Introduction
Global equities surged into the end of May 2025, buoyed by a significant thaw in trade tensions between the United States and China. The benchmark S&P 500 rose 1.2% on Friday to close the month with a robust 6.3% gain, marking its strongest monthly performance since November 2023. Investor sentiment was sharply boosted by the surprise announcement of a renewed trade truce between the world’s two largest economies, easing concerns about a renewed cycle of tariffs and supply chain disruptions.
The breakthrough came after weeks of behind-the-scenes negotiations, culminating in a joint communiqué on May 30 that emphasized mutual cooperation, intellectual property protection, and reduced restrictions on semiconductor exports. This diplomatic pivot, alongside resilient economic data and easing inflationary pressures, unleashed a wave of risk-on appetite across equities, commodities, and emerging market assets.
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Equities Surge as Risk Appetite Returns
The S&P 500 climbed to 5,475.60 by the close of trading on May 31, posting its third consecutive weekly gain. The Dow Jones Industrial Average added 0.9% on the day to finish at 40,275.81, while the tech-heavy Nasdaq Composite jumped 1.6% to settle at 18,215.40, buoyed by a rally in semiconductor and cloud computing stocks.
Monthly performance of key U.S. indices in May 2025:
- S&P 500: +6.3%
- Dow Jones Industrial Average: +4.8%
- Nasdaq Composite: +7.5%
- Russell 2000 (Small Caps): +5.2%
Technology stocks led the charge, particularly semiconductor manufacturers, after the announcement indicated that U.S. restrictions on advanced chip exports to Chinese firms would be partially relaxed for non-military applications. Nvidia (NVDA) surged 4.3% on the final trading day of the month, closing at $1,210.20, while Advanced Micro Devices (AMD) rallied 3.8%.
Investors also rotated into cyclical and industrial names. Caterpillar (CAT) gained 2.1% and Boeing (BA) advanced 2.4% amid optimism about resumed bilateral cooperation in aerospace and infrastructure development.
Trade Truce: What Changed?
The turning point came when U.S. Treasury Secretary Janet Yellen and Chinese Vice Premier He Lifeng held extended talks during the Asia-Pacific Economic Cooperation (APEC) summit in Singapore. The outcome was a “Strategic Framework for Bilateral Commerce,” which outlines the following key provisions:
- Suspension of New Tariffs: Both sides agreed to freeze new tariffs and review existing ones over the next quarter.
- Semiconductor Policy Review: The U.S. will allow certain non-military chip exports to resume, while China will ease local content requirements.
- IP Protection Measures: Beijing committed to faster judicial enforcement for foreign firms and stronger oversight of technology licensing disputes.
- Renewed Agricultural Commitments: China pledged to increase purchases of U.S. soybeans, corn, and poultry.
This unexpected diplomatic win immediately alleviated fears of a second “Tech Cold War” and triggered a re-rating of globally exposed sectors.
Commodities Respond to Improved Trade Outlook
Commodity markets reflected the broad optimism. Brent crude oil rose 2.6% on May 31 to close at $87.15 per barrel, up 7.4% for the month. West Texas Intermediate (WTI) settled at $83.40, buoyed by expectations of stronger Chinese demand in the second half of 2025.
Industrial metals also posted significant gains. Copper climbed 3.1% on the day and finished May up 9.2%, reflecting optimism about global manufacturing activity. Aluminum and zinc followed suit, gaining 7.5% and 6.9% for the month, respectively.
Gold, typically a hedge against uncertainty, saw modest declines. Spot gold dropped 0.8% to $2,245.50 per ounce on Friday and ended May down 2.1%, as investor appetite shifted away from safe havens.
Currency Markets and Dollar Reaction
The U.S. Dollar Index (DXY) slipped 0.4% on the day to 103.85, reflecting a decline of 1.7% over the month. The dollar weakened against most major currencies as investor demand for riskier assets surged.
- EUR/USD rose to 1.0950, up 1.8% in May.
- USD/JPY declined to 153.60, as the yen strengthened on broader Asian economic optimism.
- USD/CNY dropped to 7.10, its lowest level since February, on signs of improving U.S.-China relations.
The People’s Bank of China (PBoC) refrained from intervening heavily in FX markets during the month, signaling confidence in the yuan’s stabilization.
Cryptocurrencies Rally with Broader Risk Sentiment
Bitcoin (BTC) rebounded strongly in the final week of May, closing the month at $69,500—a 12.4% gain. The crypto market capitalized on the shift in sentiment as investors rotated into alternative assets. Ethereum (ETH) also surged, finishing at $3,775, up 10.6% for the month.
Market analysts attributed the move to a combination of macro tailwinds and regulatory clarity, as the U.S. Securities and Exchange Commission signaled a more accommodative stance on spot ETF approvals during a May 28 statement.
Altcoins like Solana (SOL) and Avalanche (AVAX) outperformed Bitcoin in percentage terms, posting monthly gains of 18.9% and 16.7%, respectively.
Bond Yields Steady Despite Risk-On Mood
Despite the equity and commodity rally, Treasury yields were relatively stable. The 10-year U.S. Treasury note yield edged down 3 basis points on May 31 to 4.26%, reflecting a modest decline from 4.34% at the end of April. The 2-year yield ended the month at 4.48%, essentially unchanged, as markets weighed inflation data and upcoming Federal Reserve policy decisions.
The spread between the 2-year and 10-year yields remained inverted, though the inversion narrowed slightly to 22 basis points, suggesting easing concerns about a hard landing.
Investment-grade corporate bonds saw strong demand in May, with the iShares iBoxx $ Investment Grade Corporate Bond ETF (LQD) gaining 1.9%. High-yield spreads narrowed to 3.74% over Treasuries, the tightest level since August 2022.
Economic Data: Resilience Continues
U.S. economic data during May confirmed that growth remained intact without reigniting inflation fears.
- April CPI: Headline CPI rose 0.3% MoM, down from 0.4% in March. Year-over-year inflation came in at 3.3%, aligned with expectations.
- Core PCE (May 30 release): Core personal consumption expenditures rose 0.2% MoM, in line with forecasts, with a YoY reading of 2.7%, marking continued progress toward the Fed’s 2% target.
- Jobless Claims: Weekly initial claims averaged 218,000 in May, showing a slight cooling in the labor market without triggering recessionary alarms.
- ISM Manufacturing Index (May 1): Rose to 51.8, beating estimates of 50.7, indicating expansion for the second consecutive month.
Retail sales in April posted a solid 0.5% monthly gain, boosted by durable goods and auto purchases, while consumer confidence improved to 103.1, up from 97.8 in April, according to the Conference Board.
Federal Reserve in Holding Pattern
The Federal Reserve maintained its policy rate range at 5.25%–5.50% during its May 8 meeting, reiterating its data-dependent stance. While no immediate policy changes were made, Fed Chair Jerome Powell acknowledged “encouraging signs of disinflation” during a post-meeting press conference.
Fed funds futures pricing at month-end showed an 80% probability of the first rate cut in September 2025, up from 56% a month ago. Market participants are increasingly convinced that the Fed will pivot cautiously as inflation stabilizes and global trade dynamics improve.
Several FOMC members, including Governor Lisa Cook and Atlanta Fed President Raphael Bostic, echoed this view during separate remarks, emphasizing the importance of “avoiding premature easing while monitoring global spillovers.”
Global Market Reaction
European equities mirrored the U.S. rally. The Euro Stoxx 50 rose 5.2% in May, led by industrials and autos. Germany’s DAX closed the month up 5.8%, while France’s CAC 40 added 4.9%. The UK’s FTSE 100 rose a more modest 2.7%, weighed down by commodity exporters.
In Asia, China’s CSI 300 jumped 6.1% for the month, fueled by tech stock gains and investor optimism over the trade détente. Japan’s Nikkei 225 rallied 4.4%, driven by a weaker yen and strong corporate earnings.
Emerging market ETFs posted their best month since early 2022, with the iShares MSCI Emerging Markets ETF (EEM) up 6.5%. South Korean and Brazilian equities led the advance.
ETF Flows and Market Positioning
Investor flows indicated a clear risk-on tilt:
- U.S. Equity ETFs: Took in $38 billion in net inflows in May, led by tech and growth-focused funds.
- International ETFs: Added $12.5 billion, as investors returned to developed ex-U.S. and emerging market strategies.
- Bond ETFs: Gained $16 billion, with a bias toward investment-grade corporates and long-duration Treasuries.
Volatility metrics also declined. The CBOE VIX Index fell to 12.4, down from 15.2 at the end of April, its lowest level since January 2020, signaling improved investor confidence.
Conclusion
May 2025 marked a decisive turn in market sentiment as geopolitical risk receded and economic fundamentals held firm. The surprise trade truce between the United States and China acted as a powerful catalyst, reviving global risk appetite and sending equities to new highs. With inflation trends favorable and central banks treading cautiously, markets appear well-positioned for continued gains—provided global cooperation endures.
Looking forward, investor attention will pivot toward June’s U.S. labor report, corporate guidance from the upcoming mid-year earnings cycle, and the Federal Reserve’s June 18 policy meeting. Key questions loom: Will the Fed signal a cut in September? Can U.S.-China cooperation sustain momentum into Q3? And will corporate margins remain resilient amid mixed global demand?
For now, May’s 6.3% gain for the S&P 500 stands as a testament to the market’s ability to pivot swiftly from fear to optimism. Whether that optimism is sustainable depends largely on follow-through from policymakers—and the staying power of a newly rekindled trade peace.
