May 2025 was a pivotal month for global markets, with trade policy and fiscal developments shaping investor sentiment. The S&P 500 and Nasdaq recorded their strongest monthly gains since November 2023, driven by a 90-day tariff pause with China. Additionally, a US-UK trade agreement and ongoing negotiations with Japan, South Korea, and India bolstered optimism.
Legal developments added complexity. On May 28, the US Court of International Trade ruled Trump’s use of emergency powers to impose global tariffs unlawful, but a federal appeals court allowed the tariffs to remain in place pending a Supreme Court review. The administration is exploring alternative tariff mechanisms, such as temporary tariffs for 150 days, suggesting the economic fallout from the court ruling may be limited. Despite the reprieve, trade headline volatility remains a key market overhang,
The narrow passage of the “One Big Beautiful Bill” in the House of Representatives extended the 2017 tax cuts and introduced measures like adjustments to state and local tax deductions, no tax on tips or Social Security, and business investment incentives. These policies lifted market sentiment but raised concerns about fiscal sustainability. The bill’s estimated $3 trillion deficit impact over a decade, later revised to nearly $4 trillion due to the SALT deduction cap, contributed to Moody’s downgrading the US credit rating from Aaa to Aa1. This downgrade reflects worries about widening federal deficits and rising debt burdens. The bill faces Senate scrutiny, where revisions are likely, and I will monitor its progress for potential market-moving outcomes.
The US economy showed mixed signals in May. April’s Consumer Price Index (CPI) fell to 2.3% year-over-year, the lowest since February 2021, driven by lower energy prices, including gasoline at a four-year low of $3 per gallon. This is good news, as it shows inflation falling in a still-growing economy. Manufacturing was slightly weaker than expected and remained in contraction territory, but data suggests the overall economy is expanding. Retail and food services sales were also softer than expected – an indication that consumers are choosing where to spend carefully. Employment data for April exceeded expectations, showing no immediate tariff impact on jobs.
The economy’s trajectory suggests a tug-of-war between trade optimism and slowing data. While recession probabilities have decreased, tepid growth remains a concern. Investors likely will focus on upcoming economic data, which may disappoint if the market has swung too far toward optimism. The Federal Reserve’s potential to cut rates, if we have lower inflation and labor market stability, could provide support if growth weakens further. We’ll soon see, as the Fed has a meeting in mid-June.
While the tariff pause has lessened the likelihood of the worst-case scenario, the effective tariff rate remains significantly higher than at the start of 2025. Tariffs continue to pose headwinds to economic growth, even if they are no longer as damaging as originally expected. The ongoing cooling of economic data suggests that investors should brace for potential disappointment if future trade talks falter or if data underperforms, particularly as the July 9 deadline for reciprocal tariffs looms.
The S&P 500 recovered most of its 2025 losses by the end of May. Corporate earnings growth exceeded the forecast, but over 13% of S&P 500 companies issued negative forward guidance, citing tariff pressures. Corporate profit margins held up, supported by AI tailwinds, resilient consumer trends, and increased merger activity. International markets continue to outperform, making up for many years of underperformance compared to the US.
In bonds, US Treasuries snapped a four-month winning streak. Yields rose significantly, with the 10-year at 4.50% and the 30-year at 5.15%, driven by deficit concerns and tariff uncertainty. Fixed income investors might be able to capitalize on higher yields.
Markets are swayed by headlines, but history rewards patience over short-term timing. The de-escalation of trade tensions has reduced recession risks, but cooling data and tariff uncertainty suggest a potential growth scare. In a growth scare (which should be called a recession scare, in my opinion), investors become concerned about future growth, and often sell stocks as optimism wanes. Opportunities to add stocks may emerge during market pullbacks, particularly if the Fed cuts rates to support growth. Strong balance sheets provide a floor for equity prices, but we will want to remain vigilant on trade talks, inflation, and economic data.
As the halfway point of the year approaches, now is a good time to perform a mid-year review of your finances to be sure you’re on track. Check your actual year-to-date income and expenses against your cash flow projections. Are you on track with your retirement contributions and other savings? Make sure you are not paying too much or too little income tax, either through withholding or quarterly payments.
Markets, as well as many of our offices, will be closed on June 19 in observance of Juneteenth, and will also close early on July 3 and all day on July 4 for Independence Day. Happy summer!
