Market Overview
Equity markets worldwide rose in May, as hopes for reduced global trade tensions boosted risk appetites.
Uncertainty about U.S. trade policy persisted during the month following the rollout and subsequent delay of broad tariffs on most U.S. imports in early April. Concerns that a trade war could trigger a global economic recession led to market volatility. Markets surged after the U.S. and China, whose goods were initially subject to U.S. import taxes that were exempt from the pause, announced a truce while negotiations continued. Similarly, the U.S.’s proposed 50% tariffs on European Union goods impacted markets, but they quickly recovered after the announcement of a delay in implementing the tariffs until 9 July to facilitate the two sides reaching a trade deal. Late in the month, a U.S. trade court blocked most U.S. tariffs, sparking a short relief rally. However, an appeals court subsequently upheld the tariffs temporarily, leading to uncertainty.
The economic impact of tariffs remained a key focus for major central banks. All eyes were on the U.S., where the Federal Reserve held interest rates steady for the third consecutive policy meeting in May, citing the rising risks of higher inflation and slower economic growth posed by U.S. trade policy. The Fed stated it was “not at all clear” what its next steps should be but chose to take a patient approach to lowering interest rates. Its latest action came amid data released during the month showing that domestic inflation in April remained subdued due to slower spending, and U.S. consumer confidence rose in May after five consecutive months of declines.
Across the Atlantic, the release during the month of encouraging inflation data for the eurozone’s largest economies raised expectations that the European Central Bank (ECB) would lower interest rates at its eighth consecutive policy meeting next month, though the ECB stated that potentially higher prices from U.S. tariffs could limit further reductions. In the U.K., the Bank of England (BOE) lowered interest rates 25 basis points (bps), citing the need to contain potential adverse impacts on the British economy, though it emphasized that it did not have a pre-determined path for its interest rate policy. Notably, the BOE’s rate cut occurred before the U.S. and U.K. reached a trade deal. Elsewhere in Europe, central banks in Sweden and Norway left their interest rates unchanged, with both citing the need to gauge the impact of U.S. tariffs on their respective domestic economies. In May, the yield on the 10-year German Bund, Europe’s principal safe-haven asset, rose 6 bps, ending the month at 2.51%.
Meanwhile, in Asia, the Bank of Japan, as expected, held interest rates steady and sharply reduced its growth forecasts for Japan’s export-reliant economy due to the uncertainty surrounding tariffs, though it stated that with domestic inflation headed sustainably towards its 2% target, rate hikes were still possible. Elsewhere in Asia, China’s central bank cut interest rates and lowered barriers for banks to increase lending in an effort to address potential impacts on the country’s faltering economy.
The risk-on market environment during May was tempered when the U.S. lost its last Aaa credit rating due to concerns about its rising national debt, which could worsen if 2017 tax cuts become permanent. News of the downgrade, combined with tepid demand for 20-year U.S. Treasuries at an auction in the latter half of the month, drove an increase in yields of U.S. government bonds with longer maturities, which, in turn, increased pressure on stocks by undercutting their appeal. The yield on the benchmark 10-year U.S. Treasury note ended May at 4.41%, 24 bps higher than a month earlier.
With the new earnings season in full swing, investors learned how the challenging macro environment affected company profits. In the U.S., 78% of the companies in the S&P 500 Index that reported results topped consensus estimates, outperforming the long-term average of 67%. The first-quarter earnings growth rate is estimated to have increased 13.3% from a year earlier. In Europe, 52% of the companies in the STOXX 600 Index that reported results posted better-than-expected earnings, below the 54% that do so in a typical quarter. The year-over-year first-quarter earnings growth rate is expected to have contracted 3.8%. In Japan, 55% of the companies in the TOPIX reported positive earnings surprises, which was on par with the beat rate over the past four quarters. The first-quarter earnings growth rate is estimated to have decreased 9.5% from a year earlier. In Hong Kong, 64% of the companies in the Hang Seng Index registered better-than-expected earnings, surpassing the 54% beat rate over the past four quarters. The second-quarter earnings growth rate decreased 2.6% from a year earlier.
Against this backdrop, equity markets in both the developed and developing worlds rose in May, with the former outperforming the latter. In the U.S., the S&P 500 outperformed and posted its best monthly performance since November 2023, ending May less than 4% from the record high the index recorded in mid-February, as risk appetites were buoyed by easing trade tensions, strong company earnings results, and subdued domestic inflation. Across the Atlantic, the pan-European STOXX 600 rose but lagged the broader global index, despite news of a delay in the implementation of U.S. tariffs and expectations that the ECB will deliver a rate cut next month buoyed risk appetites. In Japan, the TOPIX recorded a modest gain but underperformed due to partial profit-taking.
In China, the CSI 300, a gauge of large Chinese companies trading in Shanghai and Shenzhen, rose but underperformed, as risk sentiment was undercut by disappointing data released during the month suggesting that China’s economy continued to be hampered by persistent deflationary pressure.
Information technology was the best-performing sector in May, as news of a détente in the U.S.-China trade war boosted the stock prices of chipmakers, smart phone manufacturers, and tech giants with significant exposure to China. Health care was the worst-performing sector, as the risk-on market environment led investors to rotate away from defensive stocks.
Outlook
Increased uncertainty surrounding the U.S. economic outlook and key policy measures, including specifically tariffs, are now weighing more heavily on markets and have interrupted what had previously been, in our opinion, a clearer line of sight towards decelerating inflation and strong likelihood of success achieving an economic soft-landing. Our base case expectations for moderate economic deceleration have been further thrown in doubt during April as the announced U.S. tariff measures were more punitive than anticipated and triggered a wide range of retaliatory responses as well as grave warnings from key stakeholders of U.S. commerce and industry.
While markets continue to wrestle with considerable uncertainty, we expect Infrastructure to continue to exhibit critical defensive qualities and remain an invaluable diversification component for investment portfolios given the essential nature and real asset characteristics of the asset class. In contrast to businesses and industries where valuation is underpinned primarily by revenue growth and competitive profit margins, critical infrastructure derives considerable valuation support from its high fixed cost of investment and high visibility, high margin cash flows collected over long periods of time [to recoup the initial capital outlay].
This important combination of characteristics tends to lend itself to superior defensive positioning, in our view, against global trade uncertainty, inflationary pressure, economic recession and market volatility. On the risk side of the ledger, however, we include typically above-average levels of balance sheet leverage and sensitivity to interest rates.
From a sectoral standpoint, we see a number of multi-year critical infrastructure investment trends likely to continue largely undeterred by recent tariff and trade uncertainty. Electrification and the growing demand for power serves as an example, in our view. Utilities were a key positive contributor to performance during 2024 and have been a defensive respite thus far in 2025. While we maintain a favourable sector outlook for Utilities and foresee scope for upward earnings revision, valuations have also re-rated higher, and we do not expect the same pace of returns for utilities to continue in the U.S. On the other hand, we continue to find very compelling valuations and opportunities in utilities outside the U.S.
Outside of the utilities sector, we believe U.S. midstream energy, namely oil & gas storage and transportation, continues to offer a compelling combination of attractive valuation and improved capital allocation discipline. And while increased uncertainty regarding global trade and the risk of global recession now weighs more heavily on energy prices and the sector earnings outlook generally, the vast majority of the cash flows associated with the portfolio’s midstream holdings are fee-based and enjoy strong support from take-or-pay contracts and spread differentials at key access points.
Elsewhere within the portfolio, we see an abundance of opportunities stemming from large-scale investment in transportation infrastructure, information technology and energy development & security, leading to increased demand for materials, capital goods and industrial equipment.
We believe the portfolio remains well-positioned to take advantage of these opportunities in real asset infrastructure businesses as well as key enablers, including materials, services, and technologies, that will both facilitate and benefit from increased investment in infrastructure.
The information contained herein provides general information about the Fund at a point in time. Investors are strongly encouraged to consult with a financial advisor and review the Simplified Prospectus and Fund Facts documents carefully prior to making investment decisions about the Fund. Commissions, trailing commissions, management fees and expenses all may be associated with mutual fund investments. Mutual funds are not guaranteed; their values change frequently and past performance may not be repeated.
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Allocations and security selection are subject to change. The performance quoted represents past performance. Past performance is not a reliable indicator of future results. Mention of these securities should not be considered a recommendation or solicitation to purchase or sell the securities. It should not be assumed that any investment in these securities was, or will prove to be, profitable, or that the investment decisions we make in the future will be profitable or equal to the investment performance of securities referenced herein. There is no assurance that any securities referenced herein are currently held in the portfolio or that securities sold have not been repurchased. The securities mentioned may not represent the entire portfolio.
Equity securities will fluctuate in price; the value of your investment will thus fluctuate, and this may result in a loss. Securities in certain non-domestic countries may be less liquid, more volatile, and less subject to governmental supervision than in one’s home market. The values of these securities may be affected by changes in currency rates, application of a country’s specific tax laws, changes in government administration, and economic and monetary policy. Emerging markets securities carry special risks, such as less developed or less efficient trading markets, a lack of company information, and differing auditing and legal standards. The securities markets of emerging markets countries can be extremely volatile; performance can also be influenced by political, social, and economic factors affecting companies in these countries.
Securities and instruments of infrastructure companies are more susceptible to adverse economic or regulatory occurrences affecting their industries. Infrastructure companies may be subject to a variety of factors that may adversely affect their business or operations, including additional costs, competition, regulatory implications, and certain other factors.
Certain information contained herein constitutes “forward-looking statements” which can be identified by the use of forward-looking terminology such as “may,” “will,” “should,” “expect,” “anticipate,” “target,” “intent,” “continue,” or “believe,” or the negatives thereof or other variations thereon or comparable terminology. Due to various risks and uncertainties, actual events may differ materially from those reflected or contemplated in such forward-looking statements.
Published on June 13, 2025.