Stocks Lower But Set for Strong Monthly Gain Despite Tariff Worries

May 31, 2025 | Global Markets Desk — Equity markets dipped in Friday’s session, wrapping up the month on a subdued note as renewed trade tensions between the U.S. and China weighed on sentiment. But despite the late pullback, global equities posted their strongest monthly performance since January, with investors remaining resilient amid geopolitical noise and signs of underlying economic strength.

The S&P 500 slipped 0.6% on the day, while the Dow Jones Industrial Average shed 0.4% and the NASDAQ Composite fell 0.8%. European bourses mirrored the risk-off tone, and Asia-Pacific indices were largely flat to mildly negative. Still, for the full month of May, the S&P gained 3.2%, the Dow rose 2.5%, and the tech-heavy Nasdaq rallied 4.8%.

This divergence between daily weakness and monthly strength reflects a market that’s cautiously optimistic, driven by steady earnings, easing inflation pressures, and confidence that central banks are inching closer to policy normalization.

What Dragged Markets Lower on the Final Day?

1. Renewed Tariff Anxiety

The U.S. administration’s announcement earlier this week of higher tariffs on Chinese electric vehicles, batteries, and select semiconductors stoked fears of a brewing trade war. While Beijing’s response has been muted so far, investors remain wary of retaliatory measures that could escalate into broader economic friction.

“There’s an element of déjà vu here. Markets are pricing in the risk of another tit-for-tat tariff cycle just as global growth is stabilizing,”
said Marcia Langdon, Chief Economist at Hanover Global Capital.

2. Month-End Rebalancing

Portfolio managers often rebalance at the end of the month, locking in profits or adjusting exposures. After a strong run-up earlier in May, Friday’s selloff partly reflected technical selling and profit booking rather than a fundamental change in sentiment.

3. Mixed Economic Data

U.S. personal consumption expenditures (PCE), the Fed’s preferred inflation gauge, came in line with expectations at 2.8% year-on-year. While encouraging, the data was not strong enough to eliminate the prospect of a cautious Fed, nor weak enough to justify imminent rate cuts — keeping markets in a “wait-and-see” limbo.

Strong Monthly Gains: What's Driving the Optimism?

Despite Friday’s red finish, May was a notably strong month for equities. Several macro and micro factors helped fuel the rally.

 Earnings Outperformance

Q1 earnings season wrapped up with more than 80% of S&P 500 companies beating expectations, particularly in technology, consumer discretionary, and financials. Mega-cap tech names like Nvidia, Microsoft, and Amazon delivered strong guidance, reaffirming investor faith in corporate profitability.

 Inflation Cooling Off

Inflation, while still above central bank targets, has shown steady signs of softening. In the U.S., the core PCE and CPI data revealed a slowdown in service inflation, while Europe recorded its lowest core inflation in nearly 18 months.

 Central Bank Patience

The Federal Reserve and European Central Bank (ECB) maintained a data-dependent stance, but market participants are increasingly optimistic that rate cuts could begin in the second half of 2025. That’s helped lift interest-rate sensitive sectors, including real estate, tech, and consumer discretionary.

Sector Watch: Tech Leads, Energy Lags

• Tech stocks were the clear winners, buoyed by strong AI momentum and solid cloud computing growth.

• Energy underperformed as crude prices fell 3.2% over the month due to higher inventory levels and weak demand forecasts from China.

• Defensive sectors like utilities and consumer staples lagged as investors rotated toward growth.

Global Indices Snapshot (May 2025)

Asian markets were mixed as China’s sluggish manufacturing recovery and ongoing property sector woes continued to cloud investor outlooks.

Investor Sentiment: Resilient but Cautious

Despite tariff uncertainties, investor sentiment remains broadly constructive. The VIX volatility index stayed below 14 for most of May, signaling market calm. Meanwhile, ETF inflows into equity funds totaled over $38 billion in May, marking the strongest monthly inflow since October 2023.

“There’s underlying resilience in this market. Even with macro noise, investors are focused on fundamentals and earnings strength,”
noted Arvind Menon, Head of Research at Axis Asset Management.

The Road Ahead: June’s Market Catalysts

Looking forward, June is expected to be a data-heavy month with several key events lined up that could determine near-term market direction:

1. U.S. Jobs Report (June 7)
   A strong labor market could reaffirm the Fed’s patience on rate cuts.

2. Fed Rate Decision (June 12)
   While rates are expected to be on hold, market participants will scrutinize the dot plot and Powell’s language for clues.

3. China Trade and PMI Data
   Any improvement could help offset tariff-related concerns.

4. Eurozone CPI and ECB Meeting
   A potential rate cut from the ECB could be the first from a major central bank in 2025.

5. Corporate Pre-Earnings Guidance
   Companies may begin issuing early Q2 updates, providing insight into second-half expectations.

Risks on the Horizon

While markets have shrugged off many headwinds, risks remain:

• Escalating Trade War: Any retaliatory tariffs from China or breakdowns in negotiation talks could hurt global supply chains and investor sentiment.

• Sticky Inflation: If inflation data surprises on the upside, central banks may be forced to maintain higher rates for longer.

• Geopolitical Flashpoints: Conflicts in Ukraine, the South China Sea, or the Middle East could reignite volatility.

Summary: Holding Strong Despite Headwinds

Markets ended May on a cautious note but still managed to deliver solid monthly gains — a testament to investor faith in underlying fundamentals. While tariff tensions and economic crosscurrents are creating noise, the broad market narrative remains constructive.

For now, investors appear to be navigating choppy waters with a clear eye on long-term growth themes, including tech innovation, policy normalization, and emerging market potential.