Muzinich Weekly Market Comment: The rally continues

June 2, 2025

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In our latest roundup of the key developments in financial markets and economies, we look back on another strong week for risk assets, despite mixed data and business sentiment.

Although just a four-day week for many investors, it was another strong one for financial asset prices, with global government bond curves flattening – the long end outperforming. Corporate credit spreads tightened across the world, with investment grade slightly outperforming high yield, helped by falling government bond yields.

Currencies and commodities were relatively subdued, although the US dollar edged higher against a basket of major global currencies, reflecting risk-on sentiment. Oil prices remained range-bound, fluctuating within a narrow band amid mixed signals on supply. In contrast, metal prices experienced broad-based declines of 2–3%, driven by concerns over weakening global manufacturing activity.

US durable goods data last week reminded investors that businesses remain cautious.^[1] Having front-loaded orders in recent months, it seems many firms are reluctant to commit to longer-term expansion plans.

Volatility continued to decline, with the VIX index falling below 20,^[2] signalling a normalization in market conditions and supporting the ongoing equity market rally. May was anything but typical for equities – global stocks, as measured by the Bloomberg World Large & Mid Cap Index, finished the month up 5% making it the strongest May for the S&P 500 and Germany’s DAX since 1990 and 1998, respectively.

It seems fair to suggest that much of the left-tail risk that emerged in April, driven by concerns around the US administration’s policy agenda, has since been priced out of markets. This shift, combined with a solid Q1 earnings season for the S&P 500, has helped restore investor confidence.

With over 96% of S&P 500 companies having reported, 78% exceeded earnings per share (EPS) estimates, while 63% beat revenue expectations.^[3] The index delivered its second consecutive quarter of double-digit earnings growth, underscoring continued corporate resilience. However, this strong performance was heavily influenced by the outsized contribution of the “Big Six” technology companies – Google, Meta, Microsoft, Apple, Amazon and Nvidia (See ‘Chart of the Week’).

Time for a TACO?

On the tariff front, the week began on a positive note for European companies, as the looming 50% tariff deadline was extended to July 9 following a constructive call between President Trump and European Commission President Ursula von der Leyen.^[4]

Markets received another boost when the US Court of International Trade ruled that the Trump administration lacked the legal authority to impose many of its announced tariffs.^[5] The ruling impacts a broad range of levies, including 10% baseline tariffs, 25% tariffs on Canadian and Mexican goods, 20% tariffs on Chinese imports, and reciprocal tariffs. However, key exceptions remain, namely tariffs on steel, aluminium, and automobiles, which were implemented under separate legal authorities.

As expected, the US Court of Appeals has allowed the existing tariffs to remain in place temporarily, setting a June 9 deadline for the administration to submit briefs supporting a longer-term stay.^[6] However, the final outcome remains uncertain, with a further appeal to the Supreme Court appearing likely, suggesting legal ambiguity could persist into the summer. Nonetheless, the consensus view is that even if the court’s ruling is ultimately upheld, the administration would likely find alternative legal avenues to preserve its tariff strategy.

Inflation cloud hangs over Fed and economists

The key highlights on the monetary policy front last week included the Bank of Korea’s decision to cut its base rate by 25 basis points to 2.5%, in line with consensus expectations.^[7] The central bank signalled it would maintain an easing bias but proceed cautiously, revising down its 2025 growth forecast sharply lower, from 1.5% projected in February to just 0.8%.

Meanwhile, the release of the May US Federal Open Market Committee meeting minutes revealed a cautious tone amid heightened uncertainty around trade policy, taxation, and regulation. Fed staff noted that the odds of a recession were now “almost as likely as the baseline forecast,” with tariffs expected to push inflation “markedly” higher this year and lift unemployment above its estimated natural rate.^[8]

The overnight interest rate swap market now sees the most likely timing for the next Fed rate cut as October, with the probability of a September move falling to 57%.^[9]

Inflation was also a key focus for economists last week. In Japan, Tokyo’s core Consumer Price Index (excluding fresh food) rose to 3.6% year-on-year in May, up from 3.4% in April and slightly above the 3.5% consensus forecast.^[10] Although the increase was partly driven by one-off factors, the data reinforces the Bank of Japan’s growing confidence in the durability of its 2% inflation target.

Governor Kazuo Ueda noted that the BOJ is now closer to achieving this goal than at any point in the past three decades.^[11] The central bank's next policy meeting concludes on June 17, with rates expected to remain unchanged, although pressure is building for further tightening.

In the Eurozone, the European Central Bank’s latest monthly survey showed a second consecutive rise in 12-month inflation expectations, now at 3.1%, up from 2.9% in March and the highest level in a year.^[12] The overnight interest rate swap market is pricing in a 98% probability of a 25bps rate cut at the ECB’s June meeting, with another likely in October.^[13]

In the US, the Fed’s preferred inflation gauge, the core PCE deflator, rose 0.12% in April, bringing the year-over-year rate down to 2.5% from 2.7%, in line with expectations.^[14] Disinflation in financial services, insurance, and recreation services helped offset increases in healthcare and categories heavily exposed to Chinese imports.

Chart of the Week: The ‘Big Six’ driving the S&P 500

Past performance is not a reliable indicator of current or future results.

Source: S&P Global, as of May 30 2025. S&P 500. Index represents best proxy for US equities. For illustrative purposes only.

References

[1] US Census Bureau, ‘Monthly Advance Report on Durable Goods Manufacturers' Shipments Inventories and Orders,’ May 27, 2025
[2] CBOE, Volatility Index, as of May 30, 2025
[3] FactSet, ‘Earnings Insight,’ May 30, 2025
[4] AP News, ‘Trump says he'll delay threatened 50% tariff on EU until July,’ May 26, 2025
[5] Wall Street Journal, ‘Trade Court Strikes Down Trump’s Global Tariffs, Says President Lacks Authority,’ May 29, 2025
[6] US Court of Appeals for the Federal Circuit, ‘V.O.S. Selections, Inc. vs Trump,’ May 29, 2025
[7] Bank of Korea, ‘Monetary Policy Decision,’ May 29, 2025
[8] Federal Reserve, ‘Minutes of the Federal Open Market Committee May 6-7 meeting,’ May 28, 2025
[9] Bloomberg, World Interest Rate Probabilities,’ as of May 20, 2025
[10] Statistics Bureau of Japan, CPI, May 30, 2025
[11] Reuters, ‘BOJ's Ueda calls for vigilance over food inflation risks,’ May 27, 2025
[12] European Central Bank, ‘ ECB Consumer Expectations Survey results – April 2025,’ May 28, 2025
[13] Bloomberg, World Interest Rate Probabilities,’ as of May 20, 2025
[14] US Bureau of Economic Analysis, ‘Personal Consumption Expenditures Price Index,’ May 30, 2025

This material is not intended to be relied upon as a forecast, research, or investment advice, and is not a recommendation, offer or solicitation to buy or sell any securities or to adopt any investment strategy. Reference to the names of each company mentioned in this communication should not be construed as investment advice or investment recommendation of those companies. The opinions expressed by Muzinich & Co. are as of June 2, 2025, and may change without notice. All data figures are from Bloomberg, as of May 30, 2025, unless otherwise stated.

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Index descriptions

S&P 500 - The Standard & Poor's 500 Index (S&P 500) is an index of 500 stocks seen as a leading indicator of U.S. equities and a reflection of the performance of the large cap universe, made up of companies selected by economists.

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