May Market Commentary | Markets Rise, But Questions Multiply

From the Desk of the CIO

Shifting policy. Elevated valuations. Rising global uncertainty. John Nicola shares his latest thinking on how investors can stay focused on what matters: resilience, discipline, and building portfolios designed to endure.

• The Uncertainty Premium: Finding Value When Markets Fear Change
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• A Spanner in the Works – Section 899
  What Section 899 in the latest U.S. budget could mean for Canadians and other foreign investors with U.S. assets, and how to respond through planning and portfolio design.

To complement these broader themes, below is a condensed version of Chief Economist Rob Edel’s Market Commentary, offering key highlights from May’s market activity. To read the full commentary, click here.

Equity markets deliver strong gains, but sentiment is cautious 

May marked an impressive rebound in equity markets. The S&P 500 returned +6.3% (total return in U.S. dollars), marking its best May in 35 years. Global equity indices were also strong, with Brazil being the lone outlier in negative territory. Canadian equities also performed well, with a return of 5.6%. Gains were broad-based, although U.S. large-cap stocks led, with Korea being one of the few global peers to keep pace. Year to date, however, the S&P 500 has underperformed global markets, trailing the MSCI All Country World Index excluding the U.S. by the widest margin since 1993. Despite the strength in performance, sentiment remains subdued. Based on investor surveys, a relatively small percentage of institutional participants reported a bullish outlook, following a 19% rebound from the April lows. 

Traditional safe havens lose their footing 

The most notable development in May wasn't equities, but rather the unusual behaviour of bonds and the U.S. dollar. Typically, higher 10-year yields have been positively correlated with the dollar, but that relationship has recently broken down. Since early April, bond yields have moved higher while the dollar weakened against all major currencies. This growing divergence has caught the attention of institutional investors, with some viewing it as a potential cause for concern.  

The "One Big Beautiful Bill Act" and its implications 

The proposed “One Big Beautiful Bill Act” (OBBA) has added another layer of complexity. The bill is expected to significantly increase the U.S. fiscal deficit, with estimates ranging from $3-5 trillion to U.S. debt over the next decade. In response, Moody’s downgraded U.S. government debt one notch below its top-tier rating, joining earlier moves by S&P and Fitch. Credit default swaps on U.S. debt have risen to levels typically associated with lower-rated sovereign issuers like Italy and Greece. Investors are also watching Section 899 of the bill, which proposes taxing foreign capital inflows from countries the U.S. deems to have unfair tax regimes, a move that includes Canada. This provision could undermine the U.S.’s historic role as a magnet for global investment. While the bill’s final form remains uncertain, the early response reflects growing unease around America’s fiscal trajectory and its ability to finance long-term obligations without disincentivizing foreign capital. 

Source: Financial Times

A global shift in yield curves and debt sustainability 

Rising long-term bond yields were not just a U.S. phenomenon in May. Other large economies also saw yields move higher, with Japan drawing particular attention. The Bank of Japan has started to reduce its bond purchases as inflation pressures build, leaving private investors to take on a larger share of new government debt. Unlike central banks, markets tend to demand higher compensation, which pushes yields up. This shift is part of a broader trend: governments are continuing to run large deficits even during periods of economic growth. As central banks pull back support, markets are being asked to shoulder more of the burden, which is leading to steeper yield curves and increased scrutiny of government spending. 

Economic data offers conflicting signals 

Recent economic signals have been difficult to interpret. The Organisation for Economic Co-operation and Development lowered its forecast for U.S. economic growth in 2025 to 1.6%, down from 2.2% in March. At the same time, the Federal Reserve Bank of Atlanta’s real-time estimate for second-quarter growth jumped to 4.5%. That increase appears to reflect a sharp decline in imports rather than a broad-based pickup in economic activity. Meanwhile, inflation expectations have moved higher. According to the University of Michigan’s survey, a record number of Americans believe inflation could reach 15% or more in the next decade, with political affiliation playing a notable role in shaping those views. On corporate earnings, there was a shift in tone in May, as Citigroup’s earnings revision index turned positive for the first time in six months, though some investors remain wary that markets have already priced in much of the good news. 

This is a condensed version of Rob Edel’s Market Commentary. To read the full version, click here.