Market rebound: Trade détente eases uncertainty, but risks remain 

• Jean-Christophe Rochat
  Chief Investment Officer, Head of Asset Management und Mitglied des Exekutivausschusses
  Banque Heritage

This turnaround was fuelled by a more conciliatory tone on trade between the United States and its international partners, as well as by solid macroeconomic indicators. Contributing further to the momentum was a robust earnings season. In the United States, nearly all S&P 500 companies reported their first-quarter results. Earnings growth came in at 12.4% year-over-year, marking a second consecutive quarter of double-digit gains, a notable performance given the early-year expectations of an economic slowdown. 

Against this backdrop, the S&P 500 index delivered one of the strongest performances among major global equity markets during the month, advancing 6.3%. The technology sector stood out, with the Nasdaq surging 9.65%, driven by earnings results that significantly exceeded expectations. Cyclical sectors such as industrials and consumer discretionary also posted solid gains, reflecting renewed investor confidence in the economic outlook. In contrast, defensive sectors such as healthcare and consumer staples underperformed, weighed down by a sector rotation toward more economically sensitive segments amid easing recession fears. 

In Europe, markets also showed strong momentum in May: the Euro Stoxx 50 rose by 5.4%. Germany (DAX +6.7%) and France (CAC 40 +3.9%) benefited from improving economic indicators and a more favourable trade environment. Conversely, the Swiss market underperformed (+1.2%), dragged down by the weak performance of defensively weighted sectors, notably healthcare (Roche: -1.4%) and reinsurance (Swiss Re: -1.7%). Emerging markets, for their part, benefited from a weaker U.S. dollar and a resurgence in risk appetite. The MSCI Emerging Markets Index advanced 4.5%, while Hong Kong’s Hang Seng rose 6.6%. The top-performing markets were Taiwan (+12.5%) and South Korea (+7.8%), supported by strong performances from technology and export-oriented stocks. 

The fixed income markets presented a more contrasting picture. In the United States, growing fiscal concerns culminated in a sovereign credit rating downgrade by Moody’s, which sparked volatility and drove a sharp rise in long-term yields in mid-May. The yield on the 10-year U.S. Treasury ended the month at 4.40%, up 26 basis points from end-April. On the other hand, conditions in the Euro area remained relatively stable. The German 10-year Bund yield closed at 2.50%, up just 4 basis points, underpinned by subdued inflation dynamics. 

In a “risk-on” environment, commodities were the weakest-performing asset class in May, despite the RICI Commodity Index posting a modest gain of 1.02%. Gold prices remained in a consolidation phase around $3,300 per ounce, while agricultural commodities declined over the month. In currency markets, the U.S. dollar remained stable against the euro but fell 0.4% against the Swiss franc. The franc maintained its status as a safe-haven currency amid ongoing geopolitical uncertainty. 

Equity markets have nearly recouped losses incurred during the tariff escalation, supported by a marked improvement in investor sentiment across multiple fronts. On the trade front, signs of détente are increasingly evident: relationships with key partners such as the European Union and China have improved significantly, notably due to the temporary suspension of several planned tariff hikes. This easing has alleviated fears of a global economic slowdown. The May Geneva summit marked a pivotal moment, with the United States and China jointly announcing a temporary reduction in tariffs, establishing a three-month window to negotiate a broader trade agreement. Under this framework, U.S. tariffs on Chinese imports were lowered to 30%, while China reduced its tariffs to 10%. Negotiations resumed this week in London and appear to be advancing toward a preliminary agreement. 

Meanwhile, a bilateral deal between the United States and the United Kingdom was reached in strategic sectors including automotive and steel. Though modest in scope, this agreement signals a constructive intent to ease tensions. Talks with the European Union are also ongoing, though their outcome remains uncertain. 

In the U.S., recent economic data reveal a sharp divergence between hard data and more nuanced soft data. The May employment report provided reassurance to markets: nonfarm payrolls increased by 139,000, well above the Bloomberg consensus of 126,000, demonstrating notable economic resilience despite ongoing trade policy uncertainties. The unemployment rate held steady at 4.2%, while hourly wage growth reached 3.9% year-over-year, exceeding expectations of 3.7%. This robust wage momentum underscores the persistent strength of the labour market. On the inflation front, consumer prices showed a slight moderation in May. The headline Consumer Price Index (CPI) rose 2.4% year-over-year, up marginally from 2.3% in April, while core CPI (excluding food and energy) remained stable at 2.8% year-over-year, with monthly growth slowing to 0.1%, below forecasts. Amid this environment of solid but unspectacular growth, the Federal Reserve chose to maintain its monetary policy stance at its May meeting. The tone, however, was decidedly hawkish, with the Fed signalling that a rate cut in the near term remains premature given persistent inflationary pressures. 

Despite the positive signals from easing trade tensions and the U.S. economy’s evident resilience, several factors counsel a cautious stance on asset allocation. Chief among these is the sustainability of U.S. public debt. The 30-year Treasury yield is approaching a critical threshold of 5.1%, a level last seen in 2007 on the eve of the financial crisis, reflecting mounting concerns over America’s fiscal trajectory. The federal deficit continues to widen, and the outlook is clouded by the Trump administration’s ambitious “Big Is Beautiful” budget plan, which, while proposing some spending cuts, primarily focuses on further tax reductions for households and corporations without credible fiscal offsets. 

Moreover, the likely medium-term structural weakness of the U.S. dollar, though supportive of exports, risks exacerbating imported inflation, potentially forcing the Fed to maintain interest rates at elevated levels for an extended period. In this context, the risk of an unchecked debt spiral intensifies, which could weigh heavily on bond markets and, through contagion, more broadly on risk assets. 

Prudence and vigilance thus remain paramount. 

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