May was a big moneymaker for the stock market as more constructive news on the tariff front gave bulls hope that the trade war may not play out as badly as feared.
The S&P 500 snapped a three-month losing streak in May, rebounding 6.29%, including dividends, posting its best month since November 2023. The large-cap stock market benchmark ended the month up 1.06% on the year.
Thanks to the rebound, mutual fund investors will like what they see when they review their May statements. The average U.S. diversified stock fund gained 5.78% in May, trimming its year-to-date loss to 1.17%, according to Lipper Refinitiv data.
Stock Market Growth Engine Comes Back
Growth funds, which got hit the hardest in the early-April slide following President Donald Trump's "Liberation Day" tariff announcement, posted the biggest rebound. Growth funds outperformed value funds by a wide margin. Large-cap growth funds rallied 8.86% in May, climbing back into positive territory for the year with a 0.47% gain. Large-cap value funds posted smaller gains, rising 4.31% and finishing with a year-to-date gain of 2.66%.
On the sector scorecard, science and technology funds, up 10.41%, topped the performance charts in May, trimming their 2025 loss to 0.25%. Tech funds got a boost from rebounding Magnificent Seven stocks, which accounted for nearly 60% of the S&P 500's May gain, according to S&P Dow Jones Indices. Health and biotech funds, hurt by regulatory and policy uncertainty, fared the worst, falling 3.52%.
The other major U.S. stock market indexes also advanced in May. The tech-heavy Nasdaq posted a total return of 9.65%. The Dow Jones Industrial Average rose 3.94%. And the small-cap Russell 2000 rallied 5.2% (on a price basis).
Tariffs On Hold
Tariffs were again the driving force for markets last month. The on-again/off-again tariff news gave traders whiplash. But Wall Street shrugged off the politics and Trump's tariff negotiation tactics. Investors, it appears, are betting on a bullish outcome.
The stock rally took flight in mid-May when the U.S. and China — the world's two biggest economies — agreed to a 90-day tariff truce on their respective sky-high levies. Bulls got more emboldened later in May when a U.S. trade court ruled that President Trump's global tariffs, which he announced in early April, were illegal.
But tariff news took a negative turn in the final days of May when a federal appeals court stayed the trade court's order. Trump also accused China of violating its recent trade deal and announced he was upping the tariff on imported steel to 50%.
A protracted global trade war is seen weighing on economic growth and reigniting inflation. Many Wall Street firms have upped the odds of recession due to tariff fallout. Still, stocks soared. And ETF stock funds sizzled in May.
How Funds Did Vs. The Stock Market
ETFs focused on growth, momentum, innovation and large caps fared best.
The ARK Space Exploration & Innovation ETF rocketed 12.45% in May, the top performer among the top 20-performing U.S. diversified stock ETFs in 2025. Invesco S&P 500 Momentum, which tracks big-cap stocks with high momentum scores, rose 11.40%. Actively managed Fidelity Magellan spiked 9.18%.
In a sign of investors' risk-on mood, the Invesco QQQ Trust ETF, which tracks the tech-stock-packed Nasdaq 100, gained 9.18%, and the Vanguard S&P 500 ETF advanced 6.28%. The Vanguard Growth ETF jumped 9.21%, handily outpacing Vanguard Value's 2.95% advance.
In contrast, Vanguard Total Bond Market, which tracks the U.S. bond market, fell 0.67%. Similarly, more conservative stock ETFs that invest in dividend-paying stocks and lower-volatility names lagged their higher-octane counterparts. The Invesco S&P 500 High Dividend Low Volatility ETF, for example, eked out a 0.41% gain.
Staying In The Stock Market Paid Off
Investors who got overly bearish on U.S. stocks in May and bet that the market would fall lost money. Dedicated short bias funds, which go up when the stock market goes down, slid 11.05% in May.
Heading into June, the $64,000 question is: Will tariffs yet again be a headwind for stocks?
"It's all tariffs all the time," said Chris Fasciano, chief market strategist at Commonwealth Financial Network. "(Where the market goes from here) is just a question of the headlines."
That said, Fasciano thinks the market is past peak tariff risk. "The way I look at it is that the worst-case scenario and the tail risk to the economy has been removed," said Fasciano.
The hope is that de-escalation is underway. And also that the U.S. and its trading partners will keep talking and produce a blueprint for trade deals they can agree on, says Fasciano.
Fiscal Battle Looms
Wall Street will also turn its sights on President Trump's "Big, Beautiful Bill." The bill heads to the Senate amid concerns that steep tax cuts will cause the U.S. trade deficit to balloon further. A rising chorus of financial heavyweights — such as JPMorgan Chase CEO Jamie Dimon and hedge fund titan Ray Dalio — warn that rising U.S. debt is emerging as a major risk.
Global diversification once again paid off for fund investors. A declining dollar vs. foreign currencies due to the economic uncertainty in the U.S. continues to drive assets out of America and into foreign bourses.
The average world stock fund rose 5.10% in May, according to Lipper Refinitiv. For the year, world stock funds are up 11.15%, vs. a decline of 1.17% for the average U.S. diversified fund. The top-performing foreign fund category in May was European region funds, which gained 5.88%, stretching their year-to-date return to 21.54%. European stocks are benefiting from increased spending on defense, especially in Germany, amid fears that the U.S. will disengage with its allies.
"Clearly, international equities are back," said Fasciano. "International stocks have been cheap for 15 years. Cheap is not an investment thesis, but you're starting to see signs of fundamentals improving over there. So, our advice to clients is to continue to have a diversified approach to your equity allocation."
Go Global With Stock Market
With economic and policy uncertainty high in the U.S., foreign stock markets continued to post strong returns as money rotates in. The VanEck Vietnam ETF rose 12.59% in May as investors price in expected supply-chain shifts from China to places like Vietnam. Top foreign fund ETF performers also included funds in Europe. Global X MSCI Greece surged 11.07%, extending its year-to-date gain through May to 41.79%. The iShares MSCI Austria ETF gained 10.05%, putting it up 38.40% in 2025. Meanwhile, iShares MSCI Italy rallied 8.05% while iShares MSCI Spain advanced 6.63%.
Bond funds were a drag on returns in May, however. Sentiment in the fixed-income space soured after Moody's Ratings downgraded the U.S. government credit rating from Aaa to Aa1, due to concerns about the nation's growing debt.
The 10-year Treasury fell in value, pushing yields up from 4.18% at the end of April to 4.40% at the end of May. The result: mild losses in most fixed-income fund categories.
The Bloomberg U.S. Aggregate Bond index, which tracks the investment-grade bond market, fell 0.72% in May, slicing its year-to-date gain to 2.45%. Core bond funds slid 0.59% in May, and the decline in Treasury prices pushed general U.S. Treasury funds down 1.63%.
Brace For What's Next
In fixed income, the bright spots were world income funds, which gained 0.72%, and high-yield funds, which jumped 1.67%.
With May in the books, the market's next move is likely to be determined by tariff headlines. Also at play is what the final version of Trump's "Big, Beautiful Bill" looks like and how it will impact the size of the U.S. budget deficit over the next decade.
"The progress of the bill in the Senate is worth watching," said Fasciano.
And the market's next move will hinge on new headlines.
"With markets having priced in better policy, economic and earnings news as equities rebounded from the early-April low, the near-term risk is that these expectations are not met," said Ulrike Hoffmann-Burchardi, chief investment officer of global equities at UBS Global Wealth Management.
