Global equity markets delivered a strong rebound in May, climbing a wall of macro and geopolitical risks. Either investors are becoming more optimistic - or simply picking up the proverbial pennies in front of a steamroller. A standout example of this optimism? The belief that future trade deals will offset the self-inflicted economic impact of US policy. While major partners remain quiet, other announcements stretch credulity - such as the UAE’s pledge during President Trump’s visit to invest US$1.4 trillion in the US over the next decade, an amount equivalent to nearly 30% of its GDP.

The S&P 500 rose 6.5%, while the NASDAQ surged 9.3%. Developed markets were broadly strong, including Germany (+7.0%), Japan (+5.9%), and Australia (+4.9%). MSCI EM gained 5.0%, though China’s CSI 300 lagged at just +1.9%. Sector-wise, leadership was narrow and familiar: US Technology (+11.3%), Communications (+9.3%) and Discretionary (+8.2%) led the charge. Australian Technology stood out, jumping a remarkable 20.5% for the month.

However, this strength came in the face of mounting risks. US unemployment rose to a three-year high of 4.2%. Treasury yields climbed 23bps to 4.4%, with 30-year yields breaching 5% - just the second time since the GFC -as fiscal sustainability concerns grew. Japan’s 30-year yield hit a record 3.18%, reflecting persistent inflation and wage pressure. While the USD stabilised in May, longer-term structural weaknesses remain. Earnings estimates for 2025–26 are being revised lower, and the top 10 S&P 500 stocks now account for ~35% of index weight. Despite May’s strength, the index remains negative over the past three months, highlighting just how fragile this rebound may be.

In Australia, the RBA’s cut to 3.85% helped lift rate-sensitive sectors. Tech surged on renewed growth hopes, but economic fundamentals remain soft: consumer sentiment is weak, housing activity subdued, and business investment hesitant. The RBA’s shift could mark the start of a new easing cycle, if external conditions remain supportive.

So - omen or opportunity? Sharp rallies like this often mark late-cycle excess, especially when led by a narrow group of mega-cap stocks. But compelling longer-term trends are forming. As tech valuations stretch, value and small-cap stocks are becoming relatively more attractive, particularly in global and EM portfolios. On the defensive side, listed infrastructure and property assets look appealing, offering strong income potential if lower rates return. And with US Treasuries likely to remain the global safe-haven asset, higher yields could be a buying opportunity to position for continued economic weakness and lower interest rates, provided investors stay active and responsive to the shifting fiscal landscape.

For all the recent optimism, the road ahead remains fraught with risks, from a potential global slowdown to the uncertainty of Trump-era trade brinkmanship. While the May rally offers some encouragement, it feels increasingly fragile. The disconnect between market enthusiasm and deteriorating economic data is growing, and that alone gives us reason to lean toward caution.

Defensive assets are far from expensive, and in periods of uncertainty, patience has consistently proven to be a winning strategy - whether facing a slowdown or something more severe.