On May 12, 2025, the United States and China reached a significant breakthrough, agreeing to temporarily reduce reciprocal tariffs for 90-days. Under the terms, the U.S. reduced tariffs on Chinese imports to 30%, while China reciprocated by cutting tariffs on American goods to 10%. Both nations emphasized their commitment to fostering a stable, long-term, and mutually beneficial trade relationship.

On May 16, 2025, Moody's Investors Service downgraded the United States' credit rating from the highest possible rating of Aaa to Aa1. This downgrade marked the first time since 1917 that all three major credit rating agencies—Moody’s, S&P Global Ratings, and Fitch Ratings–have rated U.S. debt below the top tier. Moody’s cited concerns about the country's ballooning national debt, which has reached $36 trillion, as well as persistent fiscal deficits as key reasons for this action.

On May 22, 2025, the U.S. House narrowly passed a major fiscal package combining broad tax reductions with significant spending cuts. The bill is projected to increase the federal deficit by approximately $2.4 trillion and raise the debt ceiling by $3 trillion over the next decade.

U.S. – European Union trade relations experienced tensions as President Donald Trump threatened to impose a 50% tariff on EU goods, citing stalled negotiations and a significant trade deficit. Following a call with European Commission President Ursula von der Leyen, Trump agreed to delay the tariffs until July 9, providing a window for intensified talks. Despite this reprieve, the EU criticized the U.S. for doubling tariffs on steel and aluminum imports to 50%, complicating discussions. Negotiations focused on issues such as auto tariffs, regulatory standards, and market access.

The U.S. economy contracted at an annualized pace of 0.2% in the first quarter of 2025. This decline was largely driven by weak consumer spending and a substantial net export drag of nearly 5 percentage points, stemming from a sharp pull-forward of imports ahead of expected tariff hikes. The combination of subdued domestic demand and trade distortions weighed on overall growth momentum.

According to the Federal Reserve Bank of Cleveland’s nowcasts, inflation-adjusted domestic demand shows early signs of softening. Personal Consumption Expenditures (PCE) inflation rose to 2.3% year-over-year in May, while Core PCE – which excludes food and energy – accelerated to 2.7%, up from April’s readings of 2.1% and 2.5%, respectively. These figures suggest price pressures are gradually intensifying.

The labor market remains resilient but is showing signs of deceleration. Economists expect nonfarm payrolls to rise by 125,000 in May, a slowdown from the 177,000 jobs added in April, while the unemployment rate is projected to remain at 4.2%. The moderation in hiring is attributed to employers seeking to contain costs amid weakening consumer sentiment and rising trade-related uncertainty, which has led many firms to reassess investment and hiring plans.

U.S. manufacturing sent mixed signals in May. The S&P Global Manufacturing PMI rose to 52.0, its highest level since February, largely due to a temporary spike in orders as firms rushed to stockpile goods ahead of the July tariff schedule. However, actual production output declined for the third consecutive month, and hiring remained weak, reflecting a cautious stance among manufacturers. Inventory levels surged to record highs, while input costs and supply delays became more prevalent. Although expectations for future output improved slightly, overall sentiment remains clouded by trade policy uncertainty.

Recent data points to a modest reacceleration in inflation. Based on Cleveland Fed nowcasts, headline CPI is estimated at 2.4% year-over-year in May, up slightly from 2.3% in April. Core CPI is projected to remain steady at 2.8%. On a month-over-month basis, headline and core prices are expected to rise by 0.13% and 0.23%, respectively. These figures suggest that price pressures persist, though inflation remains relatively contained for now.

At its May meeting, the Federal Reserve maintained its benchmark interest rate in the 4.25%–4.50% range for the third consecutive time, citing remaining inflation risks and elevated trade uncertainty. Policymakers indicated that future rate decisions would depend heavily on how the evolving tariff landscape affects inflation and growth outlook. Based on futures markets, investors currently do not anticipate rate cuts in June or July, with expectations shifting toward a possible policy easing later in the year, contingent on softer economic data.

All major U.S. market indices posted strong gains in May. The S&P 500 climbed 6.2%, the Nasdaq Composite surged 9.6%, and the Russell 2000 increased by 4.6%. Positive momentum extended beyond the U.S., with the MSCI World Index rising 5.7% across developed markets. A notable spike occurred on Monday, May 12th, following the announcement of a U.S.-China tariff reduction agreement. This easing of trade tensions was viewed as a significant step toward resolving disputes and reducing economic uncertainty. On that day alone, the S&P 500 gained 3.3%, the Nasdaq Composite rose 4.25%, and the Russell 2000 advanced 3.42%.

Most sectors enjoyed gains in May, with Consumer Discretionary, Technology, and Industrials leading the charge. ETFs tracking these sectors — XLY, XLK, and XLI — each rose by approximately 8%. However, Healthcare remained an exception, extending its decline with the XLV ETF losing 5.6%. The sector’s ongoing struggles stem from sustained policy pressures on drug pricing and compensation, compounded by challenges at UnitedHealth Group, one of the industry leaders. The company’s stock plunged 27% in May following a 22% drop in April, driven by rising medical costs, increased care utilization, and a lowered 2025 profit outlook. Additional strain comes from difficulties in the Medicare Advantage segment and an ongoing DOJ investigation into alleged Medicare billing fraud.

U.S. Treasury yields rose across the curve, with the 1-year note increasing by 23 basis points to 4.10%, and the 10-year rising 25 basis points to 4.41%. These moves reflect growing concerns over the expanding U.S. debt burden. With interest rates at multi-year highs, debt servicing costs are increasing, elevating default risk and pushing investors to demand higher risk premiums.

Meanwhile, the Option-Adjusted Spread (OAS) of the ICE BofA US Corporate Index narrowed from 1.09% to 0.92%, signaling improved investor confidence in corporate credit. A tightening OAS reflects a reduced risk premium over comparable Treasuries, indicating greater faith in corporate issuers’ creditworthiness.

Following a steep 4% decline in April, the U.S. Dollar Index (DXY) edged down just 0.14% in May. Despite the relative stability, most analysts forecast further weakness for the dollar, citing erratic tariff policies and rising government debt as key factors eroding investor confidence.

Market volatility, as measured by the VIX, eased significantly after a turbulent April, when the index remained above 30 for most of the month and peaked at 52.33. In May, the VIX ranged between 17 and 25, indicating a transition to low-to-moderate volatility and improved investor sentiment.

The CNN Fear & Greed Index reflected the shift in sentiment, climbing steadily from levels of extreme fear in April to reach 62 by the end of May – placing it firmly in 'Greed' territory. This signals a growing optimism among investors as risk appetite returned.

The cryptocurrency market saw remarkable gains, highlighted by Bitcoin (BTC) reaching an all-time high of $111,069 on May 22, fueled by strong institutional demand and favorable regulatory developments. Ethereum (ETH) also advanced significantly, rising from approximately $1,800 to $2,550.

Oil prices rebounded from April’s declines, supported by the tariff pause and improved investor sentiment, with WTI futures rising 4.4% during May. Gold, meanwhile, experienced volatility throughout the month but managed to close with a modest gain of 0.44%.

Ethereum ETFs drew particular attention in May as the cryptocurrency surged over 41%, making it one of the top-performing major assets of the month. This rally powered impressive gains across related ETFs, including the Grayscale Ethereum Trust (ETHE), iShares Ethereum Trust (ETHA), and Grayscale Ethereum Mini Trust (ETH), each of which soared more than 40%. The sharp rise was largely driven by the successful mid-month rollout of the long-awaited “Pectra” upgrade, which significantly improved Ethereum’s scalability and reduced transaction fees – key improvements that sparked a 20% single-day jump in the token’s value. Supportive global economic conditions, including easing trade tensions between the U.S., China, and the EU, further supported investor risk appetite. Additionally, increased institutional inflows reinforced confidence in Ethereum’s long-term potential, helping to sustain the momentum in crypto-linked funds.

Meanwhile, uranium-related ETFs also posted notable gains amid a favorable shift in U.S. energy policy. President Trump’s executive order, aimed at streamlining approvals for nuclear reactor projects and boosting domestic uranium supply chains, revitalized sentiment across the sector. As a result, the Global X Uranium ETF (URA) climbed 28% in May, while the Sprott Uranium Miners ETF (URNM) dvanced 16%a.

Given the current backdrop of slowing U.S. economic growth, elevated inflation, and policy uncertainty, the following instruments are commonly considered by market participants aiming for balance and resilience in their portfolios:

• Ultra-short Treasury Bills – Highly liquid, low-risk, and currently yielding over 4% annually, these are well-suited for navigating rate volatility.
• Gold – A strong hedge against currency weakness and macroeconomic instability, with over 25% gains year-to-date.
• 2–5 Year U.S. Treasuries – Offer modest duration risk while providing attractive yields in the current interest rate environment.
• Investment-grade Corporate Bonds (2–5 year) – Deliver a yield premium over Treasuries with moderate credit risk, supported by stable spreads.
• Defensive Equities – Sectors like Healthcare, Consumer Staples, and Utilities offer income and resilience in a slower-growth, inflationary backdrop.
• Equal-weighted or Diversified Healthcare ETFs – Provide exposure to a sector with upside potential while mitigating concentration risk from troubled giants.

The following ETFs may provide investors with the exposure to highlighted categories:

• SPDR® Bloomberg 1-3 Month T-Bill ETF (BIL) or iShares 0-3 Month Treasury Bond ETF (SGOV): ETFs tracking U.S. Treasury Bills of maturities up to 3 months. Offer capital preservation, high liquidity, and yields close to the Fed funds rate. A good cash alternative with minimal interest rate risk.
• iShares Gold Trust (IAU) or SPDR Gold Shares (GLD): Provides exposure to physical gold. Ideal for long-term inflation hedging and diversification.
• iShares 1-3 Year Treasury Bond ETF (SHY): U.S. Treasury bonds with 1–3-year maturities. Balances income with low-interest rate sensitivity.
• Vanguard Short-Term Corporate Bond ETF (VCSH): Targets short-term investment-grade corporate debt. Offers higher yields than Treasuries while maintaining low duration.
• Health Care Select Sector SPDR Fund (XLV): Tracks large U.S. healthcare firms. Offers defensive exposure with stable earnings, dividends, and demographic tailwinds. Especially appealing as the sector is underperforming but fundamentally strong in 2025.
• Consumer Staples Select Sector SPDR Fund (XLP): Includes household-name staples firms. Performs well in economic slowdowns due to non-cyclical demand. Provides reliable dividends and low beta.
• Utilities Select Sector SPDR Fund (XLU): Covers U.S. regulated utilities. Provides stable cash flow and high dividends but is sensitive to interest rate changes. Attracts capital in times of volatility or when rate cuts are expected.
• Invesco S&P 500 Equal Weight Health Care ETF (RSPH): An equal-weighted approach to the healthcare sector, giving more balanced exposure beyond mega-cap names.