Tariffs down, AI up – but caution remains

In our latest monthly market update video, our Chief Investment Officer Richard Flax looks back at a positive month for equity markets in May and explores whether recent optimism is supported by broader economic fundamentals. You can also find a written version of his commentary below.

In the end, May proved to be a pretty solid month for equities, with US equities rising around 6% in sterling and UK equities up by about 4%.

Overall, investors seemed relaxed about the outlook for trade policy. The US and China had brought down their reciprocal tariffs from triple-digit levels to something a bit more manageable in the middle of the month, albeit those tariffs were still high compared to history. But with negotiations underway between the US and its trade partners, it could be said that a return to some form of normality was starting to take shape.

On the macro side, the data didn’t really suggest a dramatic slowdown. Yes, container shipments from China to the US were down, but there was hope that the disruption would be short-lived. The Citigroup Economic Surprise indices, which capture how macro data compares with analyst forecasts, were actually drifting higher, suggesting that macro data was coming in slightly better than expected. 

In terms of government bonds, bond yields drifted higher at the start of the month, but then stayed relatively flat. There’s still a lot of focus on government debt levels, both in the US and the UK.

In the US, the administrations budget proposal passed the first hurdle in Congress. Investors seem a bit conflicted here: on the one hand, the budget deficit in the US will stay high for the next few years, raising questions about long-term debt sustainability. On the other hand, government spending in the US has helped to support growth. There were some concerns that a sharp cut to government spending could hit growth going forward, but for now at least that doesn’t look likely.

Data for the month

This months figure is 13% – estimate earnings growth for the US S&P 500 in the first quarter compared to the same quarter last year. That’s the second consecutive quarter of double-digit earnings growth. It’s better than most analysts expected and a reminder that companies, particularly the larger ones, are still doing pretty well. We think it’s part of the explanation for the strong performance we’ve seen in equities in April and May. 

Question for the month

As equity markets continued to rise in May, we kept asking ourselves: is the world really in a better place than it was at the end of March?

Headline tariffs have come down from their overall peak, thanks to a 90-day tariff suspension from the US and a mutual climbdown from the 100%+ tariffs from the US and China. But tariffs are still some way above where they were in the first quarter and their impact is still to be seen.

Corporate earnings have held up pretty well so far in the first quarter. The most recent results and commentary from Nvidia highlighted that demand for their chips for Artificial Intelligence is still going strong. 

There’s still a gap between so-called soft and hard data – between the sentiment indicators and the actual spending data. Sentiment fell sharply in the wake of tariffs, while actual spending has held up ok, for now. Over time you’d expect these types of metrics to converge.

So, we’ve seen a strong recovery in equities in the past month, and generally results have held up pretty well. But we’re still cautious about dismissing the risks to growth in the global economy today. We don’t think the risk from tariffs has disappeared, and the impact from higher tariffs is still to really appear.

The latest comments from the US administration suggest they’re frustrated by the slow pace of negotiations. For now, we’re maintaining our somewhat cautious stance in our multi-asset model portfolios.