Stock markets bounced back in May, with the S&P 500 making up for its losses from earlier in the year. This good performance happened even though there were new trade deals, mixed economic news, and worries about U.S. government debt. Many reports showed the economy is doing well, but everyday people still felt worried about what might happen next. Interest rates on government bonds went up and down during the month because of concerns about government spending and debt. For investors, May shows us that markets can adjust to changing situations, even when there's a lot of uncertainty about the economy and government policies.
Main Market and Economic Events¹
- The S&P 500 went up 6.2% in May, its best month since 2023. The Dow Jones went up 3.9%, and the Nasdaq rose 9.6%. For the whole year so far, the S&P 500 is up 0.5%, the Dow is down 0.6%, and the Nasdaq is down 1.0%.
- The Bloomberg U.S. Aggregate Bond index (which tracks many different bonds) fell 0.7% in May but is up 2.4% for the year. The 10-year Treasury yield (the interest rate on 10-year government bonds) ended the month at 4.4%.
- The U.S. dollar index dropped to 99.3 at the end of the month, near a three-year low.
- The Consumer Price Index report (which measures inflation) showed that prices rose 2.3% in April compared to a year earlier. This was the smallest increase since February 2021.
- The economy added 177,000 new jobs in April while the unemployment rate stayed low at 4.2%.
Markets Kept Recovering Even with New Worries
May's market comeback shows why it's important to stick with your investment plan during rocky times. After a tough April, markets showed they could bounce back by recovering most of their losses and turning positive in May. This shows how quickly investor feelings can change when things start to get better - something investors have seen many times over the past ten years. Of course, what happened before doesn't guarantee what will happen next, and markets will keep worrying about trade deals, U.S. debt, and the economy's health in the coming months.
Trade Talks Show Improvement
There was also progress on trade talks in May, removing many of the worst possible outcomes. The administration reached deals with both the U.K. and China, while talks continued with other major trading partners. The U.S.-China trade agreement included a 90-day period of lower U.S. tariffs (fees on imported goods) on Chinese products.
Despite these deals, there will likely continue to be uncertainty around trade. More recently, China and the U.S. have both accused each other of breaking the trade truce, and the administration wants higher tariffs on steel and aluminum. At the same time, talks with the European Union created hope when the White House delayed its planned 50% EU tariff after positive discussions. This suggests that diplomatic solutions are still possible, even when starting positions seem very far apart.
The administration is also facing legal challenges to its tariffs. In May, the U.S. Court of International Trade struck down many of the newly created tariffs, ruling that they go beyond presidential power under the International Economic Emergency Powers Act. While a federal appeals court paused the ruling, allowing tariffs to stay in place for now, this legal challenge adds another layer of uncertainty to the trade situation.
It's important to remember that trade policy usually unfolds over months and years rather than days or weeks. The recovery in May reminds us that investors should not overreact to trade headlines, especially now that the worst-case scenarios are less likely to happen.
Steady Company Earnings Support the Market
First quarter company earnings reports gave another reason for optimism. Earnings are the profits companies make. S&P 500 companies delivered positive earnings per share surprises, and 64% reported positive revenue surprises, according to FactSet.3 This strong earnings performance showed the underlying health of company profits, with technology companies showing strength as they deal with trade uncertainty.
In contrast, consumers have been pessimistic this year due to tariffs and inflation concerns. However, recent sentiment indicators (measures of how people feel) began showing signs of improvement that match better with positive earnings and economic data. The University of Michigan's most recent survey for May showed inflation expectations decreasing slightly and sentiment stabilizing. While it's important not to read too much into a single month's data, this improvement is an encouraging development. A strong economy and improving sentiment could help support markets.
The bottom line? May was a positive month for investors and progress on trade deals helped boost markets. These developments show the importance of keeping a broad perspective and staying focused on fundamental trends rather than short-term policy headlines.
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