Market and economic commentary
May 2025

Equity markets worldwide performed well during May, with the US and China reaching a deal mid-month to significantly cut tariffs for at least 90 days.This agreement brings US tariffs on Chinese goods down to 30% from 145%, and Chinese levies on US goods down to 10% from 125%, paving the way for further negotiations.

All of the Compass Portfolios and ATBIS Pools (the Funds)¹ saw positive performance over the month, as equity strength was broad-based, with currency moves taking a backseat to market strength. Up-to-date performance data for the Funds can be found here.

Below are index total returns in Canadian dollar (CAD) terms for May:

Economy

Global trade tensions cooled in May, as China and the US agreed to lower their respective tariffs on each other, bringing them down from near-embargo levels. The reduced import levies are subject to a 90-day expiry, but this at least gives businesses and consumers some breathing room until a more fulsome agreement can be negotiated. Even though the headline numbers show a significant decrease in import tariffs, the average US tariff on Chinese exports is still 51.1% on average². This is because the decrease to 30% is on top of the existing around 20% tariff rate on Chinese goods, so there is still much progress to be made. 

Market participants are still waiting to see the flow-through of tariffs into the inflation data, as there has yet to be any significant price action. There hasn’t been much for news with respect to tariffs between Canada and the US specifically, but it is still weighing on the Bank of Canada’s (BoC) mind, especially with the inflation print for May. Headline CPI came in at a rosy 1.7%, but this can be attributed to a one-off impact due to the carbon tax being removed. Core inflation numbers told a different story, ranging from 2.5% for common, to 3.2% for the weighted median, which is above where the BoC has been targeting. The US saw a similar story with the headline figure coming in under core. Unsurprisingly, BoC held rates steady in June with the odds of a cut from the US Federal Reserve (Fed) diminishing. The BoC and the Fed both chose to use “data dependence” as reasons for holding policy rates steady. It remains to be seen whether this is another instance of central bankers doing too little too late as they wait for a material deterioration in the economy and/or a continued downward trend in core inflation.

Markets

Global equity markets reacted positively to the cooling of tariff tensions between China and the US with import duties from both sides taken down several notches. US markets strengthened the most, with the S&P 500 rising just over 8% mid month, but falling to just under 6% by the end, as rising long bond yields tempered market enthusiasm. The outperformance of the US market was broad-based; the popular ‘magnificent seven’ stocks led the way, rebounded, and rose just under 13%, trailed by small and mid cap names. While tariff and policy uncertainty are serving as an overhang over the US market, the resilience in US earnings cannot be ignored. Despite multiple downward revisions following the implementation of import duties, earnings have still grown more than 12% during the current quarterly earnings season. Valuations continue to be elevated in the US, but it is not without reason. 

Looking at the rest of the world, the story was much the same from a performance perspective, as major indices representing both developed and emerging markets saw single digit returns over the month. Gold continued its rally through the month, although it wasn’t the primary driver of Canadian stocks for May, taking a backseat to industrial and consumer discretionary names. The rest of the developed world was also primarily driven by industrial names, primarily those involved in infrastructure and defense-related areas of the economy. 

On a monthly basis, bonds returned to their boring, stable selves delivering a more or less flat return for May, although it wasn’t without some intra-month volatility. Fixed income markets were fairly quiet for most of the month until the combination of a poorly received 20-year Japanese government bond auction and the passing of the “Big Beautiful Bill” by the House, which saw Canadian bond yields rise around 30 basis points over a couple of days. The market reaction to both of these events might be signalling that investor appetite to fund continued spending through long government bonds might be reaching its limit. Nevertheless, the sudden jump in yields proved to be short lived, as interest rates fell, and bond prices recovered to be flat for the end of the month, furthering the point to have a long-term view on your investments.

Compass Portfolios Series F1 - Returns net of fees

ATBIS Pools Series F1 - Returns net of fees

¹ Using F series returns

² https://www.piie.com/research/piie-charts/2019/us-china-trade-war-tariffs-date-chart