Markets staged an incredible recovery in May, with major indices posting their strongest monthly gains since late 2023 as investors gained clarity on the Trump administration’s evolving tariff policies. The S&P 500 surged 6.29% for the month, the Nasdaq Composite soared 9.13%, and the Dow Jones Industrial Average advanced 4.16%, marking a dramatic turnaround from April’s volatility. The 10-year Treasury yield moderated to 4.41% by month-end, while inflation continued its gradual descent to 2.15%. Despite Q1 2025 GDP showing a contraction of 0.2%, markets rallied as trade negotiations progressed with multiple countries and the administration signaled a more strategic approach to its tariff implementation.
“Economic leaders have struggled to determine whether these actions represent a lasting policy shift or a hardline negotiating tactic. The White House has said more than 75 countries have entered into discussions with the US since Trump’s tariff announcement, signaling a potential for favorable trade terms to be reached before the end of the 90-day pause.”
Following April’s unprecedented market volatility, May brought a welcome reprieve as investors gained greater clarity on the Trump administration’s tariff strategy. The month began with markets still processing the whiplash from April’s tariff announcements and subsequent partial pause, but sentiment gradually improved as trade negotiations with various countries showed signs of progress. By month-end, all three major indices had not only recovered their April losses but posted substantial gains – the S&P 500 climbed 6.29%, turning positive for the year at 1.06%; the Nasdaq Composite surged 9.13%, also reaching positive territory on the year at 1.88% year-to-date; and the Dow Jones Industrial Average added 4.16%, though remains roughly flat at 0.08% year-to-date.
The market rebound was partly driven by easing tensions in global trade policy, following a series of high-profile negotiations and agreements. Most notably, on May 12, the U.S. announced a new trade agreement with China aimed at reducing tariffs and establishing a framework for ongoing dialogue. Both nations agreed to reduce certain tariffs by 115% while maintaining a 10% baseline rate, and China committed to removing several retaliatory measures. [1] These developments—alongside recent progress in bilateral trade relations with the United Kingdom—helped reassure investors that a renewed escalation in trade conflict was unlikely in the near term.
However, not all trade tensions eased during the month. On May 30, President Trump announced plans to double tariffs on steel and aluminum imports from 25% to 50%, effective June 4, though the United Kingdom received a temporary exemption. [2] The administration’s approach appeared increasingly targeted rather than broadly punitive.
The bond market appeared to affirm this evolving sentiment, with the 10-year Treasury yield moderating throughout the month. After reaching an intra-month high of 4.58% on May 21st, yields gradually declined to end the month at 4.41%. This moderation came despite ongoing concerns about inflation and speculation about the Federal Reserve’s rate path.
On the economic front, the Bureau of Economic Analysis released its second estimate for Q1 2025 GDP, showing a contraction of 0.2%, marking the first quarterly contraction since the pandemic-induced recession. [3] The decline was primarily attributed to a surge in imports ahead of tariff implementation and a reduction in government spending.
While consumer spending was revised down from 1.8% to a 1.2% annualized rate—its slowest pace in nearly two years—it still reflected modest resilience, supported by steady activity in discretionary categories such as dining out and takeout.
The Federal Reserve maintained its federal funds rate target at 4.25%–4.50% in its May meeting, emphasizing a cautious approach amid the uncertain economic landscape. Chair Jerome Powell acknowledged the potential inflationary impact of tariffs but noted that the Fed would need to see “sustained evidence” of rising price pressures before considering rate hikes. Market expectations for rate cuts in 2025 have been significantly reduced, with futures markets now pricing in just two 25-basis-point cuts by year-end, down from the original expectations of four rate cuts in 2025.
Corporate earnings for Q1 2025 concluded in May with generally strong results. According to FactSet, 78% of S&P 500 companies reported a positive earnings surprise, and 64% reported a positive revenue surprise. The blended earnings growth rate for the quarter was 13.3%, marking the second consecutive quarter of double-digit year-over-year earnings growth. Despite this strength, analysts revised Q2 earnings estimates downward by 4.0% between March 31 and May 29—more than the average 2.6% reduction seen over the past five years—driven by concerns over inflation, tariffs, and global trade headwinds. All 11 major sectors saw downward revisions, with the largest cuts seen in Energy, Industrials, and Materials. Nevertheless, the Technology sector led May’s market rally, with the S&P 500 Information Technology Index rising more than 10% during the month. [4]
Looking ahead, markets face several key uncertainties as we move into June. On June 4, the United States implemented a significant increase in tariffs on steel and aluminum imports, doubling the rates from 25% to 50%. This move is expected to test the resilience of affected industries and has already prompted discussions of retaliatory measures from key trading partners, including Canada and the European Union. Additionally, a 90-day pause on reciprocal tariffs, announced in April, is set to expire on July 9, creating a critical deadline for ongoing trade negotiations. Economic data will be closely watched for signs of tariff impacts, with particular attention to the May Consumer Price Index (CPI) data, scheduled for release on June 11.
While May’s market recovery was impressive, the underlying trade tensions remain unresolved, and the economic impact of implemented tariffs is still unfolding. Investors appear to have grown more comfortable with the administration’s tariff strategy, viewing it as a negotiating tactic rather than a rigid policy stance. However, the potential for renewed volatility remains high as trade negotiations continue and economic data provides clearer signals about the tariffs’ impact on growth, inflation, and corporate earnings.
[2] https://www.reuters.com/business/trump-says-he-plans-double-steel-tariffs-50-2025-05-30/
[3] https://www.bea.gov/news/2025/gross-domestic-product-1st-quarter-2025-advance-estimate
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Your Smarter Way Portfolio Management Team
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