While tariff concerns softened in May, other risks, such as rising debt, moved into the spotlight. In good news, trade tensions between the U.S. and China eased significantly with a 90-day pause on the 100%+ tariff rates. It was a solid month for global equities, which rose 6%, while global bonds struggled, falling 0.4% on the back of rising yields in the U.S. Developed markets ex-U.S. equities continue to outperform emerging markets due to better-than-expected earnings and economic performance.

In the U.S., hard data continued to hold mostly steady while soft data weakened. In particular, the labor market remained resilient, with 177k jobs being added in April, above expectations. Businesses, supported by still strong consumer spending and profits, have been hesitant to lay off employees that took them a long time to hire during the labor market tightness of 2021. Absent further economic deterioration, job growth should remain at a decent pace. On the other hand, 1Q25 GDP came in at -0.2% q/q saar, the first negative print since 2022, due to surging imports. The other components of GDP remained mostly solid, especially consumption and business fixed investment, rising x% and x%, respectively. For soft data, consumer sentiment took a nosedive, reaching 50.8, near June 2022 levels; however, the way the responses are now being collected may be skewing the results more negatively.

Elsewhere, economic data appears to be stabilizing or improving in some areas. In China, it finally seems like the recent fiscal and monetary stimulus is beginning to positively impact the economy. For example, the declines in new home prices have been getting less severe, falling 4% in April. Additionally, exports surged 8.1% y/y in April due to greater shipments to Southeast Asia. China is successfully finding other destinations for its goods amid a 21% drop in U.S.-bound shipments from China. However, trade tensions remain a large risk, as weaker demand in the U.S. often has spillover effects. MSCI China has risen 13% year-to-date, driven by a rebound in offshore tech.

Events in May renewed hope that the Trump administration’s tariffs are being used as a short-term negotiating tool rather than a long-term strategy. During a meeting in Switzerland, the U.S. and China decided to lower tariffs on each other to 41% and 27%, compared to 145% and 125% additional, respectively. Markets rallied on the positive development and shifted focus back to long-term themes such as artificial intelligence, benefiting U.S. tech stocks that rose 11% during the month. However, it does not appear that tariff-related volatility will go away, and fiscal concerns are rising to the spotlight once again. The budget reconciliation bill, a bill used to align current laws with budget goals, was passed in the House of Representatives and is expected to cost $2.4 trillion over the next 10 years. While the debt outlook was expected to continue deteriorating, the U.S. 10Y and 30Y yields rose by 24bps and 26bps, respectively, during the month due to markets digesting the final price tag of the bill. Even if there is further improvement in tariff news, fiscal concerns may continue to cast a negative shadow on sentiment toward the U.S.

Despite this, there are plenty of opportunities for investors in this environment. Global core bonds, which have historically helped during growth shocks, offer diversification and attractive income and are already up 5% so far this year. Liquid alternatives can also help investors diversify quickly. Within equity portfolios, investors should consider increasing exposure to high-quality and fairly valued companies outside the U.S., with a focus on markets like Japan and Europe. For now, significant portfolio adjustments are likely not necessary for most investors. Sticking to an investment plan, including regular rebalancing and goal-based adjustments, remains the most effective long-term strategy.