June 2025 Market Commentary

The stock market's terrific performance in May runs contrary to an old Wall Street adage. Trade tension relief and solid corporate earnings pushed equity markets higher last month.  Consumer sentiment improved but may suffer if inflation ticks higher in the coming months. Investors should expect moderating economic and earnings growth in the succeeding quarters.

In May, the S&P 500 Index and the Nasdaq Composite Index marked their best month in two years while non-U.S. markets climbed comfortably. Information Technology, Consumer Discretionary, and Communication Services were the best performing sectors, gaining at least 8% in May. The Utilities and Energy sectors posted negative returns last month. The U.S. Aggregate Bond Index generated its first negative monthly return of the year.

Sell in May and go away, come back on St. Leger's Day.

A shortened version of this phrase is a well-known adage in the financial world, suggesting that stock market returns tend to be weaker from May through October compared to the rest of the year. While the exact origin of the phrase is unclear, it is believed to have roots in British history, dating back to the 18^th century when British citizens, banks and investors vacationed during the summer months to escape the scorching heat. They arrived back in November after enjoying vacation and the St. Leger's Stakes horse event.

The Stock Trader's Almanac played a significant role in popularizing the "Sell in May and go away" trading strategy. The Almanac highlighted a historical pattern showing that investing in the Dow Jones Industrial Average (the Dow) from November to April and switching to fixed income investments from May to October could yield more reliable returns with reduced risk, at least since 1950.[i] The graphic below shows the performance of a $10,000 investment in the strategy versus the opposite strategy (invest May through October) and a "buy and hold" strategy.

While the Stock Trader's Almanac notably contributed to the visibility and popularity of the trading tactic, the strategy's effectiveness has been the subject of ongoing debate. For instance, when analyzing the S&P 500 Index rather than the Dow, certain historical periods -particularly during the 1930s and 1940s -revealed strong market performance in the summer months. These exceptions suggest that the adage may not hold universally across all indices or timeframes, highlighting the importance of context and broader market conditions when evaluating seasonal investment strategies.

The Market's Upward Surge Showed No Signs of Slowing in May

The S&P 500 Index rose 6% in May, its best May since 1990, after falling for three consecutive months. With May's gains, the index not only turned positive for the year but also recouped close to 20% from its early April decline. With markets showing strong momentum, some investors may question whether traditional stock market seasonality still holds. Notably, the ‘sell in May' strategy has only proven effective once in the past six years. S&P 500 Index investors who adopted a Buy & Hold approach would have seen their investments more than double over the six-year period.

De-escalating Trade Tensions

Eased concerns over tariffs likely played a key role in driving the sharp rebound in global equity markets during May. As was the case in April, U.S. trade policy saw several significant shifts in May, particularly in relation to China and the United Kingdom. The most notable development was a 90-day de-escalation between the U.S. and China, effective May 14, which temporarily reduced heightened tariffs imposed earlier in the year. Both countries agreed to lower tariffs by 115% from their recent peaks while maintaining a 10% baseline tariff during the suspension period.

Additionally, the U.S. adjusted its de minimis exemption policy for Chinese imports, reducing tariffs on low-value shipments while maintaining the elimination of the $800 duty-free threshold. Also, the Department of Commerce launched a new Section 232 process for steel and aluminum, expanding tariffs (25%) to include certain auto parts Starting May 3.

The U.S. similarly reached a separate agreement with the United Kingdom on May 8 to lower tariffs on British steel, aluminum, and automobiles, signaling a broader effort to stabilize trade relationships with key allies. The reciprocal tariff rate of 10%, as originally announced on Liberation Day, will remain. According to the press release from the U.S. Department of Commerce, the "deal removes longstanding U.K. market barriers creating a $5 billion opportunity of new exports for U.S. farmers, ranchers, and producers. These exports include ethanol, beef, fruits, vegetables, animal feed, tobacco, shellfish, chemicals, textiles, and more."[ii]

Clearly, a more stable trade environment after the initial uncertainty related to tariffs contributed to the positive shift in market sentiment. Strong earnings also helped drive the market's huge May gains. 

Earnings Notes and Notables

As of this writing, 98% of S&P 500 companies have released first quarter earnings, and the results point to a broadly positive quarter. Earnings were up 13.3% year-over-year, while revenues increased 4.9%. The so-called Magnificent Seven stocks (Alphabet, Amazon, Apple, Meta, Microsoft, NVIDIA, and Tesla) led the way reporting 27.7% earnings growth while the other 493 companies in the index grew earnings by 9.4%.[iii]

First quarter earnings growth was broad-based, with eight of the 11 sectors delivering positive year-over-year growth. The Energy sector reported the largest earnings decline at -12.7%, in part because of lower oil prices.

The double-digit earnings growth rate will likely not carryforward according to Wall Street analysts. They are projecting earnings growth of 5.0% in the second quarter, 7.2% in the third quarter, and 6.2% in the fourth quarter. For the full-year 2025, the projected earnings growth rate is 9.1%. The projections reflect a cautiously optimistic tone, despite a turbulent start to the year. The optimism is fueled by expectations of steady profit margins, AI-driven productivity gains, and a broadening of earnings contributions beyond the Magnificent 7 stocks. However, lingering concerns over trade policy and inflationary pressures stemming from tariffs remain.

Consumer Confidence Rebounds as Inflation Moderates

The Consumer Confidence Index saw a notable rebound in May coming in 10 points higher than analysts' estimates and 12 points higher than the prior month. The snapback comes after five consecutive monthly declines. The index gained momentum after the mid-month announcement to pause some tariffs on Chinese goods. The bounce back was seen across all age groups, income groups, and political affiliations. The survey showed that plans for major purchases such as homes, cars, and appliances were up compared to April's survey, and dining out remained the number one spending intention.

Inflation, as measured by the Consumer Price Index (CPI), continued to moderate through April with the CPI coming in at 2.3% and Core CPI coming in at 2.8%. The year started with recession concerns partly fueled by an uptick of inflation in January, but since then CPI has gradually decreased. With some of the major retailers, including Walmart, announcing price increases, a reversal of the downward trend may be in the future.

Seeking Clarity

Quarterly company earnings calls can offer investors valuable insights that go beyond the numbers in earnings reports. Management commentary tends to be more nuanced than standard written press releases. Tone, confidence, or hesitation can reveal underlying sentiment that might not be obvious in the numbers. Investors can hear about broader industry trends, customer behavior, and competitive dynamics. They can also hear analysts ask tough, unscripted questions that can uncover risks, opportunities, or strategic shifts not mentioned in prepared remarks.

A review of first quarter conference call transcripts revealed a few interesting metrics. Unsurprisingly, 91% of reporting companies cited "tariffs" on calls. Nearly 400 companies cited "uncertainty", versus the 5-year and 10-year averages of 220 and 180 companies, respectively. "Recession" was mentioned 120 times, about double the long-term average rate.  Most companies are concerned about the shift in trade policy and the uncertainty that comes with the change. But not every company is impacted in the same way. Walmart, the largest retail in the world by revenue, said that they can't absorb all the pressures from tariffs because of narrow retail margins. On the other hand, Home Depot, one of the largest home improvement retailers in the world, said that they don't expect broad-based price increases due to tariffs. They see an opportunity to take market share and negotiate with suppliers. The information gleaned from conference calls can meaningfully shape investment perspectives. Savvy investors know that these calls often reveal critical insights that can signal opportunities or red flags long before they appear in official reports.

Looking Ahead

The first five months of 2025 have been a rollercoaster ride for investors. Confronted with policy shifts, inflation fears, recession anxieties, and political unrest, the S&P 500 Index remained remarkably resilient, ending the month flat for the year. With economic and corporate earnings growth expected to slow in the coming quarters - and stock market valuations already above average - near-term market gains may be difficult to achieve. Inflation is projected to rise slightly due to new tariffs, while job growth is likely to stagnate. The futures market indicates that the data-dependent Federal Reserve is unlikely to cut interest rates before September, potentially dampening business investment. Although trade policy uncertainty persists, the range of policy outcomes has narrowed in recent weeks, providing investors with greater clarity and easing some market anxiety. Nevertheless, risk remains and should be prudently managed. We contend that risk can be effectively managed by focusing on long-term fundamentals and maintaining well-diversified portfolios. This disciplined approach can not only cushion against short-term volatility spikes but also positions investors to capitalize on enduring market trends.

We appreciate your confidence and support and encourage you to reach out to an Old Point team member with any questions.