Executive summary:
- U.S. equities broadly higher in May
- De-escalation of tariffs between the U.S. and China a major catalyst
- Reported positive earnings surprises for Large Caps exceeds 10-year average
- Developments out of Washington continue to dominate headlines
Index performance for May:
In May, the U.S. stock market saw significant gains, with the Dow Jones up 3.94%, the S&P 500 up 6.15%, the Nasdaq up 9.56%, and the Russell 2000 up 5.20%. The de-escalation of tariffs between the U.S. and China was a major catalyst leading to the best month for the S&P 500 and Nasdaq since November 2023. Big tech stocks outperformed, while other sectors such as semiconductors, travel and leisure, autos and software also saw strong gains. However, managed care, pharma, China tech, homebuilders, oil majors, food and beverage, and telecom underperformed.
Treasuries were weaker across the curve, with the 2-year yield up over 30 basis points and the 10 and 30-year yields up around 25 basis points. The dollar index and gold both declined by 0.1%, while Bitcoin futures rose by 11% and WTI crude increased by 4.4%. Despite the positive trade developments, trade headline volatility remained a key market overhang with ongoing challenges in negotiations and court rulings impacting tariffs. Despite these uncertainties, bullish sentiment was supported by resilient corporate margins, strong AI-driven earnings, robust consumer data, and a pickup in M&A and IPO activity.
Sector performance varied, with tech, communication services, consumer discretionary, and industrials leading the way. Healthcare, energy, real estate, consumer staples, materials, utilities, and financials lagged. The backup in Treasury yields was driven by concerns around budget deficits, inflation and an increasingly hawkish Fed. Corporate earnings growth for Q1 was strong, with S&P 500 companies reporting 12.5% growth, though many issued negative EPS guidance due to tariff impacts. Overall, May was a dynamic month for the markets, marked by positive trade developments and robust corporate performance.
Key Economic Data Trends in May 2025:
- Labor Market:
- Mixed Signals: The increase in initial and continuing jobless claims suggests some softness in the labor market. However, the unemployment rate remains steady at 4.20%, indicating overall stability. The decline in nonfarm payrolls growth points to slower job creation.
- Manufacturing and Services:
- Manufacturing Weakness: The ISM Manufacturing index fell below 50, indicating contraction in the manufacturing sector. The S&P Global U.S. Manufacturing PMI also remained flat, suggesting stagnant growth.
- Services Sector Resilience: The ISM Services Index improved, showing growth in the services sector, although the S&P Global U.S. Services PMI declined, indicating mixed performance.
- Inflation and Prices:
- Moderating Inflation: Both CPI and PPI data show a slight decrease in year-over-year inflation rates, suggesting that inflationary pressures may be easing. The Core PCE Price Index also indicates a slight decline, which could be a positive sign for consumers.
- Housing Market:
- Mixed Housing Data: Existing home sales declined, while new home sales increased, indicating varied performance in the housing market. The drop in building permits suggests potential future weakness in housing construction.
- Consumer Sentiment:
- Improved Confidence: The Conference Board Consumer Confidence index saw a significant increase, reflecting improved consumer sentiment. However, the University of Michigan Sentiment index declined, indicating some consumer concerns.
Sector performance total return for May:
Earnings commentary:
The S&P 500 reported strong results for Q1 2025. According to FactSet data, both the percentage of companies reporting positive earnings surprises and the magnitude of these surprises have exceeded their 10-year averages.
For Q1 2025, 78% of S&P 500 companies reported a positive EPS surprise and 64% reported a positive revenue surprise, leading to a blended year-over-year earnings growth rate of 12.50% marking the second consecutive quarter of double-digit growth. Initially estimated at 7.2% on March 31st, ten sectors reported higher earnings due to positive EPS surprises. For next quarter, 51 companies issued negative EPS guidance while 43 issued positive guidance. The forward 12-month P/E ratio for the S&P 500 stands at 21.3, above both the 5-year average of 19.9 and the 10-year average of 18.4, indicating higher market valuations.
Sales and earnings results by S&P sector:
2-day price reaction following earnings releases:
Fed Fund Futures are pricing in a 95+% chance of a hold at the Jun meeting:
10-Year Treasury Constant Maturity Minus 2-Year Treasury Constant Maturity:
Gold:
Oil:
DXY:
Bitcoin:
Looking ahead:
Market’s focus this week will be on Friday’s nonfarm payrolls report for May. Economists predict the unemployment rate to remain at 4.2% with 128,000 new jobs added. The reading will come as new and continued jobless claims continue to rise. Tariff headlines out of Washington will continue to dominate market sentiment now that earnings season draws to close. On June 20, we have “triple witch” options expiration and S&P Index rebalancing. Finally, on June 27, at the close, we have the annual Russell Reconstitution, which is traditionally one of the highest equity volume days of the year.
Economic Calendar for June:
The information contained herein is provided for informational and educational purposes only, and nothing contained herein should be construed as investment advice, either on behalf of a particular security or an overall investment strategy. All information contained herein is obtained by Nasdaq from sources believed by Nasdaq to be accurate and reliable. However, all information is provided “as is” without warranty of any kind. ADVICE FROM A SECURITIES PROFESSIONAL IS STRONGLY ADVISED.
