Markets extended their recovery in May, building on April’s lows as consumer sentiment improved and trade tensions eased.
Markets extended their recovery in May, building on April’s lows as consumer sentiment improved and trade tensions eased. Progress in US trade negotiations with the European Union (EU) and a temporary delay to planned tariff hikes reduced fears of a global recession and fuelled broad-based gains across risk assets.
Against this backdrop, developed market equities rose 6.0%. US stocks outperformed most of their global peers, and growth (+8.7%) outperformed value (+3.2%). Small cap stocks also staged a strong rebound (+5.9%) — the second-best performing style — boosted by optimism that proposed tax and regulatory changes in the US budget reconciliation bill would support smaller, pass-through businesses.
Emerging markets also continued to perform well in dollar terms, aided by a weaker US dollar. Taiwan (+12.5%) and Korea (+7.8%) stood out with particularly strong gains.
In contrast, global bond markets posted negative returns, with the Bloomberg Global Aggregate Index falling 0.4%. Rising fiscal concerns in the US — including Moody’s downgrade of its US sovereign credit rating and weak demand at long-dated Treasury auctions — triggered a mid-month sell-off in duration. Bond markets later recovered into month-end, as easing trade tensions and moderating inflation concerns, restored some confidence.
Commodities were the worst performing asset class with the broad Bloomberg Commodities Index falling 0.6% over the month. Gold fell 0.8%, as improving risk appetite reduced demand for defensive assets. Industrial metals (+1.2%) and energy (+0.5%) posted positive returns. Oil prices recovered to almost $63 per barrel, after falling to $60 mid-month, but traders remain focused on whether OPEC+1 will follow through on recent signals of increased supply.
Equities
The S&P 500 led global equity markets in May, advancing 6.3% amid a broad-based rally. The information technology sector outperformed, but the rally extended to cyclical sectors such as industrials and consumer discretionary. Year-to-date, the index has gained 1.1%, with May’s performance marking a significant rebound from earlier in the year.
The strong market performance was underpinned by a robust first quarter earnings season. With 97% of S&P 500 companies reporting, the blended year over year earnings growth rate was 12.4%. This marks the second consecutive quarter of double-digit earnings growth for the index. Notably, 77% of companies reported positive earnings surprises, and 63% exceeded revenue expectations.
European equities also performed strongly, with the MSCI Europe ex-UK Index up 4.9%. Advancements in US–EU trade talks helped to alleviate fears of recession, while expectations for fiscal support and upward earnings revisions continued to underpin regional sentiment.
The UK was the weakest major performing equity market, with the FTSE All-Share rising 4.1% in May. Consumer staples, healthcare and utilities were notable laggards. UK-listed pharmaceutical companies came under pressure following Trump’s drug pricing reforms, which threaten revenue from U.S. sales. At the same time, persistent inflation and competitive pricing make it harder for staples to pass on rising input costs. Utilities also struggled, with rising UK bond yields reducing the relative attractiveness of dividend-paying stocks.
Fixed income
Bond markets were volatile in May, caught between competing risks from sticky inflation, slowing growth and rising fiscal concerns. Yields moved higher mid-month following the downgrade of the US sovereign credit rating, which triggered a sell-off in longer-dated Treasuries and raised questions about the long-term sustainability of government borrowing.
Sovereign yields rose across much of the developed world, but performance diverged. Countries with weaker fiscal positions — including the US, UK and Japan – underperformed, while peripheral markets such as Spain and Italy, which have made strides towards improving their fiscal positions, were more defensive. The shifting fiscal narrative is becoming an increasingly important driver of duration risk, particularly as markets reassess the path of interest rates and inflation in the second half of the year.
While sovereign bond markets came under pressure in May, credit markets told a more optimistic story. High yield outperformed investment grade and sovereign bonds, buoyed by improving risk appetite. US high yield bond option-adjusted spreads have narrowed by 130 basis points since 7 April, with a similar move seen in European high yield credit spreads. This rally reflects a broader rotation back into risk assets, as investors grow more confident that the worst-case growth scenarios may be avoided – even as inflation and fiscal risks remain elevated.
Conclusion
May was characterised by a broad rotation back into risk assets, as equities and high yield credit rallied following the partial rollback of tariffs announced on Liberation Day. The easing in trade tensions helped reduce recession fears and supported a rebound in market sentiment. However, with inflation still elevated and fiscal vulnerabilities mounting the outlook remains finely balanced.
In this environment, we continue to advocate for a well-diversified portfolio that can navigate two-sided risks: persistent inflation on one hand, and the potential for weaker growth on the other. This balance is particularly important for investors with portfolios heavily concentrated in US equities, where valuations remain lofty and earnings expectations still appear overly optimistic. With more attractive valuations and policy tailwinds elsewhere, we continue to favour a rotation into regional equity markets. Diversification across asset classes and regions remains essential as the macro landscape continues to evolve.