Stocks Rally in May as Tariff Fears Subside; Long Yields Move Higher

In May 2025, U.S. stocks rallied amid ongoing trade discussions between the U.S. and China, while volatility remained elevated due to tariff sensitivities; the NASDAQ led gains, though value stocks outperformed growth year-to-date. Bond yields rose, with the 30-year Treasury yield surpassing 5%, driven by concerns over debt expansion, and high yield bonds outperforming rate-sensitive Treasuries. Economic data showed a strong job market and easing inflation, but consumer confidence declined due to tariff uncertainty, and Q1 GDP contracted by 0.2%.

Analysis

U.S. equity markets exhibited a strong rally in May 2025, with the S&P 500 gaining 6.29% and the NASDAQ Composite surging 9.65%, largely driven by a temporary 90-day pause in U.S.-China tariffs and perceived progress in trade discussions. However, this rally occurred amidst elevated volatility and followed significant market corrections earlier in the year; the S&P 500, despite being up only 1.06% year-to-date, experienced a near -20% intraday correction on April 8th. Large-cap growth stocks, such as the Russell 1000 Growth up 8.85%, led May's gains, but value stocks (Russell 1000 Value +2.5% YTD) have demonstrated more consistent year-to-date performance. Notably, international equities (MSCI ACWI ex U.S. +14.03% YTD) have significantly outperformed U.S. markets year-to-date. Concurrently, bond yields rose meaningfully, with the 30-year U.S. Treasury yield breaking above 5%—a level not sustained since before 2008—reflecting concerns over debt expansion under the “One Big Beautiful Bill Act” and impacting longer-dated Treasuries negatively (Bloomberg 30-year U.S. TSY -3.21% in May). High-yield corporate bonds (Bloomberg U.S. High Yld +1.68% in May) performed well, benefiting from the equity rally, while municipal bonds lagged. Economic data presented a mixed picture: the labor market remained robust with April non-farm payrolls at +177,000, and inflation moderated, with the core PCE price index, the Fed's preferred measure, declining to 2.5% year-over-year in April from 2.7% in March. Conversely, Q1 2025 GDP contracted by 0.2% (second reading), with personal consumption revised lower to 1.2% from a prior 1.8%, and University of Michigan consumer sentiment plummeted dramatically to 50.8 in May, underscoring the adverse impact of tariff uncertainty. The ISM Manufacturing PMI also signaled contraction, falling to 48.5 in May. The Federal Reserve maintained its policy rates throughout 2025, adopting a "wait-and-see" approach to tariff developments, with market expectations for rate cuts diminishing to just two for the remainder of the year per the CME FedWatch tool.

Key Decisions for Investors

• Investors should closely monitor the resolution of tariff negotiations as the 90-day window approaches in early July, as this remains a primary driver of market volatility and economic uncertainty.
• Given the Federal Reserve's cautious stance and moderating inflation, maintaining a focus on companies with strong fundamentals and resilient earnings will be crucial, particularly as the article notes an expectation of downward revisions to earnings estimates.
• Consider tactical diversification across asset classes and geographies, noting the year-to-date outperformance of international equities and value stocks, and in fixed income, an active management approach favoring credit exposure over pure rate exposure may be warranted in the current environment of rising and volatile interest rates.