Stock markets had a strong comeback in May. The S&P 500 (a key stock index) made up for all its losses from earlier in the year. This happened even though there were concerns about government spending and the U.S. credit rating was lowered. While the economy showed signs of strength, many people still felt worried about the future. Bond prices (which move opposite to interest rates) went up and down as investors worried about government debt. For people investing for the long term, May showed that markets can recover even when there's a lot of uncertainty.
| MTD% | YTD% | |
| Dow Jones Industrial Average | +3.90% | +1.02% |
| NASDAQ | +9.56% | -1.02% |
| S&P 500 | +6.29% | +1.06% |
| Russell 2000 | +5.34% | -6.85% |
| MSCI World ex-USA** | +4.69% | +14.37% |
| MSCI Emerging Markets | +4.31% | +8.89% |
| Bloomberg U.S. Agg Bond | -0.72% | +2.45% |
Source: The Wall Street Journal, Dimensional Returns
MTD returns: April 30, 2025–May 31, 2025
YTD returns: December 31, 2024–May 31, 2025
**in US dollars
One big surprise in May was when Moody's (a credit rating company) lowered the U.S. credit rating from Aaa to Aa1. This means they think the U.S. is slightly more risky to lend money to. This followed similar cuts by other rating companies in 2023 and 2011. They're all worried about how much money the government owes and spends. The chart shows that U.S. total debt grew to 122% of GDP (the country's total economic output) in 2024.
Even though this was historic news, stock markets barely reacted. This is because investors already knew about the debt problems. Also, U.S. government bonds are still seen as very safe investments, just like they were after the 2011 downgrade.
At the same time, Congress passed a big tax and spending bill. This bill would keep tax cuts from an earlier law, including lower tax rates and tax credits for families. Experts think this could add $2.8 trillion to the deficit (government debt) over 10 years.
The bill still needs to pass the Senate.
There was good news on trade deals in May. The government reached agreements with both the U.K. and China. The China deal included a 90-day period where tariffs (fees on imported goods) would be reduced.
However, trade uncertainty continues. Both China and the U.S. have accused each other of breaking the trade agreement. The administration also wants higher tariffs on steel and aluminum. But talks with Europe showed promise when the White House delayed planned tariffs after positive discussions.
There are also legal challenges to the tariffs. In May, a trade court ruled that many new tariffs go beyond presidential power. While an appeals court paused this ruling for now, it adds more uncertainty.
First quarter company earnings (profits) gave another reason for optimism. Most S&P 500 companies beat profit expectations, and 64% had better-than-expected sales, according to FactSet.
This showed that businesses are doing well despite trade concerns.
While companies did well, consumers have been pessimistic this year due to tariffs and inflation worries. However, recent surveys showed people feeling slightly better. The University of Michigan survey for May showed that people expect inflation to be lower and their mood is stabilizing. This improvement could help support markets going forward.
The bottom line? May was a good month for investors. While the U.S. credit rating cut and debt concerns created challenges, progress on trade deals helped boost markets. For long-term investors, these events show why it's important to stay focused on long-term trends rather than short-term news headlines.