Stock and bond markets have remained steady and the wild swings that marked April have subsided. The stock market rally in May bodes well for the rest of the year. In addition, we continue to see encouraging signals from key stocks like Nvidia and Microsoft. Lastly, inflation data has been surprising to the downside, which should help bonds post positive returns in 2025.
Good signals are stacking up
The S&P 500 rose 6% during the month of May. That is the second best May performance since 1950, and just the 9th time the index has risen more than 5% during the month of May. Seven out of the prior nine instances saw double digit returns through the rest of the year (data from Blackrock): 
If the S&P 500 were to achieve its “average” rest of year return following its May close of 5,911, it would rise 12.70% to 6,661.
This encouraging May signal stacks on top of a bullish January signal from earlier in the year. The S&P 500 went up 2.8% for the month of January. Since 1926, a positive January has been followed by higher returns the rest of the year 80% of the time. The average rest of year gain has been 12.80%, which would target 6,813 in the S&P 500 at year end (vs a January close of 6,040).
Let’s also remember that we came into the year on a 2-year winning streak. Thus far, the S&P 500 is positive for the year, on pace for a third year in a row of gains. Since 1926, the average “third year” return in a three year win streak is 15.78%. That average return would take the S&P 500 to 6,809 (from a calendar year 2024 close of 5,882).
Lastly, we noted last month that the market tends to do very well following a period of intense volatility like we saw in April. Add it all up, and we view this data as supportive evidence that the market can keep going higher in the second half of the year.
Nvidia and Microsoft wake back up
We’ve been highlighting the impact of Nvidia and Microsoft to the market for the last two years. These two stocks sit at the top of the most important market narrative today: the AI revolution. Their recent strong performance is a good sign.
In the case of Microsoft, the stock has broken out to new all time highs after being dead money for much of the last year:
Nvidia has also gone through its own dead money period for much of the last year. Lately though, the stock is spending time “above the box” over $140, suggesting it could soon join Microsoft in a renewed uptrend:
These two stocks make up nearly 14% of the S&P 500 index, so their performance has an outsized impact on the performance of the overall index. If you think of a rising tide lifting all boats, you can think of Nvidia and Microsoft as the tide, and the S&P 500 as the boat.
Bonds benefitting as inflation cools
Inflation has been trending lower over the last year after peaking in 2022. Declining inflation is one reason the market expects that the Federal Reserve may lower interest rates later this year. The graph below shows the inflation rate (CPI) versus the 2-year Treasury yield. As inflation has trended lower, the 2-year yield has fallen from 5% to 4%. Yields fall as bond prices rise, so falling yields means bond investors have gotten some price appreciation these last few quarters.
More relief may be on the way as inflation has typically been lower in the second half of the year compared to the first half. Likewise, bond returns have been stronger in the second half of the year as well (data below from Blackrock, since 1995):
We continue to recommend that investors should lock in intermediate to longer term treasury rates. Maturities between 2-10 years currently offer yields between 3.90%-4.50%. While these yields are below the highest levels of the last year, they are still near the highest since before the 2008 Financial Crisis.
In summary, the fast paced market drop that played out from March through April now appears to be behind us. While stocks can be expected to experience their normal moves up and down, various data points to a continued uptrend over the rest of the year. Key stocks like Nvidia and Microsoft have been going higher, helping lift the broader market as a result. And bonds, which still offer yields in the 4% range, are also doing well and are on track for a positive 2025.
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