Europe Remains Favorable

Commentary:

May 2025 delivered strong gains across U.S. equity markets, with the S&P 500 up 6.15%, the Nasdaq surging 9.6%, and the Dow rising 3.94%. Much of this performance was driven by mega-cap tech stocks—particularly Nvidia, Microsoft, Amazon, and Alphabet—collectively adding over $2.4 trillion in market cap. Despite rising Treasury yields, investor confidence remained high, buoyed by solid Q1 earnings and a resilient economic backdrop.

The rally was particularly striking given the macroeconomic headwinds. Despite a nearly 25 basis point rise in 10-year Treasury yields, equities remained resilient—suggesting that investors are growing more confident in the economic recovery and less concerned about tighter financial conditions. Meanwhile, U.S. trade tensions briefly flared with a court ruling on tariffs, but markets largely shrugged it off after the decision was stayed.

Importantly, rising yields in the U.S. suggest that investors are beginning to price out recession odds and instead are positioning for a backdrop of accelerating growth and inflation. As such, we’ve begun allocating toward sectors that typically perform well in these environments—chief among them Financials, which benefit from both rising rates and improving economic activity. This rotation could support broader market leadership and sustain the rally through the coming months.

Globally, equity markets also saw positive momentum. European stocks climbed on improved economic data and anticipated rate cuts from the ECB and BoE, while Latin American indices—especially Brazil and Mexico—rebounded strongly after a difficult 2024. China, however, showed mixed results, with continued industrial contraction balanced by targeted stimulus and modest equity gains.

Conclusion:

From a global growth perspective, we continue to favor European equities—particularly Germany (EWG) and Spain (EWP)—as our models currently show fewer macroeconomic headwinds than we are observing in the U.S. This positioning was validated in the second half of May, when SPY returned just -0.18% while EWG and EWP posted gains of 2.72% and 3.66%, respectively. We see room for continued outperformance in these markets if European monetary easing gains traction.

From a U.S. perspective, some indicators—such as rising yields and sector rotation—suggest markets are beginning to price in accelerating growth. We agree with this narrative in the back half of the year; however, we remain cautious in the intermediate term. Our current macro regime analysis points to a U.S Monthly "Quad 4" (growth slowing, inflation slowing) environment in July, which historically has been unfavorable for U.S. equities, and a Quarterly "Quad 3" (growth slowing, inflation rising) for the third quarter as a whole. This contrasts with European equities, where the models project back-to-back "Quad 2" (growth accelerating, inflation accelerating) regimes—a backdrop typically supportive of risk assets and economic expansion. This divergence further reinforces our preference for European exposure at this stage of the cycle.

Market Performance

·        S&P 500: 6.15%

·        NASDAQ: 9.6%

·        MSCI ACWI EX USA: 4.69%

·        Bloomberg US Aggregate: -0.72%

Model Performance Update

Our Moderate Model Portfolio returned 1.70% during the month of May and has returned 3.92% YTD

Changes to the model portfolio in May

5/1/2025

-           Removed BTAL (Market Neutral Anti-Beta) in Satellite 1

-           Added XLU (Utilities) in Satellite 1

5/9/2025

-           Added BUXX and XTWO (Two Year Treasury) in Satellite 2

-           Removed XTEN (10 Year Treasury) and XSVN (Seven Year Treasury) from Satellite 2

-           Reduced exposure to AAAU (Gold) in Satellite 3

5/22/2025

-           Added XLF (Financials) in Satellite 1

-           Added IAK (Insurance) in Satellite 1

May Performance with Benchmark

YTD Performance with Benchmark

If you were to have any questions regarding the above please reach out to us to set up a one to one meeting to review your situation.

Sincerely,

Bryant Andrus, MSF, CFP®

President

SBC Investment Management 
P: (602) 641-5996 
M: (319) 520-2033
E: bandrus@sbcinvestmentmanagement.com

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