Markets made positive progress in May amid some strong corporate earnings and hopes of de-escalation in the Middle East. In equities, emerging markets outperformed developed markets. In fixed income, corporate bonds outperformed government bonds.
Please note that any past performance mentioned is not a guide to future performance and may not be repeated. The sectors, securities, regions, and countries shown are for illustrative purposes only and are not to be considered a recommendation to buy or sell.
Global equities
Global equities moved higher in May, with the MSCI World Index gaining 4.5% for the month, as resilient earnings and continued strength in technology-related sectors supported investor sentiment. The dominant driver remained the global buildout of AI infrastructure. That sustained strong demand for semiconductors and reinforced expectations for ongoing corporate profit growth.
Geopolitical developments also contributed to the positive backdrop, as investors became more optimistic that tensions in the Middle East would not disrupt global economic activity. A late-month decline in oil prices helped improve the inflation outlook and reinforced expectations that monetary policy may not become more restrictive over time.
Despite the positive headline return, market leadership remained narrow. Gains were concentrated in a relatively small group of growth-oriented companies, while commodity-linked and defensive sectors lagged.
US
US stocks, as measured by the S&P 500 Index, rose 5.3% in May. The gain was driven by investors’ increased confidence that economic growth would remain resilient and corporate earnings, particularly in technology, would continue to beat expectations.
Market sentiment was also supported by a reduction in perceived geopolitical risks, which encouraged investors to rotate toward growth-oriented sectors. Expectations for a soft landing strengthened as concerns about energy-driven inflation eased and confidence grew that economic activity would slow without slipping into recession.
While inflation showed some persistence and the release of the minutes from the Federal Reserve’s April meeting revealed a more hawkish policy debate than previously appreciated, investors remained optimistic that the policy rate might decline over the longer term.
The dominant theme of May was the continued surge in AI-related investment and spending. Information technology was the best-performing sector by a considerable margin. Strong earnings reports and upbeat outlooks from major technology firms reinforced expectations that AI-driven capital spending is still in its early stages and will continue to bring substantial gains for chipmakers and AI-related tech companies.
Energy was the weakest sector, as oil prices declined, and investors rotated away from defensive, commodity-linked plays that had outperformed earlier in the year. Utilities also lagged, as investors favoured higher-growth sectors. The consumer staples sector was down as well, as investors’ increased risk appetite reduced the demand for defensive stocks.
Eurozone
Eurozone equities (as measured by the MSCI EMU index) rose 4.1% in May in euro terms. As was the case elsewhere, information technology was the top-performing sector amid some strong corporate earnings and optimism over the outlook for AI and related technologies. The consumer discretionary sector also performed well. Energy and utilities were the only sectors to register negative returns.
The annual inflation rate for the eurozone was 3% for April, up from 2.6% in March, largely due to higher energy prices. While the fragile ceasefire in the Middle East continued to hold during the month, there was little progress on reopening the Strait of Hormuz to shipping, meaning that supply of energy products remains tight. Several European Central Bank (ECB) policymakers warned that higher energy prices are starting to fuel broader inflation and may mean the ECB will need to raise interest rates at its meeting in June.
Survey data showed further signs of slowdown in the eurozone economy. The S&P Global flash eurozone purchasing managers’ index (PMI) showed the composite index at a 31-month low of 47.5 in May. (The PMI surveys are based on responses from businesses and appear in advance of official data. A reading below 50 signifies contraction).
UK
UK equities posted a modest gain in May, underperforming other regions. The FTSE All-Share Index rose 1.2% in sterling terms. The heavyweight energy and health care sectors both registered declines in the month, capping overall progress for the index. The consumer discretionary and basic materials sectors were the top positive performers.
The more domestically focused FTSE 250 index – which is largely dominated by the financials, industrials and consumer discretionary sectors – posted a 4.6% return in May while the large-cap FTSE 100 advanced only 0.7%.
UK annual inflation fell to 2.8% in April from 3.3% in March, partly due to the long-planned cap on household energy bills. Meanwhile, labour market data showed the lowest number of job openings in five years. The softer inflation and weak employment data were thought to make it less likely that the Bank of England would increase interest rates sharply as a result of the Iran conflict pushing energy prices higher.
Japan
Japanese equities extended the rally and exceeded historical high levels during the month. The TOPIX Total Return index was up 6.2%, and the Nikkei 225 index rose by 11.9%. Although the Middle East situation remained highly uncertain, the market was supported by growing hopes for a resolution to the conflict, which underpinned investor sentiment.
In Japan, earnings announcements for the latest fiscal year began in earnest, revealing wide dispersion across sectors and companies. Stocks with strong results and outlooks performed well, while weaker guidance was punished. AI- and semiconductor-related names led the market, supported by resilient fundamentals and positive signals from US peers. However, market leadership remained narrow, with capital concentrated in a limited group of companies showing strong earnings momentum.
Emerging markets
Emerging market (EM) equities delivered strong gains in May, outperforming the MSCI World index. Performance was led by index heavyweights Korea and Taiwan amid strong gains in memory and semiconductor stocks, benefiting from continued AI demand.
Korea was the EM index’s top-performing market in May as it benefited from a rally in memory-related stocks. Korean companies delivered strong earnings, as earnings per share (EPS) revisions remained positive across nearly all sectors, while increased domestic buying also contributed to the market rally. Taiwan similarly posted a strong performance in May, with MSCI Taiwan reaching all-time highs. This was driven by strong Q1 earnings from technology stocks as sustained demand from the US for AI-related hardware and capital expenditure continues to benefit the export-driven, tech-heavy economy of Taiwan.
The smaller markets of Peru and Greece also outperformed over the month, but the remaining EM markets lagged the broader index, reflecting the narrow leadership seen in May.
Thailand, Mexico and South Africa underperformed in May despite posting positive returns. There was mixed performance across sectors in South Africa amid softer commodity prices and an increase in the policy rate to 7%. India underperformed once again as concerns over its services-driven technology sector and vulnerability to higher oil prices continued to weigh on sentiment. The Middle Eastern markets of Saudi Arabia, the UAE and Kuwait also declined in May, underperforming the wider market.
China also lagged the index against the backdrop of mixed economic data, weakness from internet stocks and less direct exposure to the AI-driven rally that dominated this month. Brazil was one of the biggest underperformers amid heightened political risk after presidential candidate Flavio Bolsonaro was embroiled in a corruption scandal. At the same time, inflation concerns broadened, leading markets to reassess the likelihood of rate cuts.
Indonesia was once again the worst-performing market in the index following accelerating foreign outflows, reflecting ongoing uncertainty ahead of the upcoming MSCI market review in June, and as the central bank raised interest rates to protect the currency amid investor concerns about the economic fallout from the Iran war.
Asia ex-Japan
Asia ex-Japan equities posted a strong month, as the MSCI AC Asia ex-Japan Index advanced 11.2%. Still, the gains were far from uniform across the region. Korea was the standout performer. It dramatically outperformed as investors poured into semiconductor, electronics and AI-related companies. Taiwan also posted a strong gain, as it benefited from many of the same technology and AI themes.
Elsewhere, performance was much weaker. China, Hong Kong, India, Malaysia, the Philippines and Indonesia all declined during the month, while Singapore and Thailand posted only modest gains. Indonesia was the worst-performing market because of concerns about domestic economic conditions and weaker investor sentiment about commodity-linked markets.
Information technology was the strongest-performing sector, as its gains were fuelled by continued optimism about artificial intelligence, semiconductor demand and technology earnings. Energy and consumer staples were the weakest sectors. Energy stocks were pressured by softer commodity prices, while consumer staples lagged as investors favoured higher-growth technology companies over more defensive areas of the market.
Global bonds
Overall, it was a positive month for global bond markets, although volatility remained elevated. The Middle East conflict remained in full focus, with the direction of yields tracking energy markets extremely closely (reminder: yields move inversely to prices). As fears of escalation intensified mid-month, government bond yields rose to multi-year highs. However, by month-end, bond yields had retraced this move following multiple reports suggesting that a US-Iran deal might be moving closer, and stagflation fears receded.
US Treasuries lagged other government bond markets, given the robust economic backdrop, as investors brought forward expectations for interest rate hikes. April’s US labour market report surprised to the upside, including a 115,000 increase in payrolls and reinforcing the view that labour market conditions remain resilient. An above-consensus core inflation print contributed to the idea of more persistent inflation.
Apart from in very short-dated maturities, German government bond yields ended the month lower, with peripheral markets (including Spain, Italy and Greece) outperforming. The European Central Bank (ECB) did not meet in May, but markets were looking ahead to the June meeting with bond pricing reflecting a high probability that the Governing Council will raise interest rates when they meet. April’s inflation data (as measured by the harmonised index of consumer prices) showed a re-acceleration of headline inflation, to 3% from 2.6% in March, even though underlying price pressures remained more stable.
Meanwhile, in the UK, the market expects the Bank of England base rate to be held when the committee next meets in June. This helped support an outperformance of gilts. In addition to global geopolitical risks, domestic political uncertainty was another driving factor of the volatility of gilts. That came as speculation mounted around Prime Minister Starmer’s position after the governing Labour Party lost seats in the local elections.
Corporate bonds generated positive total returns and outperformed government bond markets. In the US, investment grade outperformed high yield, where, on a sectoral basis, financials lagged a little. However, in the eurozone, high-yield markets on average outperformed investment-grade names. (Investment-grade bonds are higher-quality, lower-risk debts, as determined by a credit ratings agency, while high-yield bonds are riskier and pay higher yields to compensate.)
Commodities
Commodities had a weaker month in May, with the S&P GSCI down 7.6%. The energy component was the weakest performer as the fragile ceasefire in the Middle East held during the month. Talks were ongoing between Iran and the US, but there were conflicting reports over the prospect of a longer-term peace deal being agreed. There was also little sign of progress on reopening the Strait of Hormuz to allow the shipping of oil and other commodities.
The agriculture component declined in April, as did precious metals. However, industrial metals advanced.
Please note
The value of your investments (and any income from them) can go down as well as up and you may not get back the full amount you invested. Past performance is not a reliable indicator of future performance. Investments should be considered over the longer term and should fit in with your overall attitude to risk and financial circumstances.
This blog is for general information only and does not constitute advice. The information is aimed at retail clients only.
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