Market Commentary - June 2025

June 2025

May Market Recap: Tariff Relief Sparks Strong Global Gains

Global markets bounced back sharply in May as investors welcomed the continued momentum from April’s 90-day tariff pause between the U.S. and China. A notable de-escalation in trade tensions helped moderate recession fears and spurred a broad rally in equities worldwide. Technology stocks led the charge, while signs of economic resilience and strong corporate earnings provided additional support—even as uncertainty lingers on the horizon.

Tariff Pause Fuels Market Recovery

Markets rallied across the board in May, extending gains that began in April following the announcement of a temporary tariff truce on April 9. The ceasefire helped ease investor anxiety over rising trade tensions that had triggered one of the sharpest market corrections of the year. As recession risk indicators dropped from above 50% to below 50%, risk appetite returned, and asset prices moved higher.

Equities: Tech Leads, Breadth Expands

The Nasdaq led U.S. equity indices with a powerful 9.6% gain in May, fueled by tech sector strength and a positive earnings season. The S&P 500 rose 6.2%, turning slightly positive year-to-date (+0.5% YTD), while the Dow Jones Industrial Average added a solid 3.9%. By the end of May, global stocks had fully rebounded from the steep April 2 “Tariff Day” selloff—a remarkable turnaround—though markets still remain below their year-to-date highs for 2025.

Market breadth improved as small- and mid-cap stocks joined the rally:

• Russell 2000 (small-caps): +5.2%
• S&P 400 (mid-caps): +5.3%

These gains suggest growing investor confidence beyond the mega-cap names that have dominated performance in recent years.

Corporate Earnings: Strong Q1, Cautious Guidance

Corporate earnings remained a bright spot. S&P 500 companies posted Q1-2025 average earnings growth of 12.5% (FactSet). However, forward guidance painted a more cautious picture, as many companies cited ongoing tariff uncertainty and potential recession risks as reasons for tempered future expectations.

Economic Indicators: Mixed Signals Persist

The U.S. economy showed both strength and softness in May:

• Unemployment held steady at 4.2%, signaling a still-tight labor market.
• Inflation indicators (CPI and PCE) eased modestly, offering a reprieve from recent price pressures.
• Manufacturing activity weakened, while services remained resilient.
• Consumer confidence rebounded off April lows, though University of Michigan sentiment slipped, reflecting lingering caution.

International Markets: Dollar Decline Benefits U.S. Investors

International equities continued to outperform U.S. markets year-to-date, supported by easing trade stress and a weaker dollar:

• MSCI EAFE Index (developed markets): +4.0% in May, +15.0% YTD
• MSCI Emerging Markets Index: +4.0% in May, +7.6% YTD

A year-to-date decline of 8.4% in the U.S. dollar further enhanced returns for American investors holding foreign assets. However, a weaker dollar also raises the cost of imported goods, contributing to inflationary pressures—especially in an environment already strained by tariff-related price increases.

Fixed Income: Yields Rise on Deficit and Inflation Concerns

Bond markets came under pressure in May, amid budget deficit concerns, the Reconciliation Bill, and inflation risk surrounding tariff uncertainty:

• The 10-year U.S. Treasury yield rose to 4.41%, up 0.24 percentage points for the month.
• Key drivers included rising inflation expectations, budget deficit concerns tied to the Reconciliation Bill, and a Moody’s downgrade of U.S. sovereign debt by one notch.
• The Bloomberg Aggregate Bond Index declined 0.8% in May but remained up 2.5% YTD, having offered important downside protection during April’s volatility.

Federal Reserve: Holding the Line

The Fed kept interest rates steady at its May 6–7 meeting, citing persistent inflation uncertainty, the tariff situation, and ongoing recession risk. Market expectations for rate cuts receded again, now projecting two cuts by year-end, with the earliest likely to occur in September.

Key Takeaway: Staying the Course During Volatility Pays Off

The market’s sharp rebound from the April tariff-driven selloff serves as a powerful reminder that emotional decisions—such as fleeing the market during periods of high volatility—can lead to missed opportunities. Investors who maintained their discipline were rewarded in May.

June Update: Recovery Holds Amid Geopolitical and Trade Tensions

The global market rally that reignited in May gained further momentum through early June, driven by progress in trade negotiations and resilient economic data.

Trade Talks Fuel Optimism

Markets responded positively as U.S.–China trade negotiations resumed in London, with both sides making meaningful progress. While the emerging agreement includes tariffs that remain above pre-dispute levels, the current framework is far less punitive than feared during April’s steep market selloff. This has eased investor anxiety and contributed to a more constructive economic outlook.

Risk-On Sentiment Returns

As recession concerns diminished, risk assets rallied and market volatility continued to ease. Equities—particularly in technology and industrial sectors—extended gains, while bond yields edged slightly higher as investors rotated from defensive positions to growth-oriented assets.

Solid Economic Data

The U.S. labor market remained firm in June, with unemployment holding steady at 4.2% and a strong jobs report reinforcing confidence. Inflation also surprised to the downside, as both the Consumer Price Index (CPI) and Producer Price Index (PPI) for May came in better than expected, offering additional support to equity and bond markets alike.

Geopolitical Flashpoint: Israel–Iran Escalation

However, geopolitical tensions re-emerged late in the week as Israeli missile strikes triggered retaliatory drone attacks from Iran. Global markets reacted swiftly: U.S. equities dipped between 1% and 2% across the board on Friday, and the MSCI EAFE index dropped 1.1%. While not yet a prolonged shock, the conflict underscores the fragility of the global risk environment.

Market Performance Snapshot

• U.S. Equities: In June, the S&P 500, Nasdaq, and Russell 2000 have each gained between 1.1% and 1.7%. The Nasdaq returned to positive territory YTD, joining the S&P 500, while the Dow slipped back into negative territory after Friday’s geopolitical-driven decline.
• International Equities: The MSCI EAFE index reached new all-time highs with a 0.5% gain to start June, and emerging markets led with a 2.8% advance.
• Bonds: Bond prices edged higher on favorable inflation data, though the benchmark 10-Year Treasury yield held flat at 4.41%. The Bloomberg U.S. Aggregate Bond Index is up 0.2% MTD and 2.7% YTD, with a yield of 4.71%.

Fed on Hold

All eyes turn to the upcoming Federal Reserve FOMC meeting on June 17–18. No rate changes are expected amid mixed economic signals: persistent inflation expectations, receding recession risks, and ongoing tariff and geopolitical uncertainty. The market continues to anticipate two rate cuts later this year, with the first likely in September.

The Outlook: Resilience with Caution

The swift and robust recovery from April’s tariff-induced lows highlights the importance of discipline and diversification. Yet, elevated global trade tensions and renewed geopolitical risks mean volatility is likely to persist. We encourage investors to stay diversified, remain patient, and stay focused on long-term goals.

Call your Nelson Advisor today at 800-345-7593 to discuss any concerns and review your portfolio.

~Your Nelson Securities Team    

*Past Performance is No Guarantee for Future Results; This article is for informational purposes only and does not constitute investment advice.