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Market Commentary

Monthly Financial Markets Commentary — June 1, 2025

Stocks roared back in the month of May as investors chose to believe that fears of a trade war are overblown, and that it's clear saling ahead with President Trump's otherwise supposed pro-business agenda. On note of caution is that it was mostly retail investors that drove the market up, with the so-called "smart money" (institutional money and hedge funds) sitting on the sidelines.

Breadth in the market has improved somewhat from earlier months as the more broad-based and cyclical Dow Jones Industrial Average and S&P 500 Index advanced relative to the more narrow, tech-based Nasdaq Composite Index. Narrow market leadership is not a healthy sign for the equity markets, as it historically portends declines in the markets.

By historical measures, such as price-earnings, price-to-sales, market-cap-to-GDP, Schiller CAPE Ratio, stocks are grossly overvalued. But investors, particularly retail investors, remain sanguine, as momentum has returned. This is not surprising given that every dip in the market since 2010 has proven to be a buying opportunity and an entire generation of investors and investment advisors believe the stock market only goes up. It is no coincidence that during this same period the Federal Reserve engaged in massive money printing, cementing the belief in the "Fed Put". Now there is talk of a "Bessent Put", a reference to current Treasury Secretary Scott Bessent, who is highly thougth of on Wall Street, and a stabilizing influence on President Trump.

For 2025 the S&P 500 Index, the capitalization-weighted broadest measure of U.S. stock market performance, has returned 1.14%. The Nasdaq Composite Index, another capitalization-weighted index, but more reflective of growth stocks, has returned -.81%. Finally, the Dow Jones Industrial Average, a price-weighted index, has returned .19%. All returns are on a total return basis in that includes dividends.

The Morningstar U.S. Aggregate Bond Index, a broad measure of the U.S. bond market, has returned 2.42% for the year. Longer-term rates have remained stubornly high, perhaps reflecting a higher inflation risk premium amid unsustainably high budget deficits. Credit spreads remain at very low levels, meaning that investors are demanding very little premium over so-called risk-free 10-year treasuries.

The sectors in the equity market that have performed the best in 2025 are Consumer Staples, Industrials and Utilities at 7.2%, 6.2% and 7.7%, respectively. Energy, Consumer Discretionary and Health Care have fared the worst at -6.4%, -6.4% and -4.2%, respectively. It is surprising to see the most prosaic and defensive sectors of the market performing the best during this so-called risk-on period.

The comparison of current price/earnings ratios and dividend yields as of June 1, 2025 to those of the prior year is as follows.

* based on 12-month trailing data

It is to be noted that much of the advance in the equity markets in 2024 was due to multiple expansion rather than fundamentals - this continues into the current year. The dividend yield, which is at historic lows, is a reliable metric of valuation, since it cannot be manipulated as earnings frequently are. There is general agreement that Wall Street analysts are overestimating 2025 corporate profits and will be taking those estimates down during the year. Dividend yields have continued to fall in the current year.

Gold and crude oil most recently traded at $3,340.75 and $63.25, respectively, compared to $2,620.00 and $73.75 one year earlier. Gold has risen in reaction to global political instability, increased holdings by all central banks and general concerns about the value of the dollar and creditworthiness of the United States. Year to date, Gold has significantly outperformed the S&P 500 index (as it has since January of 2000). The drop in the price of oil is alarming, as it frequently is an indication of the strength of the economy and a harbinger of future economic activity.