For the period May 1, 2025 – May 31, 2025.

Executive Summary

May was a month of reduced anxiety in the ever-evolving trade/tariff dynamics, but questions still loom, as investors navigated a mix of fiscal concerns, monetary policy decisions/expectations, corporate earnings reports, and the U.S. debt downgrade. Despite these uncertainties, investors were rewarded with the S&P 500 delivering a 6.15% gain—the best May performance since 1990 and the sixth-best May performance since 1930. It was also the best single-month return for the index since November 2023.

What Piqued Our Interest

Current Fiscal Situation: The U.S. fiscal outlook continues to deteriorate, with debt levels projected to reach 118% of GDP by 2035. The recently passed House tax bill, which extends the tax cuts from 2017’s Tax Cuts and Jobs Act (TCJA), is expected to add $3.8 trillion to the deficit over the next decade. Rising Treasury yields reflect investor concerns over debt sustainability, with 30-year yields surpassing 5%. JPMorgan CEO Jamie Dimon warned of a potential bond market crisis if fiscal reforms are not implemented soon. The weakening dollar and growing debt burden are fueling discussions about long-term economic stability.

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Federal Reserve Decision: The Federal Reserve held its benchmark interest rate steady at 4.25%-4.5% during its May 7 meeting. Policymakers acknowledged rising uncertainty, particularly around inflation and employment risks. Fed Chair Jerome Powell emphasized a "wait-and-see" approach, signaling that future rate cuts would depend on evolving economic conditions. The central bank remains cautious amid trade policy shifts and fiscal instability, which could influence inflationary pressures in the coming months. Following the “Liberation Day” tariff announcements, the market’s expectation around rate cuts in 2025 dropped considerably and continue to maintain this stance, with the market pricing in a 60% chance of two 25-bps cuts by year’s end.

Corporate Earnings Results: Despite macroeconomic headwinds, corporate earnings remained resilient. A huge majority (78%) of S&P 500 companies reported earnings above estimates, with 13.4% year-over-year growth. Sectors such as Healthcare, Technology, and Communications led the gains, while Energy companies faced earnings declines. Investors are closely watching how companies navigate higher borrowing costs and trade uncertainties in the second half of the year.

U.S. Debt Downgrade: Moody’s Investors Service downgraded U.S. sovereign debt from AAA to AA1 on May 16, citing persistent fiscal deficits and rising interest costs. This marks the third major downgrade in recent history, following S&P’s downgrade in 2011 and Fitch’s in 2023. While previous downgrades triggered sharp market reactions, the response was more muted this time around. The 10-year Treasury yield rose from 4.48% to 4.56%, and the S&P 500 saw a slight decline of 0.8%. Investors appear to have priced in the fiscal risks, though concerns remain about long-term debt sustainability.

Market Recap

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U.S. Large and Mega Cap lead all broad-based returns in the month of May, with the Nasdaq 100 (+9.13%) and Russell 1000 Growth (+8.85%) leading the charge. May was the first month in 2025 where U.S. Stocks outperformed non-U.S. stocks, as measured by the S&P 500 vs. the MSCI ACWI ex. US. May was also the first month in 2025 where the Bloomberg Barclays Aggregate Bond Index posted a negative return (-0.72%), but it’s still positive on the year (+2.45%).

Things of note beneath the surface:

• Growth stocks across all market cap segments outperformed Core and Value stocks for the second straight month after starting the year underperforming through the first quarter. This comes despite continued stretched valuations.
• Technology stocks provided the strongest returns in May (+10.89%), followed by Communication Services (+9.63%) and Consumer Discretionary (+9.44%), but only Communication Services is positive YTD among the 3 sectors. Consumer Discretionary remains the worst performing sector YTD (-5.96%), despite the strong month.
• Utilities continued their strong 2025 with a +3.83% month return and led all sectors YTD (+9.07%).

Wealth Enhancement Perspective

May 2025 underscored the delicate balance between fiscal policy, monetary decisions, and corporate performance. While markets absorbed the U.S. debt downgrade with relative calm, concerns about long-term debt sustainability persist. The Federal Reserve’s cautious stance suggests that rate cuts may not come soon, adding to economic uncertainty. Corporate earnings provided a silver lining, but investors remain wary of broader macroeconomic risks, as continued trade policy impacts could come at any time. As we move into June, trade policy, fiscal policy developments, and inflation trends will be key drivers of market sentiment.

Despite the continued near-term noise, May reminded investors of the importance of staying invested—even in periods of heightened uncertainty and volatility. This continues to emphasize our consistent messaging around building client portfolios with a long-term view in mind, knowing where you’re taking risks, and ensuring you’re being appropriately suited to take them.

This information is not intended as a recommendation. The opinions are subject to change at any time and no forecasts can be guaranteed. Investment decisions should always be made based on an investor's specific circumstances.

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