May 2025 Review

US Market Performance

The S&P 500 index ended May with an increase of about 6.2% – the strongest performance for May since 1990, following three consecutive months of declines. The Nasdaq index also climbed by about 9.6%, making May 2025 one of the best periods since 1997, while the Dow Jones index jumped by about 3.9%, its best monthly performance for May since 2020. The positive trend is mainly due to anticipation of tariff reductions by the US, a push from the technology sector – particularly AI-related companies – and reduced uncertainty regarding the trade war with China. In addition, hedge fund stock sales reached a peak not seen since November 2024, which also supported the market rally.

US Bond Market and Credit Markets

The US bond market saw a rise in yields, mainly at the ends of the curve, following the Fed's decisions to leave interest rates unchanged and Moody's downgrade of the US government's fiscal situation. Regarding tariff policy, the US Court of International Trade ruled that imposing tariffs would require a structured bureaucratic process, increasing concerns about a hit to government revenues. All these factors, along with an inflation rate measured in April at about 2.5% annually according to the PCE index, led to assessments that interest rates would remain high for an extended period, thus boosting bond yields.

Israeli Capital Market Performance

In the local arena, May was characterized by a positive trend on the Tel Aviv Stock Exchange, despite the tense security situation. The TA-125 index climbed by about 6.8% during the month, reaching around 2,730 points at the beginning of June, after being around 2,684 at the end of May. Trading data showed that foreign investors made net purchases of about NIS 2.5 billion in stocks, and local investors were buoyed by first-quarter earnings data, alongside a partial trade agreement with China and tariff reductions by the US. However, the security crisis created uncertainty – including a missile falling near Ben Gurion Airport – did not have a long-term impact, and the fact that local technology remained weaker compared to abroad did not dampen overall optimism.

Monetary Policy and Inflation in Israel

On May 26, 2025, the Bank of Israel's Monetary Committee decided to leave the policy rate at 4.50% for the 11th consecutive time. The decision was based on inflationary pressures (3.6% annually in April compared to the target range of 1%-3%), alongside relatively soft growth due to the security situation. The Bank of Israel's forecast indicated growth of about 3.5% in 2025, with a warning that if the conflict in Gaza prolongs, growth would be reduced by about 0.5 percentage points. In the first half of the year, seasonally adjusted growth of about 3.4% was recorded in the first quarter, but the Bank of Israel took a cautious approach and insisted on waiting for inflation to curb before lowering interest rates.

Key Macroeconomic Trends

Despite the security escalation in May, the Israeli economy showed relative resilience: the number of passengers at Ben Gurion Airport increased by about 63% in the first quarter of the year, and El Al also enjoyed high profitability and reduced costs. On the other hand, the decrease in the volume of foreign flights created uncertainty, and military actions in Gaza affected economic sentiment. Israeli government bond yields rose in May, due to both global influences (high interest rate environment in the US) and local inflationary pressures and the government's high financing needs. The inflation rate is expected to fall to 1.8% by the end of 2025, but no significant slowdown was recorded in the early months of the year. The shekel exchange rate weakened slightly against the dollar (about 0.2%) at the beginning of May but later recovered due to demand from exporters who benefited from a competitive exchange rate.

Summary and Recommendations

May 2025 was characterized by an exceptional wave of optimism: the S&P 500 recorded its highest return for May since 1990, and the Israeli capital market showed positive gains despite security tensions. However, it is important to remain vigilant regarding bond yields, central bank interest rate decisions, and geopolitical tensions that may escalate. It is recommended to manage a balanced and diversified investment portfolio, including exposure to international stocks alongside bonds according to personal risk profile. Looking ahead to June, it is important to follow the decisions of the Fed and the Bank of Israel, which will provide an indication of future monetary policy direction. In the local arena, if government and military support continues, the technology and banking sectors are expected to lead trading in the capital market.