment Index fell to 52.2 from 57.0 in March—a drop of 8%—bringing the index to one of its lowest readings on record. The decline was driven largely by a 5.3-point drop in the Consumer Expectations Index, which fell to 47.3, reflecting increased pessimism about future economic conditions. Despite resilient labor and equity market data, the sharp pullback in sentiment may reflect the outsized influence of alarmist media narratives and social media amplification rather than underlying fundamentals.

Several forces contributed to the decline in confidence. Inflation expectations rose sharply to 6.5%, the highest level since 1981, as consumers grew more concerned about the persistence of price pressures and signs of labor market softening. Political polarization also appears to have influenced sentiment: confidence among Democrats and independents fell to new lows, while sentiment among Republicans climbed to 90.2. These divergences suggest that consumer attitudes are increasingly shaped by both economic conditions and political lenses—factors that could influence spending patterns and weigh on broader economic momentum going forward.

In April 2025, the Conference Board’s Leading Economic Index® (LEI) for the United States declined by 1.0% to 99.4, marking its largest monthly drop since March 2023. This decrease followed a revised 0.8% decline in March and represented the fifth consecutive monthly decline in the LEI. Over the six-month period ending in April, the index fell by 2.0%, matching the rate of decline observed in the previous six months.

The April downturn was broad-based, with most of the LEI’s ten components contributing negatively. Notably, consumer expectations for business conditions have grown increasingly pessimistic each month since January 2025. Additionally, building permits and average weekly manufacturing hours turned negative in April, signaling potential weaknesses in the housing and manufacturing sectors. Despite these declines, the LEI has not fallen enough to trigger a recession signal. The Conference Board currently forecasts U.S. real GDP to grow by 1.6% in 2025, down from 2.8% in 2024, with the bulk of the impact from tariffs expected to affect the economy in the third quarter.

Meanwhile, the Coincident Economic Index® (CEI), which measures current economic activity, inched up by 0.1% in April to 114.8, following a 0.3% increase in March. The CEI rose by 1.1% over the six-month period between October 2024 and April 2025, slightly up from its 0.9% growth over the previous six months. This suggests that, despite leading indicators pointing to potential future slowdowns, current economic conditions remain relatively stable

June marks the start of the traditionally quieter summer season for markets, with trading volumes expected to decline as institutional managers and policymakers take their summer recess. While historically muted—averaging just a 0.11% return for the S&P 500 since 1950—this period of low activity can still be punctuated by short-lived bursts of volatility from unexpected geopolitical or policy headlines. With Congress set to adjourn and the Federal Reserve firmly on hold—markets now price in a 98% probability of no rate cut in June and only a 26% chance in July—policy momentum shifts to the executive branch and international trade negotiators.

Even amid reduced central bank activity, the White House and U.S. Treasury remain key players. The July deadline for global trade negotiations with the United States is likely to spark a wave of bilateral deals and policy headlines that could shift market sentiment and influence sector leadership. Recent record-breaking tariff revenues—totaling $23 billion in May alone—underscore the financial leverage trade policy is currently exerting on federal revenues, even as national debt levels remain historically elevated.

Despite these macro-level shifts, our focus remains on the fundamentals. May’s robust earnings season—featuring double-digit growth and continued margin expansion—reinforces our conviction in large-cap U.S. equities, particularly those leading the charge in artificial intelligence, cloud infrastructure, and advanced manufacturing. We continue to see opportunities in companies enabling AI productivity gains, both through direct innovation and essential infrastructure such as data centers, energy inputs, and critical materials.

While some analysts expected broader market participation post-April correction, performance trends and earnings dispersion support a continued emphasis on selectivity, favoring large-cap, growth-oriented names. At the same time, we are actively monitoring opportunities in smaller cap and sector-specific areas, especially where M&A activity and government incentives intersect with emerging technologies. As always, our portfolio positioning remains dynamic and data-driven—responsive to policy developments, macroeconomic trends, and the evolving competitive landscape.