10 Jun 2025
Tariff concerns ease but remain
As of mid-month or so, Barclays estimated that the current U.S. weighted average tariff rate was around 14%. And corporate executives have become more vocal about the impact. Walmart’s Chief Financial Officer John David Rainey said that “The magnitude and speed at which these prices are coming to us is somewhat unprecedented in history.” With a net profit margin of approximately 2.9%, the increase in its cost of goods will result in lower employee wages, lower profits, or an increase in consumer prices.
While the administration lowered tariffs on China from 145% to 30%, container ship activity from China has actually fallen subsequently, as noted by Eugene Seroka, the executive director of the Port of Los Angeles, among others. With the decline in imports, the U.S. trade deficit fell to “only” $88 billion last month, below expectations for $143 billion. But while overall trade has fallen, most economic indicators remain on solid ground so far. Initial jobless claims remain low. The U.S. added 139,000 jobs in May and the unemployment rate remained at 4.2% (U.S. Bureau of Labor Statistics). The Atlanta Fed’s GDPNow estimate for the second quarter stands at a very healthy 3.8%, far ahead of the Blue Chip consensus of 1%. Likewise, Eurozone unemployment remains at a record low of 6.2% and Eurozone Q1 GDP surprised to the upside, coming in at 0.4%. All of which helped to push equity markets higher for the month.
Indeed, trade tensions have moderated, inflation expectations have moved lower, and the Fed’s preferred gauge of consumer prices ticked up only slightly in April (the PCE increased 0.1% bringing the trailing twelve-month number to 2.1%), but consumers still think inflation will be 5.3% in one year’s time. Further, non-farm labor productivity fell in Q1 by 0.8% from the prior quarter, which has an inflationary impact. Add to that the fact that credit card, auto loan, and student loan delinquencies continue to climb, and there is still a wall of worry for Wall Street to climb.
What happened in the markets in May?
EQUITIES: THE RETURN OF THE MAG 7 (MINUS APPLE)
After a short reprieve during which global stocks in general outperformed the Mag 7, rewarding investors holding diversified equity positions, the tech giants came roaring back. Nvidia (+24%), Tesla (+23%), Meta (+18%), Microsoft (+17%), Amazon (+11%), and Alphabet (+8%) all outperformed the S&P 500®, which gained 6.3%, and those stocks accounted for most of that gain.
Earnings season concluded, and operating earnings for the S&P 500 fell by 5.6% from Q4 but were ahead of 1Q24 by 5.8% on margins that fell slightly to 11.8% from 12.0% at year end. Total corporate profits inclusive of both public and private companies fell by 2.9% in the first quarter. But according to Jeffries, sell side analysts haven’t had this many S&P stocks rated as “buys” since 2002, for whatever that is worth.
One interesting parallel with the tech bubble, as pointed out by BofA, is that defensive sectors – healthcare, utilities, and staples – as a percentage of the S&P have declined materially, almost matching the lows set back in 2000.
Overseas, equity markets enjoyed a solid month that wasn’t impacted materially by the U.S. dollar for the first time in months. International large caps gained 4.6% and international small caps returned 5.6%, while emerging markets advanced by 4.3% (all in U.S. dollars).
BONDS: THE BIG BEAUTIFUL BILL PUSHES YIELDS HIGHER
The yield curve from 3-months out to 30-years moved higher as bond investors processed the impact on the deficit of the new budget bill that passed the House and has moved on to the Senate. The Congressional Budget Office estimates that in its current form, it would add $2.4 trillion to the deficit, before considering additional interest costs, and that has the bond market on edge. With the 10-year moving up by 24 basis points (bps) and the 30-year advancing by 26 bps, long-term Treasuries fell by almost 3% during the month and the bond market as a whole pulled back by 0.7%.
But there were places to find relief. High-yield bonds returned 1.7% as spreads narrowed by 62 bps. Leveraged loans also fared well in the rising rate environment, adding 1.6%. And munis, which had hit a rough patch, were in the black, gaining 0.1%.
COMMODITIES: OIL GETS RELIEF
While oil prices hit multi-month lows during May, both WTI and Brent crude futures finished higher overall, gaining 5.9% and 3.3%, respectively. That was sufficient to offset weakness in natural gas that saw contracts fall by 4.8% and lead the energy complex to a modest gain of 0.5%. Industrial metals also moved higher, gaining 1.2% on solid economic news that helped copper and aluminum advance.
Within the precious metals group, silver futures gained about 1% and spot prices topped $35 oz for the first time in over 13 years, driven by industrial demand, supply deficits, and investor flows. The latter was at the expense of gold futures, which gave up 0.6%.
And lastly, agricultural commodities sold off by 3.3% despite advancing cattle prices that have been pushed up by a screwworm infestation (don’t ask).
How are Frontier strategies positioned?
ALLOCATION CHANGES
Due to the complexities of attempting to generalize about allocation changes across our Core, Specialty, Tax-Managed, Active ETF, Conservative Income and Faith-Based Strategies, and the additional difficulties of properly conveying how those asset allocation changes flow through to trade level activity, we instead direct clients to our monthly trade summaries, which describe in detail what trade activity occurred by strategy, and why.
Focusing on our Core Strategies, relative to their long-term asset allocations, which serve as policy portfolios guiding our dynamic allocation decisions, we favor U.S. and international small caps, emerging market equities, managed futures, TIPS, and cash/short term bonds in more conservative strategies. We are generally underweight U.S. and international large cap stocks, and both high-yield and high-quality bonds at the asset allocation level, but differences between the asset allocations and actual exposure at the fund level can and will occur. At the beginning of June, our asset allocation models reduced exposure to managed futures, global small caps, and TIPS, while adding to global large cap equities.
Expected returns fell month-over-month for all equity asset classes, but slightly more so for global small caps and emerging markets. Estimates for long-term government bonds and high-quality bonds rose, while those for high yield bonds dipped.
PERFORMANCE ATTRIBUTION
With the resurgence of the Mag 7 and the resulting outperformance of U.S. large caps compared to the rest of the global equity market, Frontier’s underweights to U.S. large caps were detrimental to relative performance. However, U.S. small caps performed quite well on an absolute basis, and international small caps outperformed their large cap peers, so in total, market cap positioning was only slightly negative. From a geographic perspective, having more exposure to non-dollar assets than our benchmarks was also a bit of a headwind, as U.S. equities outperformed non-U.S. equities. On the positive side, limited exposure to REITS and commodities in most strategies was beneficial, and being underweight duration in general was a positive within our fixed income positioning.
Past performance is no guarantee of future returns. Performance discussed represents total returns that include income, realized and unrealized gains, and losses. Nothing presented herein is or is intended to constitute investment advice or recommendations to buy or sell any type of securities, and no investment decision should be made based solely on information provided herein. There is a risk of loss from an investment in securities, including the risk of loss of principal. Different types of investments involve varying degrees of risk, and there can be no assurance that any specific investment will be profitable or suitable for an investor’s financial situation or risk tolerance. Diversification and asset allocation do not ensure a profit or protect against a loss. All performance results should be considered in light of the market and economic conditions that prevailed at the time those results were generated. Before investing, consider investment objectives, risks, fees, and expenses. Frontier may modify its process, opinions, and assumptions at any time without notice as data is analyzed.
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Inflation is the decline of purchasing power of a given currency over time. A quantitative estimate of the rate at which the decline in purchasing power occurs can be reflected in the increase of an average price level of a basket of selected goods and services in an economy over some period of time. The rise in the general level of prices often expressed as a percentage, means that a unit of currency effectively buys less than it did in prior periods.
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| ASSET CLASS | INDEX | INDEX DESCRIPTION |
| U.S. Large Cap Growth | S&P 500 Growth | Measures the performance of the large-capitalization growth stocks in the U.S. equity market. |
| U.S. Small Cap Growth | S&P 600 Growth | Covers roughly the small-cap growth range of American stocks, using a capitalization-weighted index. |
| U.S. Infrastructure | S&P Global Infrastructure | A stock market index that tracks the performance of 75 of the biggest publicly listed companies in the global infrastructure industry. |
| International Developed Equity | MSCI EAFE | An equity index which captures small-cap representation across 21 Developed Markets countries around the world, excluding the U.S. and Canada. |
| Chinese Equity | MSCI China | Captures large and mid cap representation across China A shares, H shares, B shares, Red chips, P chips and foreign listings (e.g. ADRs). |
| Global Equity | MSCI All Country World | A stock index designed to track broad global equity-market performance |
| Emerging Market Equity | MSCI Emerging Markets | Captures large and mid-cap representation across 24 Emerging Markets (EM) countries. |
| Investment Grade Corporates | Morningstar US Corporate Bond | Measures the performance of fixed-rate, investment-grade USD-denominated corporate bonds with maturities over one year. |
| High Yield Bonds | Morningstar U.S. High Yield Bonds | Measures the performance of USD-denominated high-yield corporate debt. It is market-capitalization weighted. |
| TIPS | Morningstar US TIPS | Represents inflation-protected securities issued by the U.S. Treasury. |
| Leveraged Loans | S&P / LSTA U.S. Leveraged Loan 100 | Designed to reflect the performance of the largest facilities in the leveraged loan market. |
| Long-Term Treasuries | Morningstar US 10+ Yr Treasury Bond | Measures the performance of fixed-rate, investment-grade USD-denominated Treasury bonds with maturities greater than ten years. |
| Municipal Bonds | Morningstar US Municipal Bond | Measures the performance of fixed-rate, investment-grade USD denominated tax-exempt debt issued by U.S. state, U.S territory, and local government entities with maturities greater than one year. |
| REITS | FTSE NAREIT Equity REIT | A free-float adjusted, market capitalization-weighted index of U.S. equity REITs. |
| Commodities | Bloomberg Commodity | Broadly diversified index that allows investors to track commodity futures through a single, simple measure. The DJ-UBSCISM is composed of futures contracts on physical commodities. |
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