June 2025
US Economy: Signs of slowing.
Inflation (core PCE) came in at a 2.5% annualized rate in April, inching closer to the Federal Reserve’s 2% target. Meanwhile, the breadth of U.S. growth has been narrowing with clear signs of weakness, including: an underlying linear trend of cooling in the labor market that continues to build; a relatively stagnant real estate market; state and local governments starting to cut spending; and defaults/delinquencies on consumer debt rising including on mortgages, home equity loans, credit card debt and student loans, for which the pandemic pause on repayments is now over.
US Stocks: Wild ride.
Thanks to a May rebound, the S&P 500 is up a smidgen so far in 2025 (+0.11%) despite the most volatile start to the year (first 100 days) in over 70 years, featuring a 23% average spread between the S&P 500’s lowest and highest closing prices. Most U.S. equity indices (except small stocks) rebounded strongly in May supported by strong corporate earnings, the new U.S.-UK trade deal, and the 90-day pause on extra U.S.-China tariffs. U.S. tech did well (+8.4%) as did industrials (+8.0%) and consumer discretionary (+7.8%). Healthcare (-2.9%) was the only sector to decline in May.
Foreign Stocks: Forging ahead.
May was another strong month for foreign stocks, although they lagged the U.S. for a change. Developed markets fared slightly better than the emerging markets, and in another contrast to U.S. markets, small stocks led the way outside the U.S. Even without a boost from a stronger euro in May, German stocks (+7.0%) benefited from strong corporate earnings and higher defense spending, while U.K. equities gained nearly 5% after the U.S.-U.K. trade deal. China (+2.8%) and Mexico (+3.1%) were both up modestly as they navigated trade tensions and tepid economic growth, respectively.
Fixed Income: USA no longer Aaa.
Moody’s downgraded its credit rating for the United States a notch (to Aa1), and the U.S. House of Representatives passed a budget that is predicted to increase the deficit, fueling concern about the U.S. fiscal outlook and a potential political battle over increases to the debt ceiling. Treasury bond yields rose even as the Federal Reserve left its key interest rate unchanged amid tariff uncertainty, with the markets now pricing in two Fed rate cuts in 2025. Municipal bonds, which we previously said seemed underpriced, outperformed Treasuries in May amid another strong month of inflows.
Real Assets: Widespread gains.
Stocks in the clean energy sector were up 7.8% globally in May, benefiting from ongoing demand for low-carbon solutions. Meanwhile, oil prices (+4.1%) benefited from less U.S. drilling activity and resilient global demand. Gold (+2.1%) continued to advance due to safe-haven seekers and global central banks’ adding more of it to their balance sheets. Infrastructure equities (+4.3%) are getting a boost from government projects at the local level and demand for data centers to power AI.
Alternatives: Mixed bag.
Amid the markets’ tariff-induced whiplash this spring, hedge funds mostly stayed the course to deliver positive returns in May. Absolute return strategies gained 0.7%, while the overall hedge fund market was up 1.1% and 4.0% over the past year. Private equity continued to face challenges, including a lack of distributions, which caused some big-name institutions to begin selling portions of their portfolios in the secondary market at steep discounts, favoring opportunistic buyers.
Source of data: Bloomberg
Equities Total Return
| MAY | YTD | 1 YR | |
|---|---|---|---|
| U.S. Large Cap | 6.3% | 1.1% | 13.5% |
| U.S. Small Cap | 5.3% | (6.9%) | 1.2% |
| U.S. Growth | 8.7% | (0.5%) | 17.0% |
| U.S. Value | 3.5% | 2.0% | 8.4% |
| Int’l Developed | 4.6% | 16.9% | 13.3% |
| Emerging Markets | 4.3% | 8.7% | 13.0% |
Fixed Income Total Return
| MAY | YTD | 1 YR | |
|---|---|---|---|
| Taxable | |||
| U.S. Agg. Bond | (0.7%) | 2.4% | 5.5% |
| TIPS | (0.6%) | 3.7% | 5.7% |
| U.S. High Yield | 1.7% | 2.6% | 9.3% |
| Int’l Developed | (0.6%) | (0.5%) | 1.8% |
| Emerging Markets | 0.2% | 2.7% | 8.4% |
| Tax-Exempt | |||
| Intermediate Munis | 0.7% | 1.1% | 4.2% |
| Munis Broad Mkt | (0.3%) | (1.4%) | 1.9% |
Non-Traditional Assets Total Return
| MAY | YTD | 1 YR | |
|---|---|---|---|
| Commodities | (0.6%) | 3.0% | 1.7% |
| REITs | 1.2% | 1.9% | 11.7% |
| Infrastructure | 4.4% | 13.2% | 21.6% |
| Hedge Funds | |||
| Absolute Return | 0.7% | 1.4% | 5.1% |
| Overall HF Market | 1.1% | 0.1% | 4.0% |
| Managed Futures | (1.7%) | (8.4%) | (14.4%) |
Economic Indicators
| MAY-25 | NOV-24 | MAY-24 | |
|---|---|---|---|
| Equity Volatility | 18.6 | 13.5 | 12.9 |
| Implied Inflation | 2.3% | 2.3% | 2.4% |
| Gold Spot $/OZ | $3289.3 | $2643.2 | $2327.3 |
| Oil ($/BBL) | $63.9 | $72.9 | $81.6 |
| U.S. Dollar Index | 122.1 | 129.5 | 122.5 |
Our Take
A strong May for the markets does not change the uncertainty and volatility theme we have been emphasizing. Some positive developments on trade did come to fruition (if you can call pauses positive!). As of early May, 76% of S&P 500 companies reported earnings per share above estimates, showcasing corporate resilience. But the lack of a clear and stable trade policy, as well as government budget deficits and bickering, is likely to continue manifesting as market volatility driven by a mix of good, bad and neutral news instead of fundamentals.
Data Divergence
So far in 2025, economic data has been strong on the surface, but there may be a disconnect between “hard” and “soft” indicators. Actual spending and retail sales (hard data) remain solid, although weakening. Consumer spending did rise in April, but below expectations and noticeably lower than March. Where those dollars are being spent shifted from clothing and cars to essentials like housing and healthcare, and people saved more (the savings rate rose from 4.3% to 4.9%).
Meanwhile, survey-based sentiment indicators (soft data) have continued to be weak. Therefore, there is some concern that the hard data is lagging reality, reflecting pre-tariff inventory stockpiling rather than ongoing economic strength. Actual reality is probably somewhere in the middle, not nearly as bad as sentiment indicators would suggest, yet not as robust as consumer spending and strong corporate earnings may indicate. We’ll have more information in the coming weeks as employment and sentiment data are released and trends either converge or the divergence continues.
Trade Timeline
Where do things stand on trade? In a couple of words — fluid (to be kind) and volatile (to be fair).
- On May 8, a seemingly high-level framework for a U.S.-U.K. trade agreement left in place a 10% tariff on nearly all goods from the U.K.
- In mid-May, the U.S. and China met in Geneva and tit-for-tat tariffs were paused, moving equities higher.
- On May 23, markets fell after the Trump administration threatened a 50% tariff on all EU imports, only to rebound as many investors bought the dip expecting the Trump administration to back down, which it did.
- On May 28 a federal court ruling invalidated most of the new U.S. tariffs (relying on Section 232) followed by a pause to allow the Administration’s appeal to play out.
- On May 30, U.S. tariffs on steel imports from most foreign countries were doubled to 50%.
Markets seem to have detected an on-off pattern in Trump trade negotiations – tariff announcements, followed by pauses, followed by threatening tweets, etc. We continue to believe the Administration is setting itself up to put more runs on the board (i.e. trade deals in principle). But the markets are only likely to move up on deals that are truly transformative, such as a potential trade pact with India, which currently does not exist.
Bond Market Perspective
Absent a major trade policy misstep, investors may be paying more attention to the broader U.S. economy and U.S. bond markets. In our Q1 2025 Commentary, we theorized that shifts in the 10-year U.S. Treasury yield curve would likely be the most important determinant of how the equity markets perform this year.
For context, the 10-year Treasury bond was recently yielding around 4.5%, which is more than a full percentage point below the long-term average of 5.6% going back to the 1950s. Let’s remove the early 1980s — when yields were consistently above 10%; the average then drops to 5.1%, which is still meaningfully higher than current levels.
The recent swings in U.S. interest rates may feel unsettling, but they are not unusual in a historical context. Since the White House’s tariff announcement on April 2, the 10-year yield has moved around quite a bit. But similar episodes of volatility have occurred regularly across every decade, including the 1970s, 1980s and even more recent years.
It is easy to get caught up in the day-to-day headlines, but doing so can lead to a narrow view of what’s happening. Stepping back and looking through a longer lens helps remind us that both today’s rate levels and market fluctuations are well within the range of past experience. Maintaining that historical perspective is essential to staying grounded and making sound investment decisions.
Thoughts on Portfolios
While each LNW client situation is unique, broadly speaking our recent positioning has reflected our consistent and disciplined approach to portfolio management. Where appropriate, we have trimmed equity exposures that have reached or exceeded long-term strategic targets—not as a market call, but as part of a deliberate rebalancing process. When equities perform strongly, maintaining discipline in rebalancing is a basic and fundamentally sound way to manage risk.
Also, where appropriate, topping up bond allocations when they may have drifted below target has been a consistent theme. Fixed income should offer a potential ballast if growth slows and can support portfolio stability. Allocations to real assets have also remained a focus, as these exposures can enhance diversification while also helping to mitigate the risk of sustained inflation surprises.
We have continued to add to diversifiers such as hedge funds and private credit. Performance there is not strongly correlated with traditional stock and bond markets and can therefore add value during volatile periods. Lastly, reassessing cash levels to ensure they align with each client’s comfort and liquidity needs is always prudent, but especially in an environment marked by higher levels of uncertainty.
