May brought a welcome rebound in global markets as investors took solace in a temporary tariff truce and signs of economic resilience. Yet beneath the surface, policy uncertainty, inflation pressure, and fragile consumer sentiment continue to cloud the outlook. Let’s unpack what happened in May, across three core areas: equity markets, fixed income, and macroeconomics.
Equity Markets
Global equity markets surged in May, continuing the rebound that began in April as investor sentiment improved on signs of easing trade tensions. The tone from the U.S. administration shifted materially toward negotiation and de-escalation, leading markets to reprice recession risks lower and refocus on earnings fundamentals.
United States: The S&P 500 advanced 6.15%, with broad-based participation. Leadership was driven by growth-oriented sectors:
- Information Technology jumped +10.9%, led by renewed strength in semiconductors and AI-exposed platforms.
- Industrials rose +8.8%, reflecting improved business confidence and durable goods orders.
- Consumer Discretionary also surged +9.4%, partly due to frontloaded consumer spending and upbeat retail earnings.
- Notably, Health Care fell -5.5% as scandals involving United Health weighed on sentiment.
Canada: The S&P/TSX Composite climbed 5.37%, with standout performance from:
- Financials (+6.5%), as lower bond volatility and better earnings lifted major banks.
- Industrials (+8.9%) and Consumer Discretionary (+8.1%), as cyclicals recovered from earlier tariff concerns.
- Materials (+2.5%) and Energy (+4.5%) were more muted, despite firming commodity prices.
International Markets:
- MSCI EAFE (Europe, Australasia, Far East) rose 3.97%, helped by a softening U.S. dollar and improving economic sentiment across the eurozone.
- Emerging Markets returned +4.3%, supported by reduced capital outflows and stabilization in key Asian markets following early-year currency stress.
- Small Caps: The Russell 2000 rose 5.2%, regaining some ground but still down year-to-date, as investors remained cautious around domestic cyclicals and credit conditions.
- Sector Rotation: Risk appetite re-emerged, driving outperformance in high-beta areas like Tech and Industrials, while defensives such as Staples and Utilities lagged slightly in relative terms.
This rally, although rapid, aligns with historical post-correction rebounds. Since 1970, when the S&P 500 experiences a six-week gain of 15% or more (as it just did), average forward 12-month returns have typically doubled the long-term average. Still, given the policy volatility and the fact that tariffs are only “paused,” not cancelled, investors should remain cautious about potential volatility returning.
Fixed Income
Fixed income performance was more muted.
- Canadian bonds were flat overall (+0.1%), with corporate credit outperforming due to tighter spreads
- U.S. Treasuries declined (-1.1%) as longer-dated yields rose on deficit concerns and bond market anxiety over Trump’s fiscal proposals
- High Yield outperformed globally, benefiting from lower duration and risk-on sentiment
Credit markets suggest growing confidence, but longer-end sovereign bonds remain sensitive to fiscal and inflation uncertainty.
Commodities & Currency
- Oil prices rebounded 3.2%, though remain sharply lower year to date
- Gold held firm (-0.7%) after strong April gains, as inflation and geopolitical concerns kept demand elevated
- Canadian dollar strengthened modestly (-0.4% vs. USD) as markets digested Bank of Canada and Federal Reserve policy divergence.
Economic Overview
United States:
The U.S. economy continues to navigate uncertainty stemming from protectionist trade policies. Although tariffs were scaled back following May’s diplomatic truce, they remain elevated (approximately 14%) and are likely to exert upward pressure on inflation and slow growth heading into the second half of 2025. Q1 GDP contracted for the first time in three years, with imports soaring 50.9% annualized, pulling trade’s contribution to GDP into record negative territory. Service exports, particularly tourism, declined 34.5%, while government spending saw its first drop in nearly three years due to budget cuts. Despite this, private demand remained robust, with households frontloading consumption ahead of tariff hikes.
The labour market remained relatively stable in May, with +177K payroll gains, though distortions from severance pay may have inflated the figures. Structural weakness is emerging among younger workers and the long-term unemployed. The Fed is expected to remain cautious, postponing any rate cuts until late 2025, as core PCE inflation rose at its fastest pace in over a year.
Canada:
The Canadian economy is also showing signs of strain under tariff uncertainty. While effective U.S. tariffs have dropped to around 6% thanks to USMCA compliance, the threat of escalation remains. Investment intentions and hiring plans have collapsed, with private-sector job losses of 75,000 in the past two months, most notably in Ontario. Real estate weakness is spreading, as listings rise and home sales fall to levels last seen during past recessions.
Despite a 150 basis point rate cut since September, Canadian 5-year yields remain stubborn due to global rate pressure. The Bank of Canada is expected to resume cuts in June, aiming for a 2.0% policy rate by year-end to offset housing fragility and inflation risks.
Final Thoughts
May offered some relief for investors after a turbulent start to 2025. While economic resilience and a constructive earnings season supported markets, the underlying fragility tied to trade policy, fiscal risk, and monetary caution should not be underestimated. We continue to emphasise balance: stay diversified, be patient, and ensure your portfolio reflects both risk and opportunity.