On the face of it, May continued in a similar vein to April. Stock markets continued their strong ascent continuing to reach new highs as the fragile Iranian ceasefire vied with ongoing enthusiasm for semiconductor and memory chip manufacturers (companies that make computer chips used in technology and AI), to keep markets buoyant. As we commented last month, despite the cautious outlook warranted by the unstable geopolitical backdrop, stock markets have continued to be buoyed by the breadth and sheer scale of positive company reporting that has been released.

To that end, Nvidia, the leading example for the Artificial Intelligence (AI) theme that has gripped markets in the last couple of years, has continued to report strong revenue growth while continuing to raise its forecasts (estimates of future business performance) above market expectations. Aided by strong revenue generation, the company announced a capital allocation plan outlining how the company plans to use its financial resources to reward investors with increased dividends and a financial commitment to fund the repurchase for some of their own shares.

The persistent excitement for this emerging technology has not just been a dominant driver for the technology heavy US indices but has also spurred the advance of Asian and Emerging Market stock markets too. This has seen the Korea Composite Stock Price Index advance strongly (+20.98%) for the month, aided by leading semiconductor and memory chip companies such as Samsung and SK Hynix. Such has been the advance over May that Asian and Emerging Market indices have outperformed the outperformed the US stock market over the month, which has become increasingly concentrated in technology names.

On the geopolitical front, the avoidance of a re-escalation of military strikes in the Middle East, alongside an expectation of a deal for the reopening of the Strait of Hormuz (a key global oil shipping route), has led to a double digit fall in the price of oil. Markets reacted well, as this could help reduce inflationary pressures of the conflict.

Although these trends were significant, we also need to recognise other supporting factors providing comfort to markets. An additional geopolitical event occurred mid-month with the China and US summit, postponed from April. With President Trump being accompanied by a delegation of business leaders, this more

constructive diplomacy, along with the respectful hospitality and warm words of respect helped foster a positive tone from the meeting. With the avoidance of any missteps from both sides, this helped maintain positive reporting between the two super-powers.

During the month, the space technology company SpaceX announced plans to list in the US market with an initial public offering (IPO), which is when a company first sells shares to the public. This launch is set to boldly go where no other IPO has gone before, namely the largest ever IPO listing with a total valuation north of $1.5 trillion. Such strong blockbuster launches is set to continue, with an expectation that AI darlings Anthropic and OpenAI are also set to IPO later this year. This is likely to maintain enthusiasm for this technology theme a little while yet, although more sceptical investors would hope these launches will signal the peak of frenzy in this technology cycle.

With a somewhat protracted process, Kevin Warsh was finally declared as the incoming Governor to the body setting US interest rates – the Federal Reserve Monetary Policy Committee (FED). He is expected to favour lower interest rates, indicating both employment and growth remain of greater concern than the inflationary risks caused by Middle East geopolitics that are outside the control of the FED.

On that front, jobs data has continued to surprise with its resilience. US payrolls (showing how many jobs were added or lost in the US economy in a given month) have continued to firm, so while other economic data points have become more variable, employment figures have yet to cause any great concerns for stock markets. This can make conditions tougher for bond markets, as it lowers the likelihood of interest rate cuts that investors had expected at the start of the year. To this end, we finally saw the May inflation figures start to evidence the impact from the closure of the Straits of Hormuz, a vital shipping corridor that has been controlled by Iranian threats and a US blockade. This was evidenced by the US Core Consumer Price Index, a key measure of inflation, which rose to 3.8%, alongside the Producer Price Index, a measure of how prices are changing for businesses before those changes reach consumers, which increased by 6%.

Over the month this resulted in bond yields rising (their prices falling), as rate expectations for the US, UK and Europe remained elevated. This saw the 30yr US Treasury yield (US Government Bonds) rise to their highest level since 2007. Meanwhile, UK government bonds (UK gilts) also moved sharply higher as the UK election results, at the beginning of the month, increased pressure on the incumbent government with the market being concerned that a greater left-leaning government would increase borrowing.

The inflation figures were foreshadowed by Consumer Sentiment surveys falling on both sides of the Atlantic, with the University of Michigan Survey reaching a record low. Although this contrasts with buoyant retail sales, it should be remembered that the latter are not adjusted down for inflation, so like the strong Purchasing Manager Indices seen in April, they are more of a warning that an inflationary threat may persist. The sentiment surveys also indicate that consumers concerns stem from cost of living fears, rather than a weakening labour market at this stage, a persistent concern since the Global Financial Crisis of 2009 and Covid pandemic of 2020.

As financial returns have demonstrated this year, the strength in corporate reporting has outweighed some softening of the economic outlook. Robust corporate reporting has resisted the assumption that stock markets would remain more sensitive to unfolding geopolitical events. However, although the ceasefire in the Middle East has largely remained, the blockade of the Straits of Hormuz still poses a major threat to global supply chains.

Key positioning for portfolios

The last change to portfolios occurred on 20th May:

• We rebalanced our equity exposure back to our target level, helping us maintain a steady allocation to equities and benefit from continued company earnings growth.
• We also adjusted regional allocations back to target, keeping a higher allocation to Emerging Markets, a lower allocation to the US and Japan, and a neutral position in the UK.
• As rising inflation pushed bond yields higher, we increased exposure to longer-dated government bonds, allowing us to take advantage of more attractive yields and a potentially weaker growth environment.
• To fund this change, we took profits from shorter-dated corporate bonds, as interest rate cuts now look less likely in the near term.
• We have maintained a mix of high-quality corporate bonds alongside longer-dated government bonds to support income and diversification.
  

Managed Portfolio Service investment team