May 2025 Market Update: Markets Rise Despite U.S. Credit Rating Cut

Stock markets bounced back in May. The S&P 500 (a group of 500 large U.S. companies) made up for all the money it had lost earlier in the year. This good month happened even though there were new trade deals, mixed signals about the economy, and worries about how much money the U.S. government owes. Many reports showed the economy was doing well, but regular people still felt worried about what might happen next. Interest rates on government bonds (called Treasury yields) went up and down during the month because people were concerned about government spending and debt. For people who invest for the long term, May showed that markets can adjust to changing situations, even when there’s a lot of uncertainty about economic policies.

Important Market and Economic News1

• The S&P 500 went up 6.2% in May, its best month since 2023. The Dow Jones Industrial Average (another group of large companies) rose 3.9%, and the Nasdaq (which includes many technology companies) climbed 9.6%. For the whole year so far, the S&P 500 is up 0.5%, the Dow is down 0.6%, and the Nasdaq is down 1.0%.
• The Bloomberg U.S. Aggregate Bond index (which tracks how bonds are doing) fell 0.7% in May but is up 2.4% for the year. The 10-year Treasury yield (the interest rate on government bonds) ended the month at 4.4%.
• International stocks also did well. Both developed markets (like Europe and Japan) and emerging markets (like some countries in Asia and Latin America) went up 4.0%.
• The U.S. dollar index dropped to 99.3, near a three-year low compared to other currencies.
• Bitcoin reached a new record high of $111,092 before ending the month at $104,834.
• Gold also hit a new record high of $3,422 before closing at $3,288, up 24% for the year.
• The Consumer Price Index report (which measures how much prices are rising) showed that prices went up 2.3% in April compared to the same time last year. This was the smallest increase since February 2021.
• The economy added 177,000 new jobs in April while the unemployment rate (the percentage of people without jobs) stayed low at 4.2%.

Markets kept recovering despite new worries

May’s market comeback shows why it’s important to stick with your investment plan during tough times. After a difficult April, markets showed they could bounce back by recovering most of their losses and turning positive in May. This shows how quickly investor feelings can change when things start to get better – something investors have seen many times over the past ten years. Of course, what happened in the past doesn’t guarantee what will happen in the future. Markets will keep worrying about trade deals, U.S. debt, and how healthy the economy is in the coming months.

Moody’s lowered the U.S. credit rating

One of the biggest surprises in May was when Moody’s (a company that rates how likely governments are to pay back their debts) lowered the U.S. credit rating from Aaa to Aa1. This happened after similar downgrades by Fitch in 2023 and Standard & Poor’s in 2011. All of these reflect concerns about the country’s growing debt and spending. The chart that goes with this article shows that the U.S. total debt grew to 122% of GDP (Gross Domestic Product – the total value of everything the country produces) in 2024. Net debt (which doesn’t include debt the government owes itself) has risen to 97%.

Even though this was a historic downgrade of U.S. debt, markets barely reacted. This is because the downgrade mostly looks at past problems, and investors already knew about the nation’s money troubles. The calm response also reflects lessons from the 2011 Standard & Poor’s downgrade, when Treasury securities (government bonds) continued to be seen as safe investments.

It might not have been a coincidence that this downgrade happened as the House of Representatives was passing a big tax and spending bill. The approved bill would extend individual tax cuts from the Tax Cuts and Jobs Act. This includes a 37% top tax rate, child tax credits, higher deductions for state and local taxes, and exemptions for tips and overtime pay, among other things. According to the Penn Wharton Budget Model, this legislation could increase deficits (the amount the government spends more than it takes in) by $2.8 trillion over the next 10 years.2 The bill will now be discussed and possibly changed in the Senate.

While many people agree that these money problems need long-term solutions, the U.S. dollar is still the world’s main reserve currency (the currency other countries prefer to hold). There will continue to be demand for Treasurys for the foreseeable future.

Trade talks show improvement

There was also progress on trade talks in May, which removed many of the worst possible outcomes. The administration reached agreements with both the U.K. and China, while talks continued with other major trading partners. The U.S.-China trade agreement included a 90-day period of reduced U.S. tariffs (fees on imported goods) on Chinese products.

Despite these deals, there will likely continue to be uncertainty around trade. More recently, China and the U.S. have both accused each other of breaking the trade truce, and the administration wants higher tariffs on steel and aluminum. At the same time, talks with the European Union created hope when the White House delayed its planned 50% EU tariff after positive discussions. This suggests that diplomatic solutions are still possible, even when starting positions seem very different.

The administration is also facing legal challenges to its tariffs. In May, the U.S. Court of International Trade struck down many of the newly created tariffs, ruling that they go beyond presidential power under the International Economic Emergency Powers Act. While a federal appeals court paused this ruling, allowing tariffs to stay in place for now, this legal challenge adds another layer of uncertainty to the trade situation.

It’s important to remember that trade policy usually takes months and years to unfold, not days or weeks. The recovery in May reminds us that investors should not overreact to trade news, especially now that the worst-case scenarios are less likely to happen.

Steady company earnings support the market