Monthly Market Update – May 2025

Key Takeaways

• ECONOMY REBOUNDS AND STOCKS ADVANCE In May, a series of stronger-than-expected U.S. economic reports boosted investor confidence and helped propel stocks higher. Although Q1 Gross Domestic Product (GDP) remained in contraction, it was revised higher. Labor market strength and easing inflation further supported the positive sentiment. The S&P 500 jumped +6.3%, its best May since 1990, led by Technology and Growth stocks.
• TREASURY YIELDS TAKE OFF U.S. Treasury yields rose across the curve in May, with the 10-year yield climbing 24 basis points to 4.40%, and the 2-year and 30-year yields increasing by 29 and 25 basis points, respectively. The yield curve has steepened notably in 2025, as long-term yields rose while short-term yields declined. 
• TARIFF TILT-A-WHIRL CONTINUED Financial markets continue to be influenced by tariff news, but volatility eased and markets moved higher. Trade negotiations between the U.S. and China and the U.S. and the European Union had an on-again, off-again cycle in May. Both ended the month in constructive stages, though. These developments highlight the ongoing trade uncertainty, but market reactions have muted somewhat.
• PROFIT MARGINS CAN ABSORB TARIFFS U.S. corporate profits modestly declined in Q1 2025, even before new tariffs were announced in April. Despite the decline, profits remain historically high and still show that firms have some capacity to absorb tariff-related costs without immediately passing them on to consumers.
• MISLEADING LEADING INDICATORS One economic index that has not exceeded expectations is the Conference Board’s Leading Economic Index (LEI). The April reading hit its lowest level in five years, suggesting persistent weakness in forward-looking economic trends. However, unlike the past, the index has been wrongly signaling recessionary warnings and contradicts the resilient U.S. economy.
• SUMMER SEASONALITY For decades, June was one of the weaker months for U.S. stocks, but more recent data shows a modestly bullish trend. Since 1990, the S&P 500 has posted gains in June 62% of the time. And when May sees solid gains—like in 2025—June and the following 12 months tend to perform well above average.

Market Summary

Asset Class Total Returns

Source: Bloomberg, as of May 31, 2025. Performance figures are index total returns: US Bonds (Barclays US Aggregate Bond TR), US High Yield (Barclays US HY 2% Issuer-Capped TR), International Bonds (Barclays Global Aggregate ex USD TR), Large Caps (S&P 500 TR), Small Caps (Russell 2000 TR), Developed Markets (MSCI EAFE NR USD), Emerging Markets (MSCI EM NR USD), Real Estate (FTSE NAREIT All Equity REITS TR).

ECONOMY REBOUNDS AND STOCKS ADVANCE

A host of U.S. economic reports surprised to the upside in May, helping to improve investor sentiment and spur stock indexes higher. The second reading of Q1-2025 Gross Domestic Product (GDP) came in higher than expected – although it remained in contraction at a -0.2% annualized rate. Contributions from investments, largely from inventory accumulation, and a smaller drag from government spending, provided a boost in the first quarter. An upbeat April Employment Situation Report released on May 2 showed a continued resilience in the labor market with solid Nonfarm payrolls growth exceeding Wall Street expectations. On the inflation front, the pace of headline Consumer Price Index (CPI) inflation fell more than expected, reaching its slowest pace since February 2021 at a +2.3% year-over-year rate (although pace of core CPI remained unchanged at a +2.8% annual rate). Wholesale inflation was also weaker than expected in April, with the headline Producer Price Index (PPI) down -0.5% for the month, the biggest monthly decline since 2020.

With the better-than-expected economy in the backdrop, U.S. stocks rallied. The S&P 500 Index jumped +6.3% in May, breaking a 3-month losing streak, and marking its best month since November 2023 and its best May performance since 1990. Notably, U.S. stocks outperformed international equities for the first time this year as the MSCI EAFE Index (developed market non-U.S. stocks) gained a still respectable +4.6%. The MSCI Emerging Markets Index wasn’t far behind with a +4.3% gain for the month. 

The U.S. stock rally was robust, with 10 of the 11 S&P 500 sectors making gains in May. The Technology sector led the way with a +10.8% advance for the month, buoyed by strong earnings and optimism around Artificial Intelligence (AI) and cloud infrastructure. The Communication Services and Consumer Discretionary sectors were close behind, rising +6.6% and +9.4% respectively. Consumer Discretionary stocks benefited from resilient consumer spending and easing inflation pressures. 

On the downside, the Health Care sector was the only one negative, falling -5.7% due to regulatory uncertainty and weak earnings from major pharmaceutical companies. Despite a brief spike in oil prices, Energy also lagged, up just +0.3%. The Real Estate (+0.8%) and Utilities (+3.4%) sectors also underperformed the broader market, pressured by rising bond yields and concerns over interest rate volatility. 

With the technology and consumer discretionary stocks powering it, the Growth factor outperformed Value factor handily. The Russell 3000 Growth Index was up +8.7% versus the more modest +3.5% rise for the Russell 3000 Value Index. 

The small cap Russell 2000 Index gained +5.3% in May, its first positive month in the last four, but it lagged the S&P 500 (large-cap stocks) for the sixth straight month, tying the longest monthly underperformance streak since August 2021.

Source: Bloomberg. Data as of May 31, 2025.
Price Returns for Equity, Total Returns for Bonds.
* The term basis points (bps) refers to a common unit of measure for interest rates and other percentages in finance. One basis point is equal to 0.01%. Bond prices and bond yields are inversely related. As the price of a bond goes up, the yield decreases.

TREASURY YIELDS TAKE OFF

U.S. Treasury yields rose across the yield curve in May, with the benchmark 10-year U.S. Treasury (UST) yield adding +24 basis points to finish the month with a yield of 4.40%. The 2-year UST yield was up +29 basis points to 3.90%. The 30-year UST yield added +25 basis points in May to finish at 4.93%, but that was down from 5.08% on May 21, the first time above 5% since Halloween 2023. As shown in the chart below, the Treasury Yield Curve has steepened – meaning long-term yields have become greater than short-term yields – over the months in 2025 from its relatively flat status in January. Over the last three months alone, the 2-year UST yield has declined -9 basis points while the 30-year UST yield has risen +44 basis points. With the jump in Treasury yields the Bloomberg U.S. Aggregate Bond Index slipped -0.7%, ending a four-week winning streak. Despite further easing from global central banks and a slightly weaker U.S. dollar, the Bloomberg Global Aggregate ex U.S. Bond Index (non-U.S. bonds) slipped a modest -0.1% for the week.

Treasury Yields Rise as the Treasury Curve Steepens

Monthly U.S. Treasury Yield Curves in 2025

Source: Bloomberg.

TARIFF TILT-A-WHIRL CONTINUED

The U.S. stock market continued to be impacted by tariff developments in May, but unlike in March and April, the direction of the market reversed higher, and the magnitude of the tariff-induced swings narrowed. China and the U.S. announced preliminary agreements to cut tariffs for 90 days on the morning of May 12, but two weeks later, they were accusing each other of violating the trade truce. The rhetoric ratcheted up for a few days, but at the end of the month and into the early days of June, the two countries appeared to be willing to renew trade talks, and the S&P traded less than 3% away from its February all-time high.

On May 8, the U.K. and U.S. finalized a trade agreement that retained Trump’s 10% reciprocal tariff rate, setting a precedent for other negotiations. But on May 23, after little progress on negotiations with the European Union (EU), President Trump announced a 50% tariff on all imports from the EU, effective June 1. However, just two days later, President Trump and European Commission President Ursula von der Leyen agreed to postpone the 50% tariff and extended the negotiation deadline to July 9, 2025.

The Tariff Tilt-A-Whirl Continued in May

S&P 500 Index (Jan 1 through June 4)

Source: Bloomberg.

PROFIT MARGINS CAN ABSORB TARIFFS

U.S. corporate profits fell in the first quarter by the most since 2020, indicating large companies were already feeling some pressure prior to the Trump administration’s sweeping tariffs that were announced on April 2. According to Bureau of Economic Analysis data, the -2.9% decrease in profits for Q1-2025 followed a +5.4% increase in the fourth quarter of 2024. Despite the latest drop, profits remain well above historical averages relative to Gross Domestic Product (GDP), which fell -0.2% in the first quarter. It remains to be seen if American companies can raise consumer prices to offset the tariffs on imported goods, but Wall Street economists are forecasting inflation to accelerate in response to the tariffs. However, President Trump has pressured companies to absorb any price increases, singling out Walmart Inc. in a social media post after the retail giant warned of coming price increases. The president highlighted the company’s profits, arguing it should “‘EAT THE TARIFFS.’” As shown in the chart below from Bloomberg, a measure of after-tax profits for nonfinancial firms as a share of gross value added — a proxy for profit margins — slipped to 15.7% from 15.9% but remains well above levels that prevailed from 1951 to 2019. The data suggests companies still have some room to absorb higher costs from tariffs without passing those on to consumers.

U.S. Corporate Profit Margins Have Room to Absorb Tariffs

After-Tax Nonfinancial Corporate Profits (1950-2024)

Source: Bureau of Economic Analysis via Bloomberg.

MISLEADING LEADING INDICATORS

As mentioned earlier, a bevy of economic indicators outperformed expectations in May. One that did not was the Conference Board’s Leading Economic Index (LEI), which is intended to provide an early indication of significant turning points in the business cycle. On May 19, the latest LEI report for April data was released, and it sank -1.0% to its lowest level in five years. The Conference Board also maintains the Lagging Economic Index (LAG), released with the LEI, which looks at the past. When the Leading Index is divided by the Lagging Index, we get a series that has declined in 36 of the last 40 months. As seen in the chart below, the magnitude of the current decline is roughly in line with the 1978-1980 drop. It exceeds the Gulf War (1991) decline and turn of the century recession declines. Although it has not yet reached the level of the Global Financial Crisis (GFC) decline, it did exceed the Covid decline well over a year ago. For decades, this ratio was a reliable recession indicator, but since its recent peak in December 2021, the ratio has been a major false positive for a recessionary decline in economic activity. In 2022, Gross Domestic Product (GDP) was negative for two successive quarters, which is often considered recessionary, but the National Bureau of Economic Research (NBER), the official arbiter of defining U.S. recessions, never officially declared that a recession, so there’s no gray shading for that 2022 period. If the “phantom recession” of 2022 were included, the Leading/Lagging ratio wouldn’t be so conspicuously wrong right now. Still, the fact that it hasn’t turned higher since then is notable.

The Leading / Lagging Ratio Continues to (wrongly) Indicate Recession

The Conference Board’s Leading & Lagging Indexes (Jan. 1959 – April 2025)

Source: The Conference Board, Jeff Weniger / WisdomTree.

SUMMER SEASONALITY

Historically, on average, June was one of the weakest months of the year for the U.S. stock market. But analysis from E*TRADE shows that since 1990, June has been moderately more bullish. The S&P 500 had a positive return in 21 of the past 34 years, a 62% success rate, although its +0.16% median return was the second lowest of all months. And over the last ten years, June has been positive eight times – an 80% success rate with a +1.2% median return. Ryan Detrick of Carson Investment Research points out that when the S&P 500 is up +5% or more in May, June tends to see continued strength. There have been six times in history when the S&P gained at least +5% in May, and it was up an average +20% over the subsequent 12 months. More impressive, the success rate was 100%, with the lowest subsequent 12-month return at +8% and the highest at +30%. Similarly, analysis by Bespoke Investment Group shows that when the S&P is up 2% or more in May, the average rest-of-the year performance is +10.3% versus +5.7% in the years that May was less than +2%. Moving beyond June to the broader summer season, Bespoke also shows that over the last 50 years, the S&P 500 has posted a median gain of +3.7% from Memorial Day to Labor Day, with positive returns 72% of the time.

Strength in May Often Leads to Continued Gains

S&P 500 Median Rest-of-Year Performance After May (1953-2024)

Source: Bespoke Investment Group.

Asset Class Performance

The Importance of Diversification. Diversification mitigates the risk of relying on any single investment. It offers many long-term benefits, such as lowering portfolio volatility, improving risk-adjusted returns, and helping investments to compound more effectively.

Source: Bloomberg.

Asset‐class performance is presented by using market returns from an exchange‐traded fund (ETF) proxy that best represents its respective broad asset class. Returns shown are net of fund fees for and do not necessarily represent performance of specific mutual funds and/or exchange-traded funds recommended by The Retirement Planning Group. The performance of those funds may be substantially different from the performance of the broad asset classes and to proxy ETFs represented here. US Bonds (iShares Core US Aggregate Bond ETF); High‐Yield Bond (iShares iBoxx $ High Yield Corporate Bond ETF); Intl Bonds (SPDR® Bloomberg Barclays International Corporate Bond ETF); Large Growth (iShares Russell 1000 Growth ETF); Large Value (iShares Russell 1000 Value ETF); Mid Growth (iShares Russell Mid-Cap Growth ETF); Mid Value (iShares Russell Mid-Cap Value ETF); Small Growth (iShares Russell 2000 Growth ETF); Small Value (iShares Russell 2000 Value ETF); Intl Equity (iShares MSCI EAFE ETF); Emg Markets (iShares MSCI Emerging Markets ETF); and Real Estate (iShares US Real Estate ETF). The return displayed as “60/40 Allocation” is a weighted average of the ETF proxies shown as represented by: 30% US Bonds, 5% International Bonds, 5% High Yield Bonds, 10% Large Growth, 10% Large Value, 4% Mid Growth, 4% Mid Value, 2% Small Growth, 2% Small Value, 18% International Stock, 7% Emerging Markets, 3% Real Estate.

* The term basis points (bps) refers to a common unit of measure for interest rates and other percentages in finance. One basis point is equal to 0.01%. Bond prices and bond yields are inversely related. As the price of a bond goes up, the yield decreases.

Chris Bouffard is CIO of The Retirement Planning Group (TRPG), a Registered Investment Adviser. He has oversight of investments for the advisory services offered through TRPG.

Disclaimer: Information provided is for educational purposes only and does not constitute investment, legal or tax advice. All examples are hypothetical and for illustrative purposes only. Past performance of any market results is no assurance of future performance. The information contained herein has been obtained from sources deemed reliable but is not guaranteed. Please contact TRPG for more complete information based on your personal circumstances and to obtain personal individual investment advice.