Monthly Market Review May 2025

June 6, 2025

Global equity markets extended their recovery in May, continuing the momentum from late April. This resurgence was largely driven by a notable improvement in investor sentiment from a more constructive tone in negotiations between the U.S. and China, as well as the European Union. The temporary suspension of proposed tariff hikes, particularly those targeting the auto sector, helped alleviate fears of a global economic slowdown. These developments encouraged a broad-based rally across risk assets, with investors rotating back into equities after a volatile first quarter.

In developed markets, global equities posted a robust 6.0% gain, tracked by the MSCI world index. U.S. stocks led the momentum, with growth-oriented sectors significantly outperforming value stocks. The tech-heavy Nasdaq and large-cap growth names benefited from a renewed confidence in earnings resilience in innovation-driven sectors. Notably, Microsoft, Meta, and Alphabet all posted reports that exceeded expectations at the end of April and Nvidia followed up at the end of May with further positive news. The MSCI World Growth index rose by 8.7%, while the MSCI World Value index only gained 3.2%. Small-cap equities also rebounded strongly, with the MSCI World Small Cap rising 5.9%, as optimism grew around U.S. tax bill proposals. This included relief and regulatory adjustments, which are were seen as particularly favorable for smaller businesses.

Emerging market equities continued their upward trajectory in May, supported by a softer U.S. dollar and expectations of global central bank rate cutting. The dollar’s decline has been driven by moderating inflation expectations and dovish signals from the Federal Reserve. Taiwan and South Korea stood out with impressive gains of 12.5% and 7.8%, respectively. These markets saw strong demand in the semiconductor and electronics sectors, as well as improved export outlook for the stabilization of global supply chains since liberation day.

In contrast to equities, global bond markets faced headwinds over the month. The Bloomberg Global Aggregate Bond Index declined by 0.4%. The Trump administration’s fiscal plan, brought forward by the “One Big Beautiful Bill” Act caused anxiety in bond markets as the bill showed to increase the fiscal deficit by $2.3 trillion. Additional triggers over the month were Moody’s downgrade of the U.S. sovereign credit rating, and weak demand at Treasury auctions. These events sparked a mid-month sell-off in government bonds. The 10-year Treasury yield spiked before retreating toward month-end. The easing trade tensions and a slight cooling in inflation data helped restore some investor confidence. 

Commodities were the weakest performing asset class in May, with the Bloomberg Commodities Index slipping 0.6%. Gold prices fell 0.8% as investors rotated out of defensive assets amid improving risk sentiment. In contrast, industrial metals posted a modest gain of 1.2%, supported by resilient demand from manufacturing hubs in Asia. Energy markets were mixed; oil prices recovered from mid-month lows to end near $63 per barrel. However, uncertainty persisted around OPEC+ production decisions, with traders closely watching whether the group would follow through on signals of increased supply. Meanwhile, natural gas and other energy derivatives saw heightened trading activity, reflecting the market’s ongoing need for flexible hedging tools in a volatile macro environment.

Equities

The S&P 500 delivered its strongest monthly performance since late 2023, climbing 6.3% and leading indices globally. While information technology stocks continued to outperform, driven by AI innovation, cloud infrastructure demand, and strong earnings from mega-cap names, cyclical sectors such as industrials and consumer discretionary also saw renewed investor interest. These gains reflected growing confidence in the resilience of the U.S. economy, especially as inflation showed signs of stabilizing and consumer spending remained robust. Despite a sluggish start to the year, the index turned positive year-to-date, up 1.1%, with May marking a pivotal rebound.

The foundation of May’s equity strength was a stellar first-quarter earnings season. With nearly all S&P 500 companies having reported, the blended year-over-year earnings growth rate reached 12.4%, marking the second consecutive quarter of double-digit growth. This performance exceeded expectations, with 77% of companies beating earnings estimates and 63% surpassing revenue forecasts. The breadth of earnings surprises suggested that corporate America is adapting well to the uncertain environment through managing costs effectively, and capitalizing on pockets of demand, particularly in technology, financials, and select industrials. This momentum, as well a positive progress to trade disputes between the US and China, as well as the European Union, helped restore investor confidence.

Canadian Equities also did well during the month, with the TSX composite index raising 5.6%, lead by a strong rebound in the Information Technology, Industrials, and Consumer Discretionary sectors. Corporate earnings showed resilience, showing to be on track to hit mid to high single digit annual growth for 2025. CPI inflation for April also looked encouraging, at 1.7%, inline with the Bank of Canada’s inflation target, showing a minimal current effect from tariffs. Tariffs, however, are still expected to have a coming negative impact on the Canadian economy and earnings growth. 

European markets also posted solid gains in May, with the MSCI Europe ex-UK Index rising 4.9%. The rally was supported by improving transatlantic trade relations, as progress in U.S.–EU negotiations helped ease fears of a recession. Additionally, expectations for fiscal stimulus in eurozone economies, particularly Germany and France, bolstered investor sentiment. Upward revisions to corporate earnings forecasts further contributed to the positive tone, especially in sectors tied to industrial production and luxury goods, which benefited from recovering global demand and a weaker euro.

The UK equity market underperformed its global peers, with the FTSE All-Share Index gaining 4.1%, the weakest among major developed markets. Defensive sectors such as consumer staples, healthcare, and utilities lagged. UK-listed pharmaceutical firms faced headwinds from U.S. drug pricing reforms introduced by the Biden administration, which threatened to erode profit margins on American sales. Meanwhile, persistent domestic inflation and tight competition made it difficult for consumer staples to pass on rising input costs. Utilities, traditionally favored for their stable dividends, lost appeal as rising UK bond yields made fixed-income alternatives more attractive. These sector-specific pressures weighed on overall UK market performance despite broader global tailwinds.

Fixed Income

May was a turbulent month for bond markets, as investors grappled with a challenging mix of persistent inflation, decelerating economic growth, and mounting fiscal concerns. The downgrade of the U.S. sovereign credit rating mid-month served as a key inflection point, triggering a sharp sell-off in longer-dated Treasuries. This event reignited concerns about the long-term sustainability of U.S. government borrowing, exacerbated by the deficit increasing tax bill that was put forward later in the month. 

In Canada, the overall bond market ended the month flat. The middle term and government bonds ended with a slight loss, while long- and short-term corporate bonds ended with a gain of less than a percent. This was due to credit spreads narrowing, as fears of a global recession were subdued. 

While sovereign yields rose broadly across developed markets globally, performance varied significantly depending on fiscal credibility. Countries with more fragile fiscal outlooks, such as Canada, the U.S., UK, and Japan, underperformed, as investors demanded higher risk premiums. In contrast, peripheral eurozone nations like Spain and Italy, which have made notable progress in stabilizing their public finances, saw more resilient bond performance. This divergence underscores a growing market focus on fiscal discipline. 

In stark contrast to the volatility in sovereign debt, credit markets globally painted a more optimistic picture in May. High yield bonds outperformed both investment-grade corporates and government debt, from a resurgence in risk appetite. U.S. high yield spreads tightened by 130 basis points since early April, with European high yield markets showing similar strength. This rally reflects growing investor confidence that recessions may be avoided, even with the persistent risk of tariff related inflation, and fiscal risks persist. The resilience of corporate earnings and a relatively stable default outlook have helped support demand for credit, particularly in sectors tied to consumer spending and industrial activity.

Conclusion

May witnessed a notable resurgence in risk appetite across global financial markets, as investors responded positively to easing of trade tensions and resilient corporate earnings. This in-turn reduced fears of an imminent recession and encouraged a return to riskier asset classes. Despite this renewed optimism, the broader macroeconomic backdrop remains fragile. Trade barriers are still being put up, inflation continues to run above target in many economies, and fiscal imbalances, particularly in developed markets, are becoming more pronounced.

Because of these headwinds, a diversified investment strategy is more important than ever. This is especially relevant for those heavily concentrated in U.S. equities, where valuations remain elevated and current earnings forecasts may not fully reflect the underlying economic landscape. Europe and parts of Asia still offer compelling valuation opportunities and are benefiting from supportive policy measures. As such, a strategic rotation into these markets may enhance portfolio resilience.

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Luke Demjen, CFA

Luke Demjen, CFA

I obtained my Economics Degree from the University of Calgary and have over 10 years of experience as an investment and lending advisor with one of the Big 5 banks in Canada. In 2018, I obtained the Chartered Financial Analyst (CFA®) designation, the premiere investment analysis distinction in the financial services industry. My academic knowledge, along with my experience and insights into the banking system and capital markets help make sure I put my clients savings to work and have them financially prepared to meet all of life’s goals and milestones. I am passionate about making sure my clients receive the industry’s best in financial advice and attention. In my spare time I enjoy performing martial arts as well as skiing, making music, and soaking up new experiences with friends and family.