Key Points: Overview

• Tariffs between the U.S. and China are back in the spotlight, weighing on supply chains and corporate earnings.
• Inflation remains sticky, particularly in services, though April’s CPI came in slightly below expectations.
• S&P 500 earnings growth forecasts have been revised from 14% in January to 8.5% today.
• $82 billion has flowed into money market funds year-to-date, highlighting a more defensive investor posture.
• Low-volatility equity strategies and shorter-term fixed income are being favored to manage risk.
• Alternatives like gold and thematic ETFs—focused on AI, reshoring, and Japan—are gaining interest.

Introduction

As we navigate May 2025, investors face a complex backdrop of trade disruptions, stubborn inflation, and shifting central bank signals. While opportunities remain in areas like artificial intelligence and infrastructure, many investors are becoming more defensive, seeking ways to stay invested while protecting against downside risks. This edition breaks down key market movements, macroeconomic themes, and strategic shifts shaping investment decisions.

Market Overview

U.S. stocks have come under pressure after a strong start to the year. Trade tensions, particularly between the U.S. and China, have resurfaced, triggering industry uncertainty.

A temporary 90-day tariff reduction offered relief, but companies are still grappling with potential supply chain shifts and rising costs.

This uncertainty has translated into weaker earnings guidance. Many firms are revising capital spending plans lower, and earnings expectations for the S&P 500 have dropped to 8.5% growth, down from 14% in January.

At the same time, investors have moved $82 billion into money market funds this year, reflecting a preference for safer, more liquid assets. Despite this caution, certain sectors, such as energy infrastructure, defense, and AI-related industries, are outperforming and creating selective opportunities.

Key Changes in the Macroeconomic Landscape

Inflation remains a key challenge. April’s Consumer Price Index (CPI) came in slightly softer than expected, but core inflation remains high, especially in services like housing, travel, and healthcare. 

This creates a dilemma for the Federal Reserve. While markets expect up to four rate cuts in 2025, the Fed is treading carefully, watching for inflation impacts from tariffs and potential fiscal policy shifts.

Producer prices are also rising, especially in the services sector. These increases will likely trickle down to consumers, adding another layer of complexity for policymakers. Real yields remain elevated in this environment, making it harder for the Fed to justify significant rate relief in the near term.

Strategic Themes Outlook

Defensive Positioning and Minimum Volatility Strategies

Investor caution drives demand for low-volatility equity strategies, such as minimum volatility ETFs like USMV. These strategies offer a more stable ride in choppy markets, with about 77% upside capture and only 67% downside, historically. They also help reduce reliance on large-cap tech stocks, offering more balance across sectors.

Rethinking Diversification

The old 60/40 portfolio model is showing its limits. The classic diversification benefits have eroded with stocks and bonds moving more in sync (correlation as high as 0.75). Portfolio volatility in 60/40 allocations has risen from an average of 7.8% to over 12%. In response, more investors are turning to liquid alternatives, such as hedge-like mutual funds and private credit, as tools for risk control and non-market-dependent returns.

Thematic Investing and Structural Trends

Thematic strategies are seeing renewed interest as a way to capture long-term growth trends. Sectors like AI, robotics, clean energy, and reshoring (bringing manufacturing back to the U.S.) drive capital flows into thematic ETFs. These strategies offer exposure to long-term economic shifts with lower correlation to traditional factor-based investing.

Japan is also emerging as a bright spot for global equity investors. Corporate reforms and a favorable currency environment attract worldwide capital and fuel gains in Japanese stocks.

Fixed Income Outlook

The 10-year U.S. Treasury yield ended May at around 4.39%. While yields have decreased slightly, inflation and fiscal concerns keep high volatility. Investors are leaning into short- and intermediate-term bonds, which offer solid yields without overexposure to interest rate swings.

European credit—both investment-grade and high-yield—is also drawing interest due to better relative spreads and more supportive central bank policy. Within U.S. fixed income, quality remains key. Investors are increasing exposure to high-quality corporate bonds and agency mortgage-backed securities.

Conclusion

May 2025 presents a mixed market picture: global trade disruptions, sticky inflation, and central bank caution make investors think twice about risk. At the same time, themes like AI, infrastructure, and shifting global supply chains open new avenues for long-term growth.

To navigate this environment, portfolios are evolving, focusing more on defense (via low-volatility stocks and short-term bonds), alternative diversifiers, and selective thematic investments. As always, thoughtful allocation and flexibility are essential for managing today’s challenges while positioning for tomorrow’s opportunities.

– Jason Ray

Sources:

• BlackRock Investment Institute, Weekly Market Commentary (May 12, 2025)
• BlackRock, Navigating Market Volatility (May 14, 2025)
• BlackRock, Navigating Trade Policy in Model Portfolios (May 15, 2025)
• BlackRock, New Sources of Diversification (May 2025)
• BlackRock, Tomorrow’s Themes Today (May 2025)
• The Daily Shot, “Services Drove the Decline in US Producer Prices” (May 2025)

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