Market Update for June 2025: Surprising Rally & Potential Risks Ahead
- jbrowning08
- Jun 4
- 6 min read
June 4, 2025
John Browning, MBA and CSA® | CEO, Principal
If you’re a Gen-Xer like me, you probably have put more than a few quarters in pinball machines in your time. Something about that was just a lot of fun. Now, imagine yourself inside that machine, and that is what the markets have felt like so far this spring, and as we head into summer, it may not get much better.
Financial markets rebounded in May, and the S&P 500 recovered its year-to-date losses. This positive month occurred against possible new trade agreements, mixed economic signals, and ongoing concerns about U.S. fiscal health. While many reports continued to show that the economy is strong, consumers remained pessimistic about the future, and the bond market did as well, with Treasury bond yields fluctuating throughout the month due to concerns around deficit spending. For long-term investors, May serves as a reminder that markets can adapt to changing conditions, even when there is significant uncertainty around economic and fiscal policy. There is also a cautionary tale here: extreme volatility can result from even just a few words from specific political figures, even if actual actions are not involved.
The Bottom Line at the Top:
May was an eventful and positive month for most investors. However, it is best to be vigilant and understand the timing of how economic events flow versus how headlines do. Staying vigilant with your strategy and staying consistent is nearly always the key to long-term wealth management success. Read to the end to pick up on some things we see that the larger market may not be accounting for in full.
Key Market and Economic Drivers
· The S&P 500 gained 6.2% in May, its best month since 2023, the Dow Jones Industrial Average was up 3.9%, and the Nasdaq rose 9.6%. Year-to-date, the S&P 500 is up 0.5%, the Dow is down 0.6%, and the Nasdaq is down 1.0%.
· The Bloomberg U.S. Aggregate Bond index declined 0.7% in May but is up 2.4% year-to-date. The 10-year Treasury yield ended the month at 4.4%.
· International stocks also performed well with the MSCI EAFE index of developed markets and the MSCI EM index of emerging markets both climbing 4.0%.
· The U.S. dollar index fell further to end the month at 99.3, near a three-year low.
· Bitcoin hit a new record high of $111,092 before ending the month at $104,834.
· Gold also hit a new record high of $3,422 before closing the month at $3,288, a 24% year-to-date gain.
· The Consumer Price Index report released in May showed that consumer prices rose 2.3% in April from a year earlier, the lowest 12-month increase since February 2021.
· The economy added 177,000 new jobs in April while the unemployment rate remained low at 4.2%.
While we remain concerned that the cuts proposed by DOGE for federal employees may cause a follow-on unemployment situation, the courts have reversed many of these actions. Additionally, as migrants leave the country, some additional openings may open up, so the current employment situation seems unpredictable.
Markets continued to recover despite new concerns
May's market rebound underscores the importance of consistently sticking with a tried and true investment process during market volatility. April challenged the fortitude of many investors as they were tempted to abandon their consistent, disciplined process. Markets demonstrated resilience by recovering most of their losses and returning to positive territory in May. We believe this will likely happen again in some way before the end of the year, and while the past is no guarantee of the future, this was a quick lesson in how remaining stalwart in the face of volatility tends to pay dividends.
Moody's downgraded the U.S. credit rating
In what was a day late and a dollar short move, Moody's downgrade of the U.S. credit rating from Aaa to Aa1 did not come as much of a surprise, other than that it had not happened sooner. This followed previous downgrades by Fitch in 2023 and Standard & Poor's in 2011, which all reflect concerns about the nation's growing debt and spending. The accompanying chart shows that the U.S. total debt grew to 122% of GDP in 2024. Net debt, which excludes debt the government owes itself, has risen to 97%.
The markets barely reacted. Treasury securities continued to be viewed as safe-haven assets. Many may not fully understand how large and worldwide the treasury market is. The world needs to buy them for various reasons, whether you are a sovereign wealth fund that requires at least some yield, or a bank that needs to manage risk per regulations. Needless to say the demand for Treasuries is likely to remain high.
Perhaps it was not a coincidence that this downgrade occurred as the House of Representatives passed a comprehensive tax and spending bill. The approved bill would extend the individual tax cuts from the Tax Cuts and Jobs Act. This includes a 37% top rate, child tax credits, higher State and Local Tax deduction caps, and exemptions for tips and overtime pay, among other measures. According to the Penn Wharton Budget Model, the legislation could increase deficits by $2.8 trillion over the next 10 years.2 The bill will now be debated and potentially modified in the Senate.
Trade negotiations show progress . . . kind of . . . maybe. . .
There was some progress on trade negotiations in May, taking many of the worst-case scenarios off the table. The administration reached tenuous and fragile agreements with the U.K. and China, while talks continue with other major trading partners. The U.S.-China trade agreement included 90 days of reduced but not eliminated U.S. tariffs on Chinese goods. However, this came after many Chinese workers moved back to rural villages after shutting their factories. Turning those factories back on requires much more than a proverbial "flip of the switch".
Nearly immediately, China and the U.S. accused each other of violating the trade truce, and higher tariffs on steel and aluminum were enacted. The legal battles over tariffs have begun in full force as the U.S. Court of International Trade struck down many of the newly enacted tariffs, ruling that they exceed presidential power under the International Economic Emergency Powers Act. While a federal appeals court paused the ruling, allowing tariffs to remain in place, this legal challenge adds another layer of uncertainty, sure to impact the markets going forward.
While the market overall is likely to react to each headline, prudent investors will move forward by weathering the words emanating from politicians and whatever lawyer or judge's opinion may be. Down here in our Florida offices during the summer, we often say, "If you don't like the weather, just wait a few minutes; it will change. " It would seem to be the case here as well.
Steady earnings growth supports the market:
First-quarter corporate earnings reports presented another reason for optimism. According to FactSet, S&P 500 companies delivered positive earnings per share surprises, and 64% reported positive revenue surprises, according to FactSet.3 This strong earnings performance highlighted the underlying health of corporate profitability at least for the first quarter of 2025, with technology companies showing resilience as they navigate trade uncertainty.
It is essential to understand the timing of when economic numbers are collected versus when political commentary and headlines appear. Currently, consumers who were pessimistic this year due to tariffs and inflation concerns may have been wrong, as recent sentiment indicators showed signs of improvement, aligning more closely with positive earnings and economic data. However, due to preordering ahead of tariffs and pre-buying from many consumers, supplies may soon begin to run out, and ultimately, tariffs are likely to have an inflationary effect.
Three Potentially Underappreciated Economic Considerations We See Potentially Impacting the Markets Longer Term:
1. Red Sea/Panama Canal/Suez Canal/Iran and Houthi Influence – continued reopening of trade routes long closed due to terrorist activity, lowering the cost, time, and fuel required for trade
2. U.S. manufacturing facilities are quietly already being built around the United States.
a. Reshoring will take time, but it is already in progress along with new automations and 3D printing technology.
3. The housing market is quietly decreasing in value around the country as rates stay high, housing materials move higher, and cheaper materials inventory move lower.
There is an interesting mix of good and not-so-good things mixed into these last bits of information. Keep your cash flow flowing and be ready for whatever may come over the next month or two!
1. Standard & Poor’s, Nasdaq, Bloomberg. All month-end figures are as of May 30, 2025.
3. FactSet Earnings Insight May 30, 2025
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