May 2025 was certainly an eventful month for the global stock market, marked by significant developments in trade policy, economic data, and geopolitical movements.

https://youtu.be/50VYxXpCMiU

Market Highlights & Key Events:

The month saw progress in the US-China trade war with a temporary 90-day reduction in tariffs agreed upon around mid-May. The US lowered tariffs on Chinese goods from 145% to 30%, effective May 14th, while China reduced tariffs on US imports from 125% to 10% for the same period, with talks ongoing until August 12th. This trade truce caused the market to react positively.

However, volatility was introduced by threats of a 50% tariff on European Union imports, initially announced for June 1st. This caused a market pullback, but the deadline was later extended to July 9th, 2025, matching existing negotiation terms, allowing talks to continue.

President Trump's visit to the Middle East in mid-May yielded significant results, particularly for the tech sector. Saudi Arabia, UAE, and Qatar committed to investing in the United States in exchange for purchasing AI chips from US companies like Nvidia. Saudi Arabia plans to build 1,000 MW of AI data center capacity, with Humane, one of their AI companies, committing to 18,000 initial GPU purchases and potentially hundreds of thousands over five years, alongside a $600 billion investment commitment to the US. The UAE plans a 5 GW AI campus, the largest outside the US, and signed agreements for an estimated $1.2 trillion in economic exchange, including importing 500,000 GPUs per year, benefiting US hyperscalers like Microsoft, Amazon, and Google. These deals are expected to provide additional revenue for companies like Nvidia and AMD, who also secured deals. Beyond AI chips, these countries also made the largest ever Boeing orders and significant arms sales commitments.

On the economic data front, CPI and producer price index data trended down, which is positive for the stock market. However, strong jobs reports suggest the Fed may be more patient with rate cuts, potentially delaying the first cut until around September. The Fed's dual mandate includes both price stability and maximum employment.

Fiscal policy updates include discussion of President Trump's "one big beautiful bill," aiming for deregulation, tax cut extensions, and energy/aviation restriction regulation. This bill, which includes extending tax cuts and increasing the defense budget while cutting Medicaid, passed the House narrowly in late May and is now with the Senate. Concerns exist about this bill potentially deepening the US deficit and debt, leading Moody's to downgrade US credit ratings. The Senate debate on this bill in June could introduce further market volatility. Potential tax cut extensions in July could be a positive catalyst, possibly announced before Independence Day (July 4th).

Market Performance & Overview:

Overall, the market has continued its uptrend following the trend reversal noted in the previous month. Positive catalysts like the US-China trade truce and the Middle East investment deals have fueled this.

• US Market: The Nasdaq 100 (QQQ ETF) and S&P 500 (SPY ETF) have shown confirmed trend reversals into uptrends. Over the last 10 years, the Nasdaq 100 provided around 397% return (40% average per year), and the S&P 500 provided around 170% return (17.02% average per year). The US market is seen as providing the most consistent return over the past decade. It also hosts many high-growth companies with strong drivers, particularly in sectors like AI, cloud computing, and traditional big brands.
• China Market: The Chinese stock market has been largely going sideways over the past 10 years (around a 2% increase). It is described as volatile and heavily influenced by government policies. Underlying economic problems like the property crisis, slow consumer spending (low inflation), and overproduction contribute to a slower, range-bound market. The market is primarily made up of retail traders, making it less mature and more volatile compared to the US market, which is dominated by institutional traders.
• Hong Kong Market: The Hang Seng Index has been in a negative region over the last 10 years. It is affected by both the China and US markets. While it saw an initial rally earlier in the year due to AI model announcements, momentum is slowing due to trade war uncertainties and China's economic problems. Hong Kong is also volatile and strongly influenced by the Chinese government, though it has more institutional investors than mainland China. Geopolitical factors have led to foreign funds flowing less into Hong Kong compared to Singapore, which is emerging as a financial hub.
• Malaysia Market: The Malaysian market (KLCI) has also been in a downtrend. It rebounded after a visit from the Chinese President and global trade developments, but the rebound has been weaker than in US and European markets. Uncertainty remains due to ongoing trade negotiations between Malaysia and the US. Foreign funds may be waiting for outcomes before investing, as emerging markets compete for deals. Malaysia, as a manufacturing hub, is subject to US tariff considerations, potentially impacting supply chain decisions.

Money on the Sidelines:

A record of approximately $7 trillion in cash remains on the sidelines in money market funds. Money market funds function similarly to fixed deposits, allowing funds and investors to earn interest on cash positions. The high US interest rate (around 4.5%) has made this a very attractive risk-free return. As the Fed approaches potential rate cuts (speculated for September), some funds are beginning to rotate out of money markets into other assets like stocks or bonds. This rotation out of cash positions could be a potential sign of investment movement into risk assets and could fuel a market run.

Potential Opportunities & Risks:

While opportunities exist, some risks persist:

Risks:

• Inflation Trend: Tariffs are expected to be inflationary. Monitoring global inflation, especially in the US, is crucial to see if tariffs cause spikes, which could affect Fed decisions.
• Geopolitical Tension: Ongoing trade negotiations could break down, leading to retaliations. China has historically retaliated using rare earth materials and increasing tariffs on US agricultural products. Non-tariff measures like export controls (e.g., on Nvidia chips to China) and investigations could cause supply chain disruptions. Warnings about empty shelves in the US due to potential disruptions have been noted. Potential retaliation on US digital or financial services by other countries is also a risk. The Ukraine-Russia war talks remain stalled, with Europe increasing defense budgets partly due to uncertainty over US commitments like NATO withdrawal possibilities. Threats of secondary tariffs on countries buying Russian oil (like China, India, Turkey) also add tension.
• Slower Global Growth: Tariff uncertainty and geopolitical tensions may slow the global economy. The IMF has lowered its forecast for global GDP growth. A global slowdown could reduce consumer spending, leading companies to lower earnings forecasts and outlooks, potentially negatively impacting stock prices.
• US-China Tech War: China's pursuit of self-sufficiency in semiconductors and technology under its "Made in China 2025" plan poses a concern for US tech growth. Breakthroughs by Chinese firms like Huawei or SMIC in chip technology could increase volatility in US semiconductor stocks and raise concerns about US tech dominance.
• Strong Dollar: A strong US dollar can make US exports more expensive, potentially negatively affecting the revenue of US companies with high foreign exposure when converted back to USD.
• High Valuations: Some tech and AI-related stocks have reached stretched valuation levels, making them more vulnerable to corrections during uncertainty.

Opportunities:

• Trade War De-escalation: The willingness of the US, China, and Europe to talk provides some stability. Positive outcomes from negotiations can lead to positive market reactions.
• Strong Tech Earnings & AI Demand: Recent earnings from companies like Microsoft and Meta indicate that AI demand remains strong, with companies still under data center capacity and planning significant capital expenditures. The Middle East AI infrastructure deals further confirm high demand and provide new revenue sources for AI companies like Nvidia and Broadcom.
• Potential Tax Cut Extension: Speculation about a potential tax cut extension in July could act as a positive catalyst for the market.
• Defensive & Less Affected Sectors: Opportunities may exist in sectors less affected by tariffs and retaliation. Examples include:
  Software companies: Less exposed due to online service delivery.
  Cybersecurity: High demand given geopolitical tensions and increased online data storage.
  Digital Advertising: Considered an essential trend.
  Consumer Staple Stocks: Those focused on domestic revenue are potentially safer from international retaliation.
  Companies with Diversified Import Sources: Less reliant on single countries affected by high tariffs.
• Increased Defense Spending: European countries increasing their defense budgets, and the US eyeing a $1 trillion defense budget, could create opportunities in the defense contractor and related industries.
• Market Correction Pullbacks: While cautious mode persists, pullbacks to important support levels could present investment opportunities for fundamentally strong stocks, especially when market reactions to news near support levels show stability.

Conclusion:

Despite ongoing macro risks, particularly related to trade tensions and global growth, opportunities are emerging, driven by positive developments in trade talks, strong AI demand, and potential fiscal policies. Investors should remain cautious, monitor key support levels, focus on fundamentally strong companies, and consider diversifying across sectors less affected by current trade uncertainties.