Financial Market Roundup
Produced by Fifth Third's Investment Management Group

In the following piece, Fifth Third's Investment Management Group recaps the market and how it reacted to various events in the month of May 2025.

CENTRAL BANK
POLICIES

The Federal Open Market Committee last met on May 7 and held interest rates steady, maintaining the target range for the federal funds rate at 4.25%-4.50%. Although their policy stance remained unchanged, the committee’s formal statement did address the heightened uncertainty around fiscal policy: “Uncertainty about the economic outlook has increased further.” Addressing its dual mandate of full employment and stable prices, the FOMC noted that “the risks of higher unemployment and higher inflation have risen.” The committee is scheduled to meet next on June 18, and markets are not anticipating any changes to the target rate. As of the end of May, federal funds futures imply that markets expect two 25-basis-point rate cuts over the course of 2025.

The European Central Bank last met on April 17 and lowered their target interest rate by 25 basis points. In a prepared statement, the ECB noted that future decisions “will be based on its assessment of the inflation outlook in light of the incoming economic and financial data, the dynamics of underlying inflation and the strength of monetary policy transmission.” As of the end of May, market participants expect another 25-basis-point cut when the ECB meets again in June.

EQUITY
PERFORMANCE

Following a month of increased uncertainty, volatility and declining stock prices, domestic and international equities rebounded in May. The S&P 500 rose 6.3%, while the blue-chip Dow Jones Industrial Average gained 4.2%. The tech-heavy Nasdaq composite surged 9.7%. International stocks also advanced, with the MSCI Emerging Market Index up 4.2% and the MSCI EAFE Index of developed international equities rising 4.6%. The MSCI All Country World Index of developing and developed market stocks advanced 5.8% during the month.

Earnings season is nearly complete, with more than 98% of S&P 500 companies having reported their financial results. Earnings growth remains robust, with the current season showing a 12.5% increase compared to the first quarter of last year. However, the positive momentum has not been uniform across sectors. Four sectors reported earnings growth of at least 14%, while four others posted earnings declines.

What has been gaining more attention than actual earnings results is how companies are updating their guidance on future earnings. While full-year 2025 earnings expectations have trended lower throughout the year, the pace of negative revisions has slowed over the last month. As of the end of May, investors expect earnings growth of approximately 7% for 2025 compared to 2024 results.

INTEREST RATES
AND GROWTH

On May 29, U.S. GDP in the first quarter of 2025 was revised upward from -0.3% to -0.2%. The results detailed considerable changes in imports and private investment as consumers and businesses grappled with changes to domestic trade policy. The result of the changes was a contraction for the overall economy of 0.2%, the first negative quarterly growth figure since 2022. Despite the volatility, the largest driver of GDP, private consumption, continued to show residual strength despite cooling for the prior two quarters.

At the March FOMC meeting, the Fed released their latest summary of economic projections, which details the central bank’s outlook on a variety of prospective economic measures. Specifically, investors digested lower expected GDP growth, higher unemployment and higher core inflation forecasts for 2025.

During May, the U.S. Treasury yield curve moved higher across most term points. The two-year Treasury yield rose 29 basis points, ending the month at 3.90%, while the 10-year yield increased 24 basis points to 4.40%. In addition to higher Treasury yields, credit spreads, or the premium investors require for credit exposures, moved lower for both investment-grade and high-yield credit bonds over the last month.

Mortgage rates moved higher in May, with Freddie Mac’s Primary Mortgage Market Survey showing the average 30-year fixed rate rising to 6.89%, up eight basis points from April 24.