Market Update: May 2025 In Review

Market Recap

U.S. Stock Markets Rebound Sharply in May

After a challenging start to the year, U.S. equity markets staged their strongest monthly rally since late 2023. The S&P 500 and Nasdaq Composite led the charge, buoyed by robust earnings from leading technology firms and signs that inflationary pressures may be easing. This surge broke a three-month losing streak for major indexes, with the technology sector providing much of the momentum. Investors responded positively to a combination of better-than-expected corporate results, a temporary pause in new tariffs, and a sense that the Federal Reserve may be nearing the end of its rate-hiking cycle.

Market sentiment was also helped by a brief easing in U.S.-China trade tensions, which had weighed heavily on risk assets earlier in the year. The rally was broad-based, with the Dow Jones Industrial Average and the Russell 2000 also posting solid gains. However, it’s worth noting that much of the market’s strength was concentrated in large-cap technology names, while other sectors and smaller companies have lagged somewhat behind.

Despite this impressive rebound, the S&P 500 remains only marginally higher for the year, reflecting the volatility and uncertainty that have characterized markets in 2025. The sharp selloff in April, triggered by renewed trade concerns and a spike in bond yields, underscored just how sensitive investors remain to macroeconomic and policy developments. Nevertheless, May’s performance provided a welcome respite and demonstrated the market’s capacity to recover swiftly when sentiment improves.

Economic Growth Slows Amid Tariffs and Trade Uncertainty

Beneath the surface of the equity rally, the U.S. economy continues to grapple with significant headwinds. Real GDP contracted in the first quarter of 2025, primarily due to a surge in imports as businesses rushed to get ahead of newly announced tariffs. This front-loading of economic activity has distorted underlying growth trends and created a challenging environment for policymakers and investors alike.

Looking ahead, most economists have revised down their forecasts for U.S. growth in 2025, with consensus expectations now centered around 1.5% or lower for the year. The imposition and partial rollback of tariffs have created volatility and uncertainty, complicating business planning and investment decisions. While consumer spending remains resilient, business investment has slowed, and manufacturing activity has softened in response to the uncertain trade environment.

Fiscal pressures are also mounting. The national debt continues to rise, and a recent credit rating downgrade cited unsustainable debt projections as a concern. Inflation, while moderating somewhat in recent months, remains above the Federal Reserve’s target; the central bank has signaled it will keep interest rates steady for the time being. These factors, combined with ongoing trade negotiations and policy uncertainty, are likely to keep both inflation and interest rates elevated in the near term.

International Stocks Continue to Outperform U.S. Equities Year-to-Date

Perhaps the most striking development of 2025 so far has been the decisive outperformance of international equities relative to their U.S. counterparts. The broad European market-focused Stoxx 600 Index has outpaced the S&P 500 by over 20 percentage points in dollar terms, a reversal of the long-standing trend of U.S. market dominance.

Several factors are driving this shift. Europe’s economic outlook has brightened thanks to significant fiscal stimulus, a robust euro, and a rebound in industrial activity. The European Central Bank’s recent rate cuts have provided additional support, while increased defense spending and improved corporate earnings have further bolstered investor confidence. Emerging markets, particularly in Eastern Europe and Latin America, have also benefited from more attractive valuations and improving macroeconomic conditions.

In contrast, U.S. equities have struggled to gain traction, with the S&P 500 up only 1.1% year-to-date. The shift in performance has benefitted global diversification strategies, with many investors seeking to capitalize on the relative strength of international markets. While some analysts caution that U.S. markets still offer structural advantages—such as liquidity and innovation—and we maintain our U.S. tilt, the current environment has clearly favored overseas equities.

This trend marks a significant change from the past decade, during which U.S. stocks consistently outperformed most global peers. The “U.S. exceptionalism” narrative that dominated investor thinking at the start of the year has given way to a more balanced view, with global diversification once again in focus.

Closing Thoughts

May 2025 was a month of contrasts: a strong rebound in U.S. equities, ongoing economic headwinds at home, and a remarkable run for international stocks. These developments underscore the importance of maintaining a broad perspective and staying attuned to shifts in the global investment landscape.

As always, we remain committed to monitoring market conditions closely and we’ll continue to keep you informed of significant trends and developments. Thank you for your trust.