Markets in May were anything but quiet. What began with elevated anxiety fueled by escalating trade rhetoric and surging bond yields, quickly pivoted into a broad-based rally, as investors responded to a series of headline-driven shifts. At the center stood President Trump, whose abrupt softening on China tariffs and temporary delay of punitive measures against the EU triggered a powerful reversal in sentiment. Equities surged, led by the U.S., as fears of a global trade war gave way to hopes of renewed negotiation. Robust corporate earnings and a rebound in consumer confidence added to the momentum, helping to offset concerns over fiscal sustainability and persistent inflation pressures. The result was a market driven more by political headlines than economic fundamentals. Yet one that delivered a decisive recovery from April’s lows.
Equities
The equity rebound in May was as rapid as it was revealing. After April's sell-off, equities found their footing in May, rallying not because risks disappeared, but because they were repriced. The S&P 500 climbed +6.3%, its strongest monthly performance since late 2023, underpinned by a synchronized shift in earnings sentiment, easing geopolitical headwinds, and a reacceleration in soft macro data. What was initially a tactical short-covering rally evolved into a more fundamental recovery as the month progressed. At the heart of the rebound was a recalibration of trade expectations. The Trump administration’s decision to roll back tariffs on Chinese goods from 145% to 30%, and delay the imposition of sweeping EU levies soothed fears of an imminent stagflationary spiral.
The US tech sector reclaimed its leadership, buoyed by strong Q1 results. Nearly 77% of S&P 500 companies beat earnings estimates, with overall EPS growth at +12.4% YoY (more than double initial expectations). The “Magnificent 7” posted their strongest collective earnings surprise since Q3 2023, validating their status as both growth proxies and defensive balance sheet plays.
Europe posted solid returns as well with the STOXX Europe 600 up +4.9%. Importantly, flows into European equities resumed, marking a potential inflection point in cross-border positioning, as relative valuations have attracted domestic investors. Thematic allocations were also in focus: European defense stocks soared +18% on renewed geopolitical urgency, while semiconductor plays gained +14%, tracking positive U.S. capex signals and strong earnings from global hyperscalers.
Emerging market equities posted mixed but directionally positive returns. Taiwan and Korea led the pack with +12.5% and +7.8% gains, respectively, driven by AI-linked tech exports and FX tailwinds from a weakening dollar. China’s performance was more subdued, as international investor’s skepticism around governance and geopolitics capped the upside. India, by contrast, saw muted gains as earnings disappointed relative to lofty valuations.
Importantly, May marked a turning point in equity leadership dynamics. The rally was not just narrow or driven by mega-cap tech. It broadened across styles, sectors, and geographies. Yet, this broadening was not indiscriminate. Investors gravitated toward companies with pricing power, earnings visibility, and clean balance sheets. This suggests that while the risk-on regime may persist tactically, the market remains highly selective and rewards fundamentals over narrative.
Fixed Income
May was a sobering month for sovereign bond markets, as yields surged not on the back of improving growth, but due to rising fiscal alarm. The U.S. 10-year Treasury yield climbed 40 basis points to 4.4%, briefly touching levels not seen since February, while the 30-year breached 5.15%. The trigger was twofold: a Moody’s downgrade of U.S. sovereign credit and weak demand at long-end auctions, which revived concerns over the long-term sustainability of U.S. deficits. These pressures lifted the term premium to its highest level since 2014, underscoring that the market is increasingly demanding compensation for fiscal risk rather than inflation alone.
This yield repricing occurred despite easing trade tensions and stable core inflation, highlighting a shift in what drives bond markets. The correlation between equity gains and rising yields, a relationship that held through most of May, was interpreted by some as growth-positive. However, the move in rates was largely a reflection of balance sheet deterioration and supply concerns, not accelerating demand.
In Europe, the fixed income picture was more contained. The ECB remains on a cutting path, with two additional rate cuts expected by July. Bund yields drifted higher but remained anchored by soft forward-looking data and modest inflation pressure. Peripheral sovereigns, such as Spain and Italy, outperformed core markets, aided by improved fiscal optics and reduced net issuance projections.
Credit markets diverged from sovereign stress. Driven by renewed risk appetite and strong technical, U.S. and European high yield spreads compressed meaningfully by roughly 130bps. The rally in credit was supported by resilient corporate earnings, low default expectations, and broad rotation into risk assets following April’s dislocations.
Commodities and Currencies
After dominating headlines in early 2025, commodities took a breather in May as investor appetite shifted from hedging to risk-taking. The Bloomberg Commodity Index fell -0.6% on the month, dragged lower by precious metals and soft commodities. Gold declined -0.8% as demand for defensive positioning waned amid reduced immediate trade threats. ETF flows into gold slowed, while central bank purchases remained firm but no longer the dominant market catalyst. The modest correction highlights gold’s dual sensitivity to real rates and market volatility, which both faded in May.
In currency markets, the US Dollar continued to weaken, down -3.16% on the month. The move reflected increased concerns over the long-term sustainability of U.S. debt and the greenback’s diminished safe-haven appeal.
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