Despite a rocky start to 2025—defined by policy uncertainty and renewed fears over the U.S. economic outlook—equity markets have shown notable resilience in recent weeks.

As of late May, the S&P 500 is down just 1.3% year-to-date, and the NASDAQ Composite has fallen roughly 3%. However, the Russell 2000—a key benchmark for smaller, more economically sensitive companies—has declined 8.5%, suggesting investors are still wary of cyclical exposures.

Soft Data Surprises Offer a Buffer

According to analysts at Wolfe Research, the market’s relative stability is being driven by “positive news on the trade front and better-than-expected soft data economic surprises.” These developments have helped counterbalance the growing anxiety around a potential recession, which spiked earlier in the year.

Fiscal Risks and Volatility Ahead

Still, concerns are intensifying over the U.S. fiscal path. With bond markets increasingly reacting to rising federal deficits, Wolfe Research expects heightened volatility to persist throughout the summer.

“We continue to remain defensively positioned as stocks are likely to be hypersensitive to economic data and moves in long-term interest rates over the coming months,” the analysts noted.

Cautious Optimism, But Not a Green Light Yet

Sentiment indicators have shown modest improvement, offering a glimmer of hope. However, Wolfe remains cautious, emphasizing that a genuine shift toward cyclical sectors will likely require clear signs of economic reacceleration.

“While we’re encouraged by the slight improvement in sentiment surveys, our sense is we’ll need to see a reacceleration in the economy before shifting to more cyclical positioning,” the firm said.

Geopolitical Developments Ease Trade Tensions

Global markets were also lifted by news that former President Donald Trump has postponed a proposed 50% tariff on EU imports until July 9, following a constructive call with European Commission President Ursula von der Leyen.

“She said she wants to get down to serious negotiation,” Trump said Sunday. “July 9 would be the day… I agreed to do that.”

The announcement gave European markets a boost, with the STOXX 600 index rising 1% and Germany’s DAX climbing as much as 1.6%.

Looking Ahead

With U.S. markets closed Monday for Memorial Day, investors will be watching closely when trading resumes on Tuesday. As markets digest a mix of fiscal concerns, trade developments, and tentative signs of improving sentiment, the coming weeks may prove pivotal in shaping the trajectory of the year.