Resilience Amid Credit Downgrade and Trade Developments

May 2025 witnessed a notable market recovery as the S&P 500 regained its year-to-date losses despite significant headwinds. The month brought a mix of encouraging developments including trade agreement progress alongside persistent concerns about America's fiscal position. Economic indicators painted a complex picture of strength tempered by consumer uncertainty, while Treasury yields experienced volatility driven by federal spending concerns. For investors focused on the long term, May demonstrated markets' capacity to navigate uncertainty and adapt to evolving economic conditions.

Key Market and Economic Highlights¹

• The S&P 500 delivered a 6.2% gain in May, marking its strongest month since 2023, while the Dow Jones Industrial Average rose 3.9% and the Nasdaq surged 9.6%. Year-to-date performance shows the S&P 500 up 0.5%, the Dow down 0.6%, and the Nasdaq down 1.0%.
• The Bloomberg U.S. Aggregate Bond index fell 0.7% in May but maintains a 2.4% year-to-date gain. The 10-year Treasury yield concluded the month at 4.4%.
• Global markets participated in the rally with both the MSCI EAFE developed markets index and MSCI EM emerging markets index advancing 4.0%.
• The U.S. dollar index continued its decline, finishing at 99.3 near three-year lows.
• Bitcoin reached a new peak of $111,092 before settling at $104,834 month-end.
• Gold achieved a record high of $3,422, closing at $3,288 for a 24% year-to-date increase.
• Consumer Price Index data revealed 2.3% year-over-year price growth in April, the smallest increase since February 2021.
• Employment remained robust with 177,000 jobs added in April and unemployment steady at 4.2%.

Moody's historic decision to downgrade the U.S. credit rating from Aaa to Aa1 represented May's most significant surprise. This action joined earlier downgrades by Fitch in 2023 and Standard & Poor's in 2011, all citing concerns over escalating debt and spending levels. The data reveals U.S. total debt reached 122% of GDP in 2024, while net debt climbed to 97%.

Market reaction to the downgrade proved surprisingly muted, largely because investors had already factored in America's fiscal challenges. The restrained response also drew from lessons learned during the 2011 S&P downgrade, when Treasuries maintained their safe-haven status despite the rating cut.

Trade negotiations advanced meaningfully in May, removing several worst-case scenarios from consideration. The administration secured agreements with both the U.K. and China, including a 90-day period of reduced tariffs on Chinese goods, while continuing discussions with other key partners.

However, trade uncertainty persists as both nations have recently accused each other of violating agreements. Legal challenges also emerged when the U.S. Court of International Trade struck down numerous tariffs, though an appeals court has temporarily maintained their enforcement. These developments remind investors that trade policy evolves gradually, making measured responses more appropriate than reactions to daily headlines.

First quarter earnings provided additional reasons for optimism, with S&P 500 companies delivering positive earnings surprises and 64% reporting revenue beats according to FactSet.² This performance highlighted corporate resilience, particularly among technology companies navigating trade uncertainties.

Consumer sentiment, while previously pessimistic due to tariff and inflation concerns, showed improvement in May's University of Michigan survey. Inflation expectations decreased slightly while overall sentiment stabilized, suggesting alignment between economic fundamentals and public perception may be improving.

The Bottom Line

May’s market recovery demonstrated resilience despite significant challenges including the U.S. credit downgrade. Trade agreement progress helped offset fiscal concerns, reinforcing the importance of maintaining long-term perspective rather than reacting to short-term policy developments.

¹Standard & Poor's, Nasdaq, Bloomberg. All month end figures are as of May 30, 2025.

² FactSet Earnings Insight May 30, 2025

Indexes are unmanaged and it’s not possible to invest directly in an index. The S&P 500 Total Return Index is a market-capitalization-weighted index of the 500 largest U.S. publicly traded companies. The Nasdaq Composite Index is a market capitalization-weighted index that includes over 3,000 stocks listed on the Nasdaq Stock Market, primarily representing technology companies. The Bloomberg US Aggregate Bond Index, or the Agg, is a bond market index representing intermediate term investment grade bonds traded in the United States.  The Dow Jones Industrial Average is a stock market index of 30 prominent companies listed on stock exchanges in the United States. The 10-year Treasury yield represents the interest rate investors can expect to receive for holding a U.S. Treasury bond with a 10-year maturity.