Stock markets bounced back in May, with the S&P 500 recovering all its losses for the year. This happened even though there were concerns about U.S. government debt and mixed economic news. While the economy showed strength, consumers remained worried about the future. Bond yields (interest rates) moved up and down throughout the month due to concerns about government spending. For long-term investors, May shows that markets can adjust to changing conditions, even when there’s uncertainty about the economy.

Key Market Numbers¹

• The S&P 500 (a group of 500 large U.S. companies) gained 6.2% in May, its best month since 2023. The Dow Jones was up 3.9%, and the Nasdaq rose 9.6%. For the year so far, the S&P 500 is up 0.5%.
• U.S. bonds fell 0.7% in May but are up 2.4% for the year. The 10-year Treasury bond yield ended at 4.4%.
• International stocks also did well, with developed and emerging markets both climbing 4.0%.
• The U.S. dollar fell to 99.3, near a three-year low.
• Bitcoin hit a new record high of $111,092 before ending the month at $104,834.
• Gold also hit a new record high of $3,422 before closing at $3,288, up 24% for the year.
• Consumer prices rose 2.3% in April compared to a year earlier, the lowest increase since February 2021.
• The economy added 177,000 new jobs in April while unemployment stayed low at 4.2%.

Markets bounced back despite new worries

May’s market recovery shows why it’s important to stay invested during tough times. After a difficult April, markets quickly recovered most of their losses. This shows how fast market feelings can change when conditions improve. However, past performance doesn’t guarantee future results, and markets will continue to worry about trade deals, U.S. debt, and the economy.

U.S. credit rating was downgraded

One big surprise in May was when Moody’s (a credit rating agency) downgraded the U.S. credit rating from its highest level to the second-highest. This followed similar downgrades by other agencies in recent years, all due to concerns about growing government debt and spending. The chart shows that total U.S. debt reached 122% of GDP (the country’s total economic output) in 2024.

Despite this historic downgrade, markets barely reacted. This is because investors already knew about the nation’s debt problems. The calm response also reflects lessons from a similar downgrade in 2011, when U.S. Treasury bonds continued to be seen as safe investments.

The downgrade happened as Congress was passing a major tax and spending bill. The bill would extend individual tax cuts, including lower tax rates and higher deductions. According to budget experts, this legislation could increase deficits by $2.8 trillion over 10 years.² The bill now goes to the Senate for debate.

While these debt challenges need long-term solutions, the U.S. dollar remains the world’s main reserve currency, and there will continue to be demand for Treasury bonds.

Trade talks showed progress

There was also progress on trade talks in May, reducing fears of trade wars. The administration reached agreements with both the U.K. and China, while continuing talks with other countries. The U.S.-China deal included a 90-day period of lower U.S. tariffs (taxes on imports) on Chinese goods.

Despite these deals, trade uncertainty will likely continue. Recently, both China and the U.S. have accused each other of breaking the trade agreement. However, negotiations with Europe showed promise when the White House delayed planned tariff increases after positive discussions.

The administration is also facing legal challenges to its tariffs. In May, a trade court struck down many newly enacted tariffs, saying they exceed presidential power. While an appeals court paused this ruling, it adds more uncertainty to trade policy.

Trade policy typically takes months or years to unfold, not days or weeks. May’s recovery reminds investors not to overreact to trade headlines, especially since worst-case scenarios are now less likely.

Company earnings supported the market

First quarter company earnings (profits) provided another reason for optimism. S&P 500 companies reported better-than-expected earnings, and 64% had higher revenues than expected.³ This strong performance showed that companies remain profitable, with technology companies doing well despite trade uncertainty.

In contrast, consumers have been pessimistic this year due to tariffs and inflation concerns. However, recent surveys began showing signs of improvement. The University of Michigan’s May survey showed inflation expectations decreasing and sentiment stabilizing. While one month’s data isn’t enough to confirm a trend, this improvement is encouraging.

The bottom line? May was a positive month for investors. While the U.S. debt downgrade created new challenges, progress on trade deals helped boost markets. For long-term investors, these events show the importance of staying focused on long-term trends rather than short-term headlines.

1. Standard & Poor’s, Nasdaq, Bloomberg. All month end figures are as of May 30, 2025.

2. https://budgetmodel.wharton.upenn.edu/issues/2025/5/23/house-reconciliation-bill-budget-economic-and-distributional-effects-may-22-2025

3. FactSet Earnings Insight May 30, 2025