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Dow Jones NewsMay 30, 8:29 PM UTC
DJ You Should Have Bought in May. Should You Go Away in June? -- Barrons.com
By Avi Salzman
May flowers really bloomed for investors this year. June may not be quite as pretty.
The S&P 500 saw its best monthly gain since 2023 and its best May in 35 years, as markets quickly climbed back from their deep hole earlier in the year. The index was flat on Friday but was up more than 6% for the month. The Dow Jones Industrial Average rose 3.8% for the month, and the Nasdaq Composite jumped nearly 10%, its biggest gain since November 2023.
The biggest reason for the market optimism is that President Donald Trump has backed off some of his largest tariffs, and a court has challenged the legal basis for most of them. The U.S. Court of International Trade ruled on Wednesday that many of the president's tariffs, including his broad set of "reciprocal" tariffs, were put through illegally. An appeals court delayed the ruling for now, and Trump's advisers are considering new tariff plans that might face less legal pushback. But Wall Street seems to have breathed a sigh of relief and now expects the levies will be less draconian.
But it wasn't just tariffs. Earnings for companies that have already reported are up 13% year over year, according to Jeff Buchbinder, chief equity strategist at LPL Financial. An impressive 78% of companies have beaten earnings expectations, he notes, and most companies have been expanding their margins despite anxiety that tariffs and consumer weakness would weigh on them. The biggest tech stocks have contributed about half of that earnings growth, which is a big reason why the Nasdaq is outpacing the other indexes.
Fears of tariff-induced inflation have failed to be realized. The Personal Consumption Expenditures Price Index, the Federal Reserve's favored metric, slipped in April, while consumer confidence is picking up. The May payrolls report, due June 6, will be the next test.
Nonetheless, the S&P 500 has lately seemed stuck in a range just below 6000. To break out and start testing its previous high of 6144, several things would have to happen, strategists say. Craig Johnson, chief market technician at Piper Sandler, is looking for "lower inflation data, lower 10-year bond yields, and less noise out of Washington."
Most important, investors will need to watch how tariffs shake out. Vanguard now expects average tariff levels to settle around 10%, about half as much as Trump's original tariffs implied. That's a number that will undoubtedly impact company margins and consumer prices, but is less likely to tank the economy or cause rampant inflation.
Buchbinder, however, worries that 10% may be an understatement, and that tariffs could settle in around 13% to 15% -- bad news for the stock market, at least in the short term. "We wish we could dismiss the risk of higher tariffs, but we can't -- at least not yet," he writes. "LPL Research expects these tariff rates to largely hold, likely pushing out a possible S&P 500 breakout until earnings estimates go higher on the tax bill, which could take a while."
Time, unfortunately, may not be on our side.
Write to Avi Salzman at avi.salzman@barrons.com
This content was created by Barron's, which is operated by Dow Jones & Co. Barron's is published independently from Dow Jones Newswires and The Wall Street Journal.
(END) Dow Jones Newswires
May 30, 2025 16:29 ET (20:29 GMT)
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