The market has continued to rally in May, with the S&P 500 up about 6% for the month through 5/29. Most of those gains took place in the first half of the month on continued tariff de-escalations, and the market has been essentially flat since May 13th. The question is what’s next? The weight of the evidence suggests that the market advance will resume and lead to new highs this year.
Widespread pessimism has been a consistent feature of the past few months. Market skeptics seemingly got their wish recently with the Moody’s downgrade of US government debt, and escalation in tariffs on the EU. In both instances, May 19th, and May 23rd, the market opened significantly lower due to the negative news, but buyers stepped in during the trading day to support the market. When the market absorbs bad news and still sees net buyers, it is a sign of underlying strength in the market. By the same token, the market saw net selling during the day on May 29th, despite a positive earnings report from Nvidia and a court ruling limiting presidential action on tariffs. Taken together, these examples suggest the sideways movement in the market of the past few weeks may continue in the very short term.
Looking past the very short term, the character of the rally from the April lows suggests it is sustainable, despite widespread pessimism. Several indicators of demand surges suggest large institutional buying; performance following comparable instances has been extremely strong. Market leadership in recent weeks has been in growth-oriented and economically sensitive sectors, suggesting risk-on appetite among investors. Internal measures of market strength, such as the S&P 500 advance-decline line, have hit new highs ahead of price. This suggests that price will follow.
Corporate earnings have also been supportive of the rally. S&P 500 corporate profits in Q1 2025 were 13.4% higher than a year ago; the expectation was for 7.1% growth at the beginning of the quarter. Forward looking guidance has been strong as well, as S&P 500 companies increased their full-year earnings expectations by a nearly 2-1 ratio. This is far better than what investors feared given the policy uncertainty in April.
We maintain that the market is in a secular bull market with years left to run. In bull markets most of the surprises are on the upside.
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