Investment Viewpoint: equity markets find solid footing

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Markets and macro insights with Bernard Swords, Chief Investment Officer

What happened in financial markets last week?

• Equity markets are ending May on a solid footing, with world equities up 1.2% so far this week in Euro terms and nearly 6% for the month of May. Easing trade tensions, as US President Donald Trump retracted his tariff announcements from last Friday helped significantly. Additionally, encouraging results from Nvidia provided a boost to equity markets. Currently, there are court challenges in the US to President Trump’s use of specific executive powers to implement the announced tariffs. However, the President has other executive powers he can use should the current challenge not succeed. As a result, trade policy headlines will persist, and it is best to assume that the administration’s tariff policy will not be seriously derailed by court challenges.

• The recovery in equity markets has been led by the sectors that fell the most during the downturn. The IT sector is the strongest, up over 11%, followed by Industrials and Communication Services, both up over 8%. Defensive sectors were the main laggards, with Healthcare being particularly disappointing (Chart of the week provides further detail on this). This shift to cyclical sectors is due to easing trade tensions and their implications for economic growth. Over the month of May, forecast growth rates for the US economy in 2025 have moved from 0.5%, and with a high probability of a couple of negative quarters, to 1.5% and an expansion in each quarter. This trend has likely run its course now. It will be harder to achieve economic surprises from here, and we still lack certainty about tariff levels. Going forward, we expect more muted market movements overall and a more balanced performance between cyclical and defensive sectors.

• As mentioned, the IT sector led during the month, partly because it fell the most during the market correction and partly due to a strong first-quarter results season. This was capped off this week with Nvidia’s results. Despite restrictions on sales to China, the company beat expectations and is still anticipating data center-related sales growth excluding China of 17%. The Artificial Intelligence theme remains strong and should support continued recovery in the sector. It appears that the momentum in the IT sector will continue.

What were the main recent economic developments?

• Economic news was sparse this week. The minutes from the last meeting of the FOMC (the interest rate-setting committee of the Federal Reserve) indicated that participants are still uncertain about the impact of tariffs. Prices are likely to be boosted, but it is uncertain whether this will be persistent. At the same time, economic activity will be reduced, but the scale of this is very unclear. The minutes reinforce the view that the Federal Reserve will be on hold for the next few months. The US Conference Board Consumer Confidence Index was released last week, showing a significant jump from 85.7 to 98. This improvement was driven by the expectations component.

The week ahead: what to watch out for

The big figure from the US will be the non-Farm Payrolls, but we will also get the major business surveys, the ISM’s. From the Euro area, we will receive the inflation reports (CPI and PPI) along with Retail Sales. The highlight will be the ECB’s policy meeting. The primary business surveys for China (PMI’s) will also be released.