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.
GLOBAL
TRENDS
On April 2, President Donald Trump announced reciprocal tariffs on imported goods on a country-by-country basis which were more severe than market participants expected.
These tariffs were in addition to those announced prior to April 2. On April 9 and May 12, the administration lowered tariff rates with most trading partners to 10% for 90 days to allow trade negotiations to begin. In response to these announcements, investors have noted a considerable increase in global trade uncertainty, lower business sentiment, weaker consumer sentiment and elevated market volatility. Market and economic fundamentals that Fifth Third’s Investment Management Group favor — labor market strength, moderating inflation, easing monetary policy, strong corporate earnings — remain resilient; however, we suspect these fundamentals will deteriorate until a clear path forward for global trade is agreed upon by policymakers and businesses alike.
After restrictive monetary policies helped to curtail persistent inflation, most global economies have begun to lower interest rates to help foster growth and support global labor markets. Short-term interest rates from most of the world’s largest central banks are still elevated relative to the last decade, which adds pressure to global financial systems. Offsetting these easier global financial conditions is a sharp increase in global trade policy uncertainty.
The war in Ukraine continues. Aside from the human tragedy that is always associated with war, this conflict has added to the risks and volatility in global financial markets.
Taken together, recent global and economic actions have kept investors on edge. Despite these concerns, global economic growth remains resilient, driven by consumer spending in most developed nations. We expect this to continue in 2025, although likely at a slower rate than historical norms.
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.
POLITICAL AND
REGULATORY TRENDS
Trump announced reciprocal tariffs on imported goods on a country-by-country basis which were more severe than we or market participants expected.
These tariffs seek to decrease the trade deficit, promote domestic manufacturing and protect American workers. The net effect of these policy changes resulted in the largest increase in the effective tariff rate on imported goods since the 1920s, which has put downward pressure on business sentiment and upward pressure on inflation expectations from U.S. consumers. Over the past month, progress on trade agreements and a de-escalation of trade tensions with China have helped reduce some of the current economic uncertainty.
In addition to trade efforts, Trump has remained very active, signing more than 150 executive orders so far in his second term.
INVESTMENT
TRENDS
Domestic equities continue to see downward pressure on future earnings expectations, though that pressure has eased over the last month.
In addition, the most recent earnings season notched another strong quarter of actual earnings growth for large-cap stocks. Headline inflation has moderated but remains elevated, with April’s consumer price index falling to 2.3%. Core CPI, which excludes food and energy, also remains above the U.S. central bank’s 2.0% target, rising 2.8% over the past year in the most recent reading. The first-quarter U.S. GDP report showed a 0.2% contraction in economic growth, primarily due to a dramatic increase in import activity. Finally, the most recent summary of economic projections forecasts year-end 2025 GDP growth of 1.7%, with inflation measures still above the U.S. central bank’s 2.0% target.
It is our belief that peak trade uncertainty is now behind us; however, tighter fiscal policies are likely to continue. Additionally, cooling-but-persistent inflation — both domestically and abroad — along with ongoing geopolitical tensions, continues to weigh on investor sentiment. On balance, the headwinds and tailwinds currently at play suggest there is a potential path for global economic growth, albeit at a slower pace than initially expected.
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