May 2025 Financial Markets

U.S. Economy

U.S. GDP decreased at an annualized growth rate of -0.2 percent in the first quarter, driven by a surge in imports and a reduction in government spending. April’s monthly CPI increase of 0.2 percent came in lower than expected as annual inflation slid to 2.3 percent, the lowest since February 2021. The Fed’s preferred measure of inflation, core PCE, increased by 0.1 percent in April with an annualized inflation rate at 2.1 percent and within the range of the Fed target of 2.0 percent. The ISM Manufacturing PMI survey results weakened modestly to 48.5 (below 50 indicates economic contraction) with sub-sectors such as inventories, imports and new export orders lower from the prior month. The health of the labor market remains resilient, as the economy added 177,000 new jobs in April with the unemployment rate 4.2 percent. The Conference Board Consumer Confidence Index survey indicators increased for the first time in five months, while their CEO Confidence survey had its steepest quarterly drop of 26 percent to 34 (below 50 reflects more negative than positive responses) since the survey began in 1976.

Sources: Standard & Poor’s, Bloomberg, MSCI and Russell

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Equity markets

U.S. equities rebounded broadly with a 6.3 percent return, as the S&P 500 had its best performance in the month of May since 1990. On a sector basis for the month, information technology (+10.9 percent) and communication services (+9.6 percent) were the top contributers, while healthcare (-5.5 percent) was the lone negative contributor. On a year-to-date basis, the only negative portion of U.S. markets is now only small capitalization stocks (S&P 600 index at -8.5 percent).

International equity markets, including both developed (EAFE +4.6 percent) and emerging regions (EM +3.1 percent), were positive and underperformed the U.S. Within developed markets, Europe (+4.8 percent) led the way on a regional basis with strong returns from Germany (+6.2 percent). Within emerging markets, Asia (+5.0 percent) outperformed with strong results from Korea (+13.1 percent) and Taiwan (+12.7 percent). For the month, information technology was the strongest performing sector abroad.

Fixed income markets

The bond market continues to demonstrate macro concerns from the potential increasing fiscal deficits, produced by the proposed budget bill, as well as fears of inflation due to the unresolved tariff issues. Amidst this backdrop, fixed income returns were mixed, with U.S. Treasury yields rising (inversely prices fell, hence negative returns) across the curve with 2-year U.S. Treasury bonds rising 31 bps to 3.9 percent and 30-year Treasuries rising by 22 bps to 4.9 percent. There were pockets of positive returns in sectors where higher coupons offset price declines such as investment grade corporate credit and high yield sectors.

Looking ahead

While the positive month in stocks and economic data provided a reason for optimism, another bout of market turbulence would not be surprising given continued geopolitical news, stretched valuations and budget battles. Amid heightened volatility, we continue to advise clients to retain a disciplined approach by focusing on asset allocation, rebalancing as appropriate and maintaining sufficient reserves to pay benefits.