May 2025 Market Recap from Greenwood Hoff Wealth Management
Markets Rally Amid Cooling Inflation, Trade Hopes, and AI Optimism
May delivered a much-needed dose of optimism for investors, with the S&P 500 and Nasdaq Composite notching their strongest monthly gains since November 2023. Stocks rallied across most sectors, buoyed by easing inflation data, robust earnings results, and a positive shift in trade rhetoric between the U.S. and China. The S&P 500 surged past 6,000 to end the month just 2.3% shy of its February all-time high, closing out a powerful two-week rally that capped a broader May rebound.
At the heart of the rally was a surprise tariff de-escalation agreement, which renewed hope that ongoing trade disputes could moderate heading into the summer. Meanwhile, first-quarter corporate earnings came in stronger than anticipated, powered in part by accelerating demand across AI-driven industries. These factors, combined with gradually improving consumer sentiment and lower-than-expected inflation, helped markets look past rising bond yields and lingering geopolitical risk.
A Fed on Pause: Data-Dependent and Patient
As expected, the Federal Reserve held the federal funds rate steady in May, maintaining its target range at 4.25%–4.50%. In its policy statement, the Fed acknowledged the persistence of inflation pressures but signaled no urgency to hike or cut rates, reiterating its commitment to a data-dependent approach.
Markets interpreted the Fed’s stance as appropriately cautious, especially in light of mixed economic signals. On the inflation front, there were encouraging signs. The Fed’s preferred inflation gauge, the Core Personal Consumption Expenditures (PCE) Price Index, rose just 0.1% in April, bringing the annual rate down to 2.5%, its lowest level since early 2021. The broader headline PCE, which includes food and energy, slowed to 2.1% year-over-year.
These developments suggest inflation is gradually cooling, albeit not fast enough to warrant rate cuts just yet. Fed Chair Jerome Powell emphasized the need for “greater confidence” that inflation is on a sustained path to 2% before altering monetary policy. For now, the central bank appears content to let rates sit tight, allowing time to assess how earlier hikes continue to filter through the economy.
Earnings Season Surprises to the Upside
Corporate America exceeded expectations this quarter. With 98% of S&P 500 companies having reported results, 78% beat earnings estimates, while just 18% fell short, according to FactSet. The blended earnings growth rate for the S&P 500 reached 12.92%, a healthy acceleration from recent quarters.
Growth was driven in part by sectors exposed to artificial intelligence, where demand for infrastructure, chips, and services continues to soar. A particularly strong earnings report from a prominent AI chipmaker helped reinforce the view that AI-related investments may continue to provide meaningful tailwinds for equity markets.
From a style and size perspective, Mid Cap Growth led the charge in May, climbing 9.59%, closely followed by Large Cap Growth at +8.85%. Value stocks trailed, with Large Cap Value and Small Cap Value posting more modest gains of 3.51% and 4.20%, respectively. Despite recent strength, small-cap stocks continue to lag on a year-to-date basis, though they’ve trimmed earlier losses to single digits.
Sector Rotation and Performance
Ten of the eleven S&P 500 sectors posted gains in May. Technology extended its leadership from April, driven by AI enthusiasm, while Real Estate, Communication Services, and Industrials also outperformed. In contrast, healthcare was the lone laggard, falling 5.55% amid mixed earnings and regulatory uncertainty.
While cyclicals gained favor in May’s risk-on environment, defensive sectors such as Utilities and Consumer Staples remain among the top year-to-date performers, a reflection of ongoing investor caution in a still-uncertain macroeconomic backdrop. Year-to-date, Utilities are up 9.07%, while Consumer Discretionary remains the worst performer at –5.96%.
Global Equities: Strength Abroad, With Notable Leaders
International markets also moved higher in May, though they trailed U.S. equities overall. The MSCI EAFE Index, tracking developed markets outside North America, rose 4.58%, extending its year-to-date gain to an impressive 16.87%.
Germany continued to outperform within the EAFE universe, adding 5.68% in May and bringing its year-to-date return to 31.29%, as industrial production and consumer confidence improved. Japan also posted solid gains, rising 4.05%, supported by a stable yen and improving export data.
Emerging markets posted a more modest gain of 4.27%, with wide dispersion across countries. Taiwan surged 12.54% amid strong semiconductor exports, while Saudi Arabia declined 4.77%, weighed down by soft oil prices and geopolitical headwinds.
Bond Markets Under Pressure
Despite equity market enthusiasm, bond investors faced a tougher backdrop. Yields on 10-year U.S. Treasurys rose sharply during the month, ending May at 4.39%, up 0.24% from April. At one point, yields briefly topped 4.5%, reflecting concerns about the Fed’s policy path and heavy Treasury issuance.
Higher yields pressured fixed income performance. The Bloomberg U.S. Aggregate Bond Index, a broad measure of investment-grade bonds, fell 0.72% in May. Longer-duration government bonds fared worse, with the Bloomberg U.S. Government Long-Term Index falling 2.86%. On the flip side, high-yield (“junk”) bonds continued to attract risk-seeking investors, advancing 1.68% in May.
Municipal bonds were relatively stable, edging up 0.06%, as improving sentiment and lower supply expectations supported prices.
Tariff Headlines and Trade Policy in Focus
Trade policy returned to the forefront in May, injecting volatility but also moments of relief. A federal court initially struck down a set of Trump-era tariffs, only for a federal appeals court to later uphold them. While tariffs remain in place, the legal back-and-forth underscored the fluidity of U.S.-China trade dynamics.
Further boosting sentiment, Presidents Biden and Xi held multiple calls to reaffirm commitments to dialogue. Although substantive progress remains slow, markets interpreted the engagement as a positive signal.
Tariff-related uncertainty also appeared to impact hiring. The Job Openings and Labor Turnover Survey (JOLTS) showed an unexpected uptick in job postings to 7.4 million, yet companies were slow to fill positions, likely due to ongoing trade tensions and mixed demand expectations.
Commodities and Currency Moves
Gold futures fell 2.33% earlier in May before rebounding nearly 0.94% the following week. The fluctuations reflect shifting investor appetite for safe-haven assets as inflation fears ebb. Meanwhile, U.S. crude oil prices surged 5.92% for the week ending May 31, the strongest weekly performance since November 2024, driven by strong demand data and OPEC+ production news.
The U.S. Dollar Index slipped 0.2%, continuing its rangebound behavior as traders weighed slower inflation against strong relative U.S. growth.
Looking Ahead
As we approach midyear, markets are enjoying a rare window of relative calm, supported by cooling inflation, resilient earnings, and improving sentiment. Still, risks remain. The Fed’s next steps are far from certain, trade policy remains a wild card, and geopolitical developments, from Eastern Europe to the Middle East. could shift market tone at any time.
Investors should be mindful that while May’s gains were broad-based, they were also heavily influenced by sentiment shifts. As always, we continue to advocate for diversification and a long-term approach, recognizing that markets rarely move in a straight line, even in bull markets.
At Greenwood Hoff Wealth Management, we remain committed to helping our clients navigate this complex landscape with clarity, confidence, and discipline. If you have questions about how current market conditions may affect your financial plan, we invite you to reach out for a conversation.
Written by the Greenwood Hoff Wealth Management Team
This material is for informational purposes only and should not be considered investment advice or a recommendation to buy or sell any security. Past performance is no guarantee of future results.
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