U.S. equities have posted strong gains in May, with the S&P 500 rising more than about 15% from its lows in April. Markets have stabilized following a temporary truce in U.S.-China trade tensions, which were previously rattled by President Donald Trump's renewed push for reciprocal tariffs.

Tariff Pause and Cooling Inflation Lift Markets

Investor sentiment improved on the back of paused tariff actions, a temporary U.S.-China trade ceasefire, and moderate inflation data. Although the S&P 500 remains about 3% below its all-time highs, momentum has turned positive across broader indices.

Rate Cuts on the Horizon?

Federal Reserve Governor Christopher Waller indicated that interest rate cuts could be considered if the Trump administration keeps its tariff policies relatively restrained. Speaking to Fox Business, Waller suggested monetary policy may turn more accommodative should trade tensions ease further.

Economic Data Shows Steady Growth

On the macroeconomic front, data released this week showed strength. U.S. business activity accelerated in May, signaling growing demand and business confidence. Initial jobless claims declined, pointing to continued strength in the labor market. These indicators support the view that the U.S. economy remains on stable footing despite trade-related headwinds.

Markets Pricing in Fed Easing

According to LSEG data, traders now expect at least two 25-basis-point interest rate cuts by the end of the year, suggesting strong belief that the Fed will move to counterbalance any slowdown triggered by external pressures.

Proposed Trump Tax Bill to Boost Bond Yields?

The House of Representatives narrowly passed a sweeping tax cut bill on May 22. A new analysis from the Congressional Budget Office (CBO) estimates that the tax provisions would add $3.8 trillion to the federal deficit over the next decade. This may boost U.S. treasury yields and weigh on the equity market.

Market Breadth Mixed Despite Rally

Despite headline gains, market breadth remained weak. The S&P 500 registered one new 52-week high and nine new lows on May 22, while the Nasdaq Composite saw 34 new highs and 83 new lows.

Is the Long-Term Prospect Bright?

While tariff fears were blamed for the April selloff, the market was likely due for a pullback after a strong run late last year and into early 2025. Either way, it presented a buying opportunity, just like most pullbacks and corrections do.

Since 1950, whenever the S&P 500 fell 10% in just two days (like what happened in April 2025), it has offered at least 18% returns over the next 12 months, with the highest being 59% (in 2020).