Tech, Consumer, and Comms Drive Best May Since 1990

Jeff Buchbinder | Chief Equity Strategist

Last Updated: June 04, 2025

Additional content provided by John Lohse, CFA, Research.

Despite May's usual reputation for underwhelming performance, U.S. stocks experienced a robust monthly gain. The S&P 500 delivered a total return of 6.3%, marking its biggest gain during the month of May since 1990, and turning positive year to date. Broad equity benchmarks stabilized on optimism surrounding trade deals, encouraging investors to return to previously struggling sectors. Given such a notable return for the month, we decided to dive into the sector components driving those returns and explore themes of what worked.

Sector Performance

Ten out of 11 sectors experienced gains in May, with the three largest growth sectors — technology (+10.9%), consumer discretionary (+9.4%), and communication services (+9.6%) — dominating the rankings in terms of total returns. These gains were powered by the "Magnificent Seven" stocks, improvement in trade negotiations with the European Union (EU), and solid first-quarter earnings. This is in stark contrast to first quarter returns in which those three sectors led the way down with an average return of -10.9%. Sharp spikes in volatility during April amid escalating trade tensions eventually eased as tariffs were paused, paving the way for the market to find its footing in May. The “May Reverses Q1 Performance in the Most Growth Focused Sectors” chart highlights the divergent returns between the first quarter and May (+10.0% on average) for those growth-oriented sectors mentioned above. Healthcare, as referenced in the chart, was the lone sector to decline in May, shedding 5.6%.

May Reverses Q1 Performance in the Most Growth-Focused Sectors

Source: LPL Financial, Bloomberg 06/02/25
Disclosures: Past performance is no guarantee of future results. All indexes are unmanaged and can’t be invested in directly.

Key Sector Themes

A common theme in May was that higher valuation sectors tended to outperform. We experienced a notable degree of correlation between sectors with high forward 12-month price-to-earnings (P/E) ratios and positive returns. The “Higher P/E Sectors Tended to Outperform in May” chart illustrates that six of the seven sectors with a forward P/E ratio lower than the broad index underperformed in May, whereas three of the four sectors with a higher forward P/E ratio outperformed.

Higher P/E Sectors Tended to Outperform in May

Source: LPL Financial, FactSet, Bloomberg 06/02/25
Disclosures: Past performance is no guarantee of future results. All indexes are unmanaged and can’t be invested in directly.

A major contributor to this was a strong earnings season from companies that needed to continue to justify their premium prices. Information technology and communication services were standouts, having the highest percentage of companies reporting above-consensus revenue. Meta Platforms (META) and Alphabet (GOOG/L), within the communication services sector, were the largest contributors to earnings growth. In the information technology sector, artificial intelligence (AI) giant NVIDIA (NVDA), a high P/E name, reported strong earnings that were well received by the markets, despite the lingering impact of trade restrictions in China.

May was characterized by a risk-on sentiment in which growth outperformed value and large caps outperformed small caps. Within the Russell 1000 Index, companies that don’t pay dividends had an average return of 6.1%, vs. 4.6% for those that do pay dividends. The top quintile of beta stocks (a measure of risk relative to the broad market) beat the bottom quintile by 5.0%, and the top 200 in market capitalization beat the bottom 200 by 3.4%.

Technical Analysis

On a technical basis, there has been considerable repair following the April 8 lows. The S&P 500 regained and continues to hold above its 100- and 200- day moving averages (dma), and 60% of stocks were in an uptrend at month-end. Notably, the information technology sector, which holds a 32% weight in the index, ended the month with 88% of its constituents impressively in an uptrend.

Asset Allocation Insights

Equity markets appear to have already factored in much of the positive May news, between easing tariff rhetoric, legal challenges to tariff implementation, and strong earnings reports. Sectors with high growth prospects and high earnings multiples that caught the brunt of the sell-off in the first quarter as tariff fears intensified were the biggest beneficiaries in May as trade tensions eased. Still, LPL Research anticipates that episodes of market unease will continue, given the unresolved tariff policies and ongoing concerns about economic growth, inflation, and deficits.

Based on current valuations, we believe the S&P 500 is priced at fair value. Given that, the Strategic and Tactical Asset Allocation Committee (STAAC) is positioned tactically with a neutral weight to stocks and bonds, and an overweight to diversifying alternative investments. Domestically, we slightly favor growth over value and large caps over small caps. Geographically, we are positioned neutrally with an equal weight versus the benchmark to emerging markets, developed markets, and U.S. equities.

We favor the financial and communication services sectors as they have both shown strong technical progress. Within financials, credit conditions are stable, and we expect tariff-related resiliency despite broader uncertainty. Digital media companies, which have less tariff sensitivity and had a strong earnings season, support our overweight to communication services. The STAAC has an underweight view on basic materials and utilities amid slower global growth for the former and an opaque direction driven by interest rates and AI trends for the latter.