Monthly Market Summary
- The S&P 500 Index returned +6.3%, its strongest 1-month return since November 2023. Large Cap Growth stocks led the rally, with the Nasdaq 100 and Russell 1000 Growth gaining +9.2% and +8.9%, respectively.
- Technology was the top-performing S&P 500 sector for a second consecutive month, with the Industrials and Consumer Discretionary sectors also gaining over +8%. Health Care was the only sector to trade lower, and defensive sectors were relative underperformers as the market traded higher.
- Bonds ended the month with a slight loss, with the U.S. Bond Aggregate posting a -0.6% total return. Corporate bonds outperformed as credit spreads tightened, with investment-grade posting a +0.2% total return and high-yield returning +1.7%.
- International stocks traded higher but underperformed the S&P 500. Developed Markets gained +4.8%, while Emerging Markets returned +4.0%.
Markets Back Near All-Time Highs, But Forward Visibility Remains Low
The defining story of 2025 has been changing trade policy. Markets have weathered two months of policy-driven volatility, only to end up roughly where they started. After a nearly 20% decline from late February to early April, the S&P 500 has rebounded and is within 4% of its all-time high. What remains is weakened business and consumer confidence, rising inflation expectations, and a Federal Reserve that has paused interest rate cuts. The threat of a full-scale trade war and global supply chain disruption has diminished, but the full impact of recent events may take months to become known. Early economic data suggests the tariffs have had a limited impact, but we will continue monitoring what happens to economic and earnings growth in the coming quarters.
To date, the administration has introduced multiple 90-day tariff pauses. The pauses are temporary and staggered: the pause for most countries runs through early July, while the agreement with China extends through mid-August. A recent court ruling adds a layer of uncertainty by challenging the administration’s authority to impose tariffs, although the decision is under appeal. The U.S. economy entered the year with solid momentum, and current market conditions suggest investors are pricing in only a modest impact from tariffs. With policy details still emerging, markets are likely to remain sensitive to new developments, which could mean continued volatility over the coming months.
Looking Ahead: Navigating Uncertainty with a Steady Plan
What is most notable about this period is how quickly sentiment can change. Markets are forward-looking, which means they price in not only current conditions but also future expectations. This helps explain why the market can rally when data is weak and selloff despite strong earnings and economic growth. The stock market’s sharp decline and quick rebound is a reminder of the importance of maintaining a long-term perspective. Periods like this reinforce several important investment principles. Staying invested can help avoid the costly mistakes of poorly timed exits and re-entries. Emotional discipline and a well-diversified portfolio are your best defenses against making reactive decisions during market volatility. With the potential for more volatility, it’s important to focus on what you can control—diversification, discipline, and sticking to your long-term plan.
Executive Summary: May 2025
The S&P 500 Index returned +6.3%, its strongest 1-month return since November 2023. Large Cap Growth stocks led the rally, with the Nasdaq 100 and Russell 1000 Growth gaining +9.2% and +8.9%, respectively.
Technology was the top-performing S&P 500 sector for a second consecutive month, with the Industrials and Consumer Discretionary sectors also gaining over +8%. Health Care was the only sector to trade lower, and defensive sectors were relative underperformers as the market traded higher.
Bonds ended the month with a slight loss, with the U.S. Bond Aggregate posting a -0.6% total return. Corporate bonds outperformed as credit spreads tightened, with investment-grade posting a +0.2% total return and high-yield returning +1.7%. Municipals returned +0.6% (+0.2% YTD) as supply-demand technicals, which had impacted the asset class all year, reversed somewhat. Rates rose across the curve as fears of widening deficits spooked the markets; the 30-year treasury rate briefly crossed the psychological 5% threshold before falling back below late in the month.
International stocks traded higher but underperformed the S&P 500. Developed Markets gained +4.8%, while Emerging Markets returned +4.0%.
Markets Back Near All-Time Highs, But Forward Visibility Remains Low
The defining story of 2025 has been changing trade policy. Markets have weathered two months of policy-driven volatility, only to end up roughly where they started. After a nearly 20% decline from late February to early April, the S&P 500 has rebounded and is within 4% of its all-time high. What remains is weakened business and consumer confidence, rising inflation expectations, and a Federal Reserve that has paused interest rate cuts. The threat of a full-scale trade war and global supply chain disruption has diminished, but the full impact of recent events may take months to become known. Early economic data suggests the tariffs have had a limited impact, but the Investment Office will continue monitoring what happens to economic and earnings growth in the coming quarters.
To date, the administration has introduced multiple 90-day tariff pauses. The pauses are temporary and staggered: the pause for most countries runs through early July, while the agreement with China extends through mid-August. A recent court ruling adds a layer of uncertainty by challenging the administration’s authority to impose tariffs, although the decision is under appeal. The U.S. economy entered the year with solid momentum, and current market conditions suggest investors are pricing in only a modest impact from tariffs. With policy details still emerging, markets are likely to remain sensitive to new developments, which could mean continued volatility over the coming months.
Looking Ahead: Navigating Uncertainty with a Steady Plan
What is most notable about this period is how quickly sentiment can change. Markets are forward-looking, which means they price in not only current conditions but also future expectations. This helps explain why the market can rally when data is weak and selloff despite strong earnings and economic growth. The stock market’s sharp decline and quick rebound is a reminder of the importance of maintaining a long-term perspective. Periods like this reinforce several important investment principles. Staying invested can help avoid the costly mistakes of poorly timed exits and re-entries. Emotional discipline and a well-diversified portfolio are your best defenses against making reactive decisions during market volatility. With the potential for more volatility, it’s important to focus on what you can control—prudent diversification, discipline, and sticking to your long-term plan.
Equities
The S&P 500 returned +6.3% in May to take the index back into positive territory for the year, though not without volatility. The key catalyst during the month was an unexpected, albeit temporary, truce in the trade war with China, and a delay in EU tariffs. Inflation data showed limited impacts of tariffs to date, while cooling economic data boosted bets that the Fed would cut rates later this year to prevent a recession. Intra-month, equities fell amid rising treasury yields driven by Moody’s downgrade of U.S.’s credit rating and the House passing a budget bill that showed rising deficits, but then rebounded again as yields retreated. Late in the month, strong earnings from Nvidia, the second largest stock in the S&P 500, also supported the index. Mid cap stocks (+5.7%) and small caps (+5.3%) also rose though they lagged large caps. Information technology (+10.9%) and communication services (+9.6%) were the best performing sectors in the S&P 500; healthcare (-5.3%) was the only sector with negative returns, roiled by potential changes to drug pricing and Medicare. EAFE markets returned 4.6% in May with strong results across geographies while EM returned 4.3%, both aided by the news around tariffs.
From a valuation perspective, only U.S. large caps trade above +1 standard deviation based on historical forward P/E ratios with the S&P 500 at +1.7. The NASDAQ is at +0.9. For the next 12 months, EPS growth for S&P 500 is expected to be 6.0% (vs. 6.9% annualized over the last 20 years). For the next 12 months, EPS growth for NASDAQ is expected to be 11.9% (vs. 10.7% annualized over the last 20 years). Equities across markets caps in the U.S., and in non-U.S. developed and emerging markets, trade at or above their 20-year averages based on forward P/E ratios.
Fixed Income
Investment grade fixed income asset classes had mixed returns as rates rose across the curve, though tempered by spread compression. Municipals returned +0.6% (+0.2% YTD) as supply-demand technicals, which had impacted the asset class all year, reversed somewhat. The Bloomberg Aggregate Index returned -0.7% (+2.5% YTD) while investment grade corporate returns were flat (+2.3% YTD). High yield bond returns returned +1.7% (+2.7% YTD) as spreads compressed 69bps. Leveraged loan returns returned 1.5% (+2.0% YTD) during May. Emerging Market debt returned +1.7% (+3.1% YTD) as US dollar fell 0.1% and spreads compressed 55bps.
Rates
Rates rose across the curve as fears of widening deficits spooked the markets; the 30-year treasury rate briefly crossed the psychological 5% threshold before falling back below late in the month. Markets also expect limited help from the Fed as it remains in “wait and see” mode. The recession-watch 3M-10Y spread widened 18bps and has flipped positive again to +5. The 2Y-10Y spread compressed 6bps to +50. Rates rose in other developed markets. The spread between Italian and German 10Y bonds is 0.98%. 5-year breakeven inflation expectations rose 8bps and now sit at 2.39%; 10-year breakeven inflation expectations rose 9bps and now sit at 2.33%; the 10Y real yield rose 14bps to 2.06%. The market now expects two cuts in 2025 vs the Fed’s guidance of two cuts. At year-end 2025, the market expects the Fed Funds rate to be 3.80% vs. the Fed’s guidance of 3.75%-4.00%.
Currencies/Commodities
The dollar index fell 0.1%. The commodities complex rose 1.6% with energy prices rising 3.0%. Brent prices rose 1.6% to $64/bbl. US natural gas prices rose 3.6% and European gas rose 5.7% both based on expectations of warmer weather.
Market monitors
Volatility fell for stocks and bonds (VIX = 19, MOVE = 92). Market sentiment, which has been weak all year, improved from -34 to -9, but investors remain spooked as markets gyrate with every passing headline.