The S&P 500 experienced its strongest monthly gain since 2023 and its best May in 35 years. This significant rebound marks a welcome recovery from earlier market challenges.
Market drivers: Tariffs and corporate earnings
The evolving landscape surrounding tariffs was a key factor for the market surge higher. The administration moderated its more substantial tariff proposals, and a U.S. Court of International Trade ruling challenged the legal basis for several existing tariffs. While an appeals court has temporarily delayed this ruling, and new tariff strategies are being considered, Wall Street appears to have responded with a collective sigh of relief, anticipating a less severe impact from trade levies going forward.
Beyond tariffs, strong corporate earnings provided a solid foundation for market gains. On average, companies reported impressive year-over-year earnings growth, with a majority exceeding expectations. Furthermore, businesses expanded their profit margins, defying earlier concerns that tariffs and potential consumer weakness would exert pressure. Notably, the largest technology companies have been significant contributors to this earnings strength, which explains why the Nasdaq index has outpaced its counterparts.
Inflation and economic indicators
Concerns about tariff-induced inflation have, fortunately, not materialized. The Personal Consumption Expenditures (PCE) Price Index, the Federal Reserve’s preferred inflation metric, showed a slight decline in April, while consumer confidence has been on the rise. These indicators suggest a stable economic environment, supporting the market’s upward trajectory.
Outlook: Breaking the range
Despite the recent gains, the S&P 500 is trading within a defined range, just below 6000. To break out and potentially test its previous high of 6144, we look for signs of lower inflation data, a decrease in 10-year bond yields, and a reduction in policy uncertainty from Washington. This may not happen, so we expect a trading range environment in the near term. We view any pullback from here as a potential buying opportunity.
Tariffs remain a critical area to monitor
Market experts anticipate average tariff levels to settle around 10%, roughly half of what was initially proposed. While this level would still undoubtedly hurt company margins and consumer prices, it is less likely to trigger a broad economic downturn or rampant inflation. A scenario where tariffs settle higher, between 13% and 15%, could present a more challenging environment for the stock market, at least in the short term.
Ultimately, a significant and lasting breakout for the S&P 500 will likely require a sustained increase in earnings estimates, a process that may take time to develop.
We continue to monitor these key indicators closely. Please do not hesitate to reach out to your Signet advisor if you wish to discuss your portfolio or these market developments further.
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