Market Update

Quick Hits

1. Stock Surge
2. Bond Pressure
3. Economic Strength
4. Risks Ahead

Stocks Bounce Back in May

Markets had a strong rebound in May, helped by a cooling of trade tensions between the U.S. and China. This more relaxed tone gave investors confidence, leading to a solid rally in stocks:

• The S&P 500 rose 6.29 percent.
• The Dow Jones Industrial Average (DJIA) gained 4.16 percent.
• The Nasdaq Composite, which includes many tech companies, jumped 9.65 percent.

Strong Company Earnings Helped Drive Gains

Aside from cooling trade tensions, another key reason for the market’s strong performance was better-than-expected earnings from companies. First-quarter earnings season just ended, and results were stronger than many predicted. According to Bloomberg Intelligence (as of May 30), companies in the S&P 500 saw average earnings growth of 13.5 percent—much higher than the 6.6 percent analysts expected. This shows that many businesses are off to a healthy start in 2025.

Over time, company performance (i.e., fundamentals) tends to drive stock prices, so this strong earnings growth is a good sign for investors.

Mixed Signals from Market Trends

Although company performance was strong, some technical indicators (tools investors use to spot trends) gave mixed signals:

• The S&P 500 and Nasdaq ended the month above their 200-day moving averages. This is a long-term trend line that many investors watch to gauge market momentum.
• The DJIA, however, stayed below its 200-day average for the third consecutive month. This could suggest that investors are still cautious about that part of the market.

Global Stocks Also Performed Well

International markets also had a good month:

• Developed markets (such as Europe and Japan), tracked by the MSCI EAFE Index, rose 4.58 percent.
• Emerging markets (such as Brazil and India), tracked by the MSCI Emerging Markets Index, gained 4.31 percent.

Technical indicators were also supportive for both groups of international stocks.

Bonds Struggle as Interest Rates Rise

While stocks fared well, bonds had a tougher time in May. Long-term interest rates went up, partly because investors are worried about the growing U.S. government deficit.

• The 10-year U.S. Treasury yield rose from 4.25 percent to 4.41 percent.
• The Bloomberg U.S. Aggregate Bond Index, which tracks a broad range of bonds, fell 0.72 percent.

High-yield bonds (which are riskier but offer higher returns), however, did better:

• The Bloomberg U.S. Corporate High Yield Index rose 1.68 percent.
• Credit spreads (the extra return investors demand for taking on more risk) narrowed from 3.94 percent to 3.32 percent, showing increased investor appetite for these bonds.

Trade Tensions Ease, for Now

A big reason for the market rally was a pause in the U.S.-China trade dispute. Midway through the month, both countries agreed to a 90-day break from new tariffs, which investors welcomed. This followed a similar pause in April for tariffs affecting other countries.

Although this was good news, trade policy remains uncertain. These pauses give more time for negotiations, but future changes could still shake up the markets. Investors should expect trade issues to remain a source of uncertainty in the months ahead.

Economic Data Shows Continued Strength

Economic reports released in May painted a mostly positive picture:

• The U.S. added 177,000 jobs in April, beating expectations of 138,000.
• Consumer spending and retail sales continued to grow.
• Inflation slowed: Prices rose 2.3 percent over the past year, the lowest increase in more than four years.

Figure 1: Consumer Price Index for All Consumers, Year-over-Year Percentage Change

The Takeaway

• Economic growth continued throughout the quarter, with solid hiring growth leading the way.
• Consumer and business spending were healthy in February.
• Worsening consumer confidence to start the year is a potential risk to future spending and economic growth.

Market Risks Worth Monitoring

While a healthy economic backdrop and strong fundamentals were encouraging developments for long-term investors to start the year, the market volatility served as a reminder that real risks remain for investors. The falling consumer confidence throughout the quarter is a potential risk to the economic outlook given the importance of consumer spending on overall economic growth.

Asides from economic concerns, political uncertainty remains another large risk for markets. The planned rollout of tariffs continues to cause uncertainty and contributed to the rattled markets at the start of the year.

International risks remain as well, highlighted by the continued conflicts in Ukraine and the Middle East. And, as always, markets continue to face unknown risks that could pop up at any time. There’s certainly a lot for investors to keep an eye on. Given the real risks that markets face, it’s quite possible that we’ll see continued choppy returns in the months ahead.

The Takeaway

• Risks remain for markets, including economic and political risks.
• Domestic risks include a potential economic slowdown as well as high levels of political uncertainty.
• Unknown risks can also negatively impact markets and can’t be predicted.

Cautiously Optimistic Outlook

While it’s certainly important to acknowledge the current market risks, on balance we believe we remain in a relatively good place.

The economic backdrop remains largely supportive, powered by a resilient job market and decent spending in the first quarter. U.S. companies have shown an impressive ability to grow earnings, and analysts expect to see continued earnings growth in the quarters ahead. Despite the recent turbulence, it’s important to note that bouts of short-term volatility are normal when investing over the long term. While negative quarters can feel painful for investors at the time, over the long run, the outlook remains cautiously optimistic.

Ultimately, things are pretty good right now, but that may not always be the case. While continued economic growth and market appreciation remain the most likely path forward, we may face short-term setbacks along the way. Given the potential for short-term uncertainty, a well-diversified portfolio that matches investor goals with timelines remains the best path forward for most. If concerns remain, you should speak to your financial advisor about your financial plans.

Disclosure: This material is intended for informational/educational purposes only and should not be construed as investment advice, a solicitation, or a recommendation to buy or sell any security or investment product. Please contact your financial professional for more information specific to your situation.

Certain sections of this commentary contain forward-looking statements based on our reasonable expectations, estimates, projections, and assumptions. Forward-looking statements are not guarantees of future performance and involve certain risks and uncertainties, which are difficult to predict. Past performance is not indicative of future results. Diversification does not assure a profit or protect against loss in declining markets. All indices are unmanaged and investors cannot invest directly into an index. The Dow Jones Industrial Average is a price-weighted average of 30 actively traded blue-chip stocks. The S&P 500 Index is a broad-based measurement of changes in stock market conditions based on the average performance of 500 widely held common stocks. The Nasdaq Composite Index measures the performance of all issues listed in the Nasdaq Stock Market, except for rights, warrants, units, and convertible debentures. The MSCI EAFE Index is a float-adjusted market capitalization index designed to measure developed market equity performance, excluding the U.S. and Canada. The MSCI Emerging Markets Index is a market capitalization-weighted index composed of companies representative of the market structure of 26 emerging market countries in Europe, Latin America, and the Pacific Basin. It excludes closed markets and those shares in otherwise free markets that are not purchasable by foreigners. The Bloomberg Aggregate Bond Index is an unmanaged market value-weighted index representing securities that are SEC-registered, taxable, and dollar-denominated. It covers the U.S. investment-grade fixed-rate bond market, with index components for a combination of the Bloomberg government and corporate securities, mortgage-backed pass-through securities, and asset-backed securities. The Bloomberg U.S. Corporate High Yield Index covers the USD-denominated, non-investment-grade, fixed-rate, taxable corporate bond market. Securities are classified as high-yield if the middle rating of Moody’s, Fitch, and S&P is Ba1/BB+/BB+ or below. One basis point (bp) is equal to 1/100th of 1 percent, or 0.01 percent. 

Authored by Chris Fasciano, chief market strategist, and Sam Millette, director, fixed income, at Commonwealth Financial Network^®.

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