Market rallies, tariff negotiations, are we on the cusp of a full recovery? — Market Insights (May 2025)

Strong market bounce in stocks

After a volatile April which saw global equity markets drop more than 10% post-liberation day on 2 Apr only to recover back its losses by the end of the month, May saw a strong stock market rally, particularly in the S&P 500 which rose 6.3% amid market optimism on reconciliation of the tariff wars, expectations for fiscal stimulus, and solid 1Q earnings. This was the strongest May for the S&P 500 since 1990, and the US outperformed emerging markets for the first time since January this year. The performance was driven by a strong rebound in the Nasdaq Index, which rose 9.0% for the month, with the Magnificent 7 stocks recovering by 12.4%.

Other asset classes, such as global bonds (-0.3%), commodities (-0.9%) and currency fluctuations, took a back seat in May, with the USD only down around -0.1% for the month. Bitcoin (+10.6%) and high yield (+1.6%) were the only noticeable movers other than equities, indicating an overall “risk-on” mode in markets.

The headlines were still dominated by tariffs, with continued noise around tariff negotiations between the US and China. While equities saw a strong rally, bonds had a tougher time as long duration bonds demand higher term premiums.

Longer duration government bonds saw a sell-off

Sticky inflation – something that Japan has not experienced for a long time – has led to softer demand for long duration bonds. The 30-year Japanese Government Bonds (JGB) hit a three-handle in May, the highest level in almost 25 years. As interest rates rise in Japan, the risk of the so-called “carry trade” – borrowing from Japan to buy assets in other places – unwinding has heightened.  

Even without the sell-off in long-dated JGB, US treasury bonds continued to see the yield curve steepening as investors demanded more term premiums amid the US credit rating downgrade by S&P, Trump’s tax bill and general nervousness to hold USD assets for the long run. Yields on 30-year treasury bond rose 25 bps in May to end the month at 4.93%, while 10-year yields rose 24 bps to 4.40%. This is in contrast to the US Treasury 3-month bill, which rose only 6 bps to 4.30%.

Even without the sell-off in long-dated JGBs, US Treasury yields continued to steepen as investors demanded higher term premiums. This was driven by a confluence of events during the month. 

The US lost its last top credit rating with a downgrade from Moody’s, which followed earlier downgrades by S&P in 2011 and Fitch in 2023. Concerns around a staggering US government debt continued to loom. 

Moody’s statement said US government debt and interest payment ratios have risen to levels significantly higher than similarly rated sovereigns. The statement also notes: “Even though US Treasury assets remain in demand, debt affordability has deteriorated due to higher yields since 2021… While we recognise the US’ significant economic and financial strengths, we believe these no longer fully counterbalance the decline in fiscal metrics.”

Adding to the uncertainty includes Trump’s tax bill and broader concerns about long-term exposure to USD assets. In May, the 30-year Treasury bond yield rose by 25 basis points to end the month at 4.93%, while the 10-year yield increased by 24 basis points to 4.40%. In contrast, the US Treasury 3-month bill saw a more modest rise of 6 basis points, closing at 4.30%.

What’s next?

Coming off of a strong May and with the momentum continuing in early June, the S&P 500 is only a stone's throw away from its all-time high in February this year. The recent episode has shown yet again the resilience of financial markets and why it is important to stay invested, but also the critical need for diversification. 

Despite the strong performance of US stocks in May, on a year-to-date basis as of 6 June 2025, emerging market stocks have outperformed US stocks and have also done it with positive returns every month. European stocks have also performed well YTD as of 6 June 2025. As for bonds, while longer dated bonds struggled in May, the overall bond index (global agg index) is up 1.7% YTD as of 6 June 2025 and continues to offer healthy yields.

Ultimately, it is extremely difficult to forecast the markets. Consider your investment objectives and risk tolerance before deciding to allocate a significant sum of money to your next investment.

Global equity

Equities were positive across the board in May, with US tech stocks leading the recovery. The mid-month U-turn of equities in April, with President Trump’s 90-day pause on reciprocal tariffs, as well as rising optimism on fiscal policies and better-than-expected earnings, saw strong performance from equities around the world.  

Korean stocks were among the best performing amid expectations for fiscal stimulus and corporate governance reforms with the presidential elections. The performance of the KOSPI benchmark helped drive performance for Asia ex-Japan as one of the best-performing regions after the US.

Chinese stocks had a more mixed month (albeit ending the month up a healthy +2%) as the tariff and geopolitical situation between the US and China oscillated between positive (higher than expected tariff rollbacks earlier in the month) and negative (the US announced plans to revoke visas for some Chinese students).

Global fixed income

In April, bond investors were taken aback when the US 10-year bond yield surged to nearly 4.5% despite an equity and USD sell-off. This was driven by a loss of confidence in US assets amid concerns that the Liberation Day tariffs might undermine the US's safe haven status, posing risks of capital outflows. 

With the 90-day pause in tariffs, however, both equities and bonds rallied mid-month, with 10-year yields coming back down to around 4.2%.

In May, however, the 10 year yield moved higher yet again as expectations of fiscal stimulus and the ripple effect from the weakness in long-dated JGBs caused further concerns on long-dated US Treasuries.

High yield performed well in May as spreads have tightened to levels that are close to levels seen at the end of 2024 (after 3 consecutive months of spread widening). From the height of the post-Liberation Day scare, US high yield spreads have tightened by around 142 bps at the end of May.

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