May delivered one of the strongest monthly performances since late 2023, as markets rebounded sharply from early tariff-driven turbulence. But with inflation risks, valuation pressures, and geopolitical uncertainties still looming, is the recovery sustainable—or just temporary relief?
In this latest Monthly Market Update, Scott Cheng, MBA, CFA, Portfolio Manager at AimStar Capital Group Inc., offers a timely and in-depth breakdown of recent market dynamics and what to watch in the second half of 2025:
🔹 What drove the market’s powerful rebound in May?
🔹 How are inflation, Fed policy, and earnings expectations evolving?
🔹 What short- and medium-term strategies can investors consider amid elevated uncertainty?
Market Review
Market Reaction to Tariff Announcements:
Following President Trump’s “Liberation Day” tariff announcement on April 2, financial markets experienced sharp volatility. The immediate reaction was negative: equity markets sold off, Treasury yields climbed, and the U.S. dollar weakened. Facing mounting political and economic pressure, the administration announced a 90-day suspension of reciprocal tariffs on April 9 to create room for negotiations. This shift in tone was followed by the announcement of a trade agreement with the UK on May 9, and developments in trade talks with China on May 12, which included again a 90-day suspension of tariffs. These developments triggered a strong market rebound, with major indices not only recovering losses from early April but also reclaiming ground lost in Q1 (largely driven by economic uncertainty and the derating of technology stocks). Following a few months of negative performance, May delivered one of the strongest monthly performances since November 2023. That said, volatility was elevated throughout the period, with several trading days marked by price swings exceeding 5% and the VIX briefly spiking to 50 in April.
U.S. Markets:
In May, U.S. equities posted strong gains across the board. The S&P 500 rose 6.2%, the NASDAQ surged 9.6%, the Dow Jones advanced 3.9%, and the Russell 2000 (small caps) climbed 5.2%. From a sector perspective, four of the eleven S&P sectors outperformed the broader index: Technology, Communication Services, Consumer Discretionary, and Industrials. On the other hand, Healthcare (pressured by concerns over drug pricing), Real Estate, Consumer Staples, Energy, and Materials lagged. This marked a notable shift from prior months, when defensive sectors had outperformed amid heightened macroeconomic uncertainty.
Canadian Market:
The TSX delivered a strong performance in May, gaining 5.4%, supported by strength in Industrials, Consumer Discretionary, Financials, and Technology. On a year-to-date basis, the TSX has meaningfully outperformed the S&P 500.
International Markets:
The MSCI EAFE Index (Europe, Australasia, and the Far East) rose 5.1% in May in USD terms (4.1% in local currency terms), while Emerging Markets gained 4.0% in USD (2.9% in local currency). Within EM, China, South Korea, and Taiwan led the gains (tariff relief) while Brazil and Mexico lagged. Year-to-date, both EAFE and Emerging Markets have outperformed the S&P 500, supported by attractive valuations after years of relative underperformance and investors seeking diversification outside the U.S.
Commodities:
Gold dipped 0.5% in May, pausing after strong gains in previous months (25.7% through April and surpassed $3,400 for the first time in April). The rally was driven by a weaker U.S. dollar, inflation concerns, and heightened geopolitical tensions. Oil prices rebounded 4.4% in May, recovering some ground after a sharp 19% decline from January to April amid economic slowdown fears and increased OPEC output.
Bonds:
The 10-year U.S. Treasury yield rose by 24 basis points in May. It initially spiked above 4.5% in the wake of the tariff announcement but later eased as the administration moderated its stance. The Bloomberg U.S. Aggregate Bond Index declined 1% for the month.
Currencies:
The U.S. dollar stabilized in May after a sharp decline of nearly 9% through April, including a 4.6% drop in April alone, one of its steepest monthly losses since 2009. The trend is attributed to heightened trade uncertainty, rising concerns over the U.S. fiscal deficit, and a shift in investor sentiment away from U.S. assets. The Canadian dollar was unchanged against the U.S. dollar in May but up 4% year-to-date.
Summary:
The market initially reacted negatively to the tariff announcement but reversed course as the administration adopted a more conciliatory stance.
Macro and Micro Outlook
We continue to monitor the key issues that may drive the market in H2, 2025. On the macro side, these include: 1) inflation (tariff impact), 2) economy (slow-down or recession?), 3) FED policy (timing and extent of rate cuts), and 4) geopolitical issues (Russia/Ukraine war, Middle East conflicts, U.S.-China relations, US politics, etc.). On the micro side, these include: 1) corporate earnings, and 2) valuation.
- Macro Conditions:
- Inflation: Inflation has been on a downward trend so far this year, with April’s CPI at 2.3% and PCE at 2.1%, both below expectations. However, concerns persist regarding the potential inflationary impact of tariffs. Estimates suggest a 10% universal tariff could add 0.5–0.7% to inflation, though the actual effect depends on how much of the tariff would be absorbed by consumers and price elasticity. In addition to product inflation, housing (~35% of PCE inflation) and labor costs (~30-40% of PCE inflation) are equally important (if those two are well contained, we don’t expect a hyperinflation scenario). Our base-case view is that inflation could trend higher, but not likely to get out of control.
- Economy: we have seen mixed and somewhat distorted data so far (e.g., Q1 GDP -0.2%, largely driven by the surge in imports). Headline data will continue to be volatile and distorted in the next few months as companies and consumers change their behavior to adapt to changing tariff policies. Risks include weak consumer sentiment and delayed business investments due to policy uncertainties. However, potential tax cuts and FED policy (if the economy weakens meaningfully) provide downside support for the economy. Therefore, our base-case view for the US economy is a slowdown without a deep recession. Key indicators to watch include consumer confidence, job market conditions, business investments, etc.
- Federal Reserve Policy: Fed Chair Powell has indicated a cautious, wait-and-see approach considering tariff-related uncertainties. Market expectations for rate cuts have diminished; the CME FedWatch Tool now sees a 43% probability of three or more cuts in 2025, down from 70% a month prior, aligning with the Fed’s own projection of approximately two cuts this year. First rate cut is expected to be in September or October.
- Overall Macro Outlook: Macro uncertainties persist, but the U.S. economy is likely to navigate through with higher inflation and moderated GDP growth, avoiding a full-blown recession. Fiscal measures, such as tax cuts, and potential monetary easing could offer support.
Micro Conditions
- Corporate Earnings: Q1 earnings have been resilient, with S&P 500 companies reporting over 13% growth and nearly 80% surpassing expectations. However, many firms have cited “tariffs,” “uncertainties,” and “recession” in their communications, and some have refrained from providing full-year guidance due to macroeconomic uncertainties. Wall Street analysts have revised earnings estimates downward, projecting 8.8% EPS growth for 2025 (down from 12.5% at the beginning of the year) and 13.4% for 2026. As economic growth decelerates and inflation remains a concern, we believe those estimates could be subject to potential further downward revisions.
- Valuation: Despite the S&P 500 returning to its year-beginning level, downward adjustments in earnings estimates have led to valuation expansion.The current forward P/E ratio stands at 21.4x, exceeding the 5-year average of 19.9x and the 10-year average of 18.4x. Coupled with still heightened bond yield (10-year Treasury yield around 4.4%), valuations appear somewhat stretched.
- Overall Micro Outlook: Microeconomic conditions are less favorable, with potential earnings risks and relatively high valuations.
Investment strategy and recommendations
Short-Term Outlook: Markets are expected to remain sensitive to news and sentiment, with heightened volatility in the near term. While tariff risks have diminished, they have not been eliminated, pending ongoing negotiations and legal challenges. The market’s full recovery from the tariff-induced downturn and Q1 losses suggests certain degree of complacency. Given our views on inflation, economic growth, policy risks, and earnings, we adopt a relative cautious near-term stance, anticipating potential volatility and pullbacks.
Medium-Term Outlook: The administration’s responsiveness to market reactions, as observed in April, indicates that dramatic drop-down (like those ones on April 3 and 4) may be less likely. With more clarity on tariffs through trade negotiations, prospective tax cuts, deregulation, and potential rate reductions in H2, we anticipate market stabilization and recovery towards latter half of the year.
Investment Recommendation: given our view of short-term volatility and potential stabilization in H2, we recommend taking a barbell approach in the near term and adjusting our strategy as the year goes on:
- Maintain a defensive tilt with positions in defensive sectors (such as Utilities, Consumer Staples, etc.).
- Invest in selective high-quality growth (Tech) companies.
- Pay attention to sectors poised to benefit from policy shifts (for example, Financials due to deregulation, certain Industrials names that can benefit from manufacturing reshoring or increased defense spending, etc.).
- Allocate to Gold (hedges) and alternative investments (diversification).
- Consider selective investments in international markets.
- Remain vigilant and adaptable, prepared to be aggressive if significant market pullbacks happen.
Stay Invested and Diversified:
Recent market dynamics continue to demonstrate the importance of staying invested. If we sold at the peak of the market panic (e.g. days after the tariff announcement), we would miss the huge comeback.
Given the anticipated continued volatility stemming from ever-changing policy decisions, it’s crucial to adhere to fundamental investment principles and your long-term objectives.
Author by: Scott Cheng
Edited & Published by: Vikki Zhao
Published Date: June 6, 2025
Estimated Reading Time: 8 minutes
Disclaimer
The views and opinions expressed in this article are for informational purposes only and do not constitute investment, legal, tax, or accounting advice. They are not intended to provide, and should not be relied upon for, investment decisions. Readers are encouraged to seek independent professional advice before making any financial decisions.
Reproduction or redistribution of this material, in whole or in part, is strictly prohibited without prior written consent.
Legal and Regulatory Disclosure
Securities-related products and services are offered through AimStar Capital Group Inc., a member of the Canadian Investor Protection Fund (CIPF) and regulated by the Canadian Investment Regulatory Organization (CIRO).
Insurance products and services are provided through AimStar Insurance Inc., which is not a member of CIPF.
AimStar Capital Group Inc.’s financial and investment advisors are not tax advisors. Clients are strongly encouraged to consult with a qualified tax professional regarding any tax-related questions or strategies.
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