Resilient Recovery: A Strong May Despite Credit Downgrade
Financial markets rebounded in May, with the S&P 500 recapturing its year-to-date gains. This rally occurred amid an environment of complex signals, including evolving trade negotiations, inflation moderation, and renewed concerns about federal debt and interest rates. While the economy continues to show signs of strength, consumer sentiment remained subdued. Treasury yields fluctuated throughout the month, reflecting uncertainty about fiscal stability. For long-term investors, May served as a clear reminder that markets can adapt and advance even in the face of headline risk.
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Key Market and Economic Highlights
- The S&P 500 rose 6.2% in May, its strongest month since 2023. The Dow gained 3.9%, while the Nasdaq surged 9.6%.
- Year-to-date: S&P 500 is up 0.5%, Dow down 0.6%, Nasdaq down 1.0%.
- The Bloomberg U.S. Aggregate Bond Index declined 0.7% for the month but remains up 2.4% YTD.
- The 10-year Treasury yield ended May at 4.4%.
- Developed and emerging market equities (MSCI EAFE and MSCI EM) both rose 4.0%.
- The U.S. dollar index declined to 99.3, a near three-year low.
- Bitcoin hit a record $111,092 before ending the month at $104,834.
- Gold also reached an all-time high of $3,422 before settling at $3,288, reflecting a 24% gain YTD.
- The Consumer Price Index showed a 2.3% year-over-year increase in April — the lowest since February 2021.
- The U.S. added 177,000 jobs in April; unemployment held steady at 4.2%.
Markets Regain Ground Amid Fiscal Noise
May’s rebound reinforced the importance of a long-term perspective. After a turbulent April, equity markets recovered most losses and returned to positive territory. This illustrates how quickly sentiment can shift when fundamentals remain intact. While headlines around trade and fiscal issues persist, disciplined investors benefit from remaining grounded in their long-term strategy.
U.S. Credit Downgrade: Markets Stay Calm
Moody’s Downgrade and Market Response
One of the month’s most notable developments was Moody’s downgrade of the U.S. credit rating from Aaa to Aa1. This followed prior downgrades from Fitch (2023) and S&P (2011), all of which were rooted in concerns about the growing national debt.
Total U.S. debt reached 122% of GDP in 2024; net debt climbed to 97%. Yet markets remained largely unmoved, reflecting the market’s familiarity with America’s fiscal profile. The muted reaction echoes 2011, when Treasurys maintained their safe-haven status despite S&P’s downgrade.
Legislative Developments
Coinciding with the downgrade, the House passed a new tax and spending bill that extends several provisions from the Tax Cuts and Jobs Act. These include the 37% top marginal rate, increased child tax credits, SALT deduction caps, and exemptions for tips and overtime. According to the Penn Wharton Budget Model, the bill could increase deficits by $2.8 trillion over the next decade. The bill is now with the Senate for review.
While the fiscal outlook deserves scrutiny, the U.S. dollar remains the global reserve currency, and Treasury securities continue to attract demand.
Read here: Why effective tax planning strategies are a critical part of wealth management
Trade Policy Progress Provides Tailwind
Developments in Trade Agreements
Positive momentum emerged on the trade front. The U.S. reached agreements with both the U.K. and China, reducing tariffs temporarily and de-escalating some of the prior tension. Talks with the EU also progressed, prompting the White House to delay proposed tariff hikes.
Lingering Trade Tensions
That said, tensions remain. Both China and the U.S. have alleged violations of trade terms, and the administration is pursuing higher tariffs on key materials. Furthermore, a federal court challenge has added uncertainty by striking down newly enacted tariffs, citing limitations to presidential authority. While a federal appeals court temporarily paused this ruling, legal uncertainty will likely persist.
Trade policy typically evolves over longer cycles, and investors should not overreact to near-term headlines. May’s rally is a reminder that patient, diversified investors are well-positioned to weather global policy shifts and benefit from diversification.
Earnings Strength Supports Market Resilience
Q1 earnings were a bright spot. According to FactSet, 64% of S&P 500 companies beat revenue expectations, and earnings per share broadly exceeded estimates. Technology companies led the charge, demonstrating flexibility despite global pressures.
Although consumer sentiment remained cautious amid concerns about inflation and tariffs, recent surveys indicate a modest improvement. The University of Michigan’s May reading showed decreased inflation expectations and stabilizing sentiment. While one month doesn’t define a trend, it suggests that consumer confidence may be gradually aligning with the broader economic data.
Conclusion: Fundamentals Over Headlines
Despite fiscal uncertainty and global trade tensions, May reinforced the power of disciplined investing. Strong earnings, cooling inflation, and positive trade developments fueled a sharp market recovery. As always, we encourage clients to stay focused on their long-term objectives, rather than being swayed by short-term market volatility.
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