May In Review: Markets Embrace TACO Trade

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As if all was forgiven from April, in May the ASX joined the rally in US and European equities boosted by technology and the AI trade

-Did markets call Trump’s tariff bluff in May?
-Australia’s technology stocks a real stand out as RBA cuts rates
-Gold stocks rally, while defensive sectors take a step back from April
-Commodity-related stocks were a mixed bag with uranium back in fashion
-May ends with elevated valuations and a narrow breadth across stocks and sectors

By Danielle Ecuyer

Animal spirits come back in May

If April was all-out shock and tariff awe (horror), followed by a key reversal on the Trump pivot to a tariff 90-day pause, then the month of May solidified the narrative and expectations that US tariffs are being used as a negotiating mechanism of sorts against trading partners.

On May 2, FT columnist Robert Armstrong coined the “TACO trade” acronym, “Trump Always Chickens Out”, in his Unhedged newsletter to describe a pattern of behaviour whereby the US President announces aggressive tariff measures, causing market volatility and sell-offs, only to backpedal or delay the actions, leading to market rebounds.

When Trump was asked by a CNBC reporter at a press conference in the closing week of May whether he was aware of the “TACO Trade”, he was nothing short of outraged and stated, “what a nasty question”, before going on to detail his negotiating style.

Markets across asset classes have increasingly reacted less and less to his tariff announcements, with Bloomberg columnist John Authers highlighting the “issue boils down to cynicism“.

Having taken Trump seriously for a week or two post-Liberation Day, markets are now operating around the assumption that he can be “safely ignored”.

But like the boy who cried wolf one too many times, if the President wants to sustain negotiating leverage and believes in tariffs and protectionism, as he has advocated for over the decades, then the point at which he doesn’t chicken out might make the “market choke on its tacos”, Authers postures.

Anecdotally at least, playing chicken usually hasn’t worked out too well for participants, but for the month of May, markets were happy to embrace risk-on and the TACO trade.

How asset classes performed over May

As much as the S&P/ASX300 was viewed as a safe haven during the global April sell-off, its May performance, whilst very good in a relative sense with a total return of 4.2%, lagged the US S&P500 total return of 5.8%. It marked the highest gain for the S&P500 since November 2023.

The last time the ASX200 returned over 4% in May was in 2020 at the height of the covid pandemic lockdowns and central bank stimulus measures. On average, May returns have been more muted, with many investors opting for the narrative, “sell in May and go away” since 2015 with negative total returns seen in 2017, 2022 and 2023.

Interestingly, on a three-month basis, the S&P500 total return remains down by -3.8% versus the ASX300 posting a positive total return of 4.3%.

Over the year past, the S&P500 is up 17.3% compared to the ASX300’s total return of 13.2%.

Traveling further afield to other global equity markets, European equities mirrored Australia with a total return of 4.2% over the month, 5.1% over three months, and up 17.3% over one year.

Chinese equities are the standout with one-year total return of 30.8%. Probably not surprisingly, given trade tensions with the US, Chinese markets are lagging on a one- and three-month basis with total returns of 2.3% and -3.1%, respectively.

Other interesting trends included a rebound in Brent oil, up 3% from a three-month decline of -15%, and the Newcastle Thermal Coal price up 2.9% versus a three-month decline of -4.6%.

Precious metal LME Gold took a breather in May, down -0.5%, but remained up 11.2% over three months, while Dalian Iron Ore Futures remained soft, down -0.7% and -11.1% over one and three months.

For those travelling overseas, Morgan Stanley notes the US dollar weakened -0.5% in May against the Australian dollar, and is -3.5% weaker over three months.

There is no shortage of commentators speculating further weakness in the USD will drive the likes of the gold price higher.

So how did all these dynamics translate into market moves?

The ASX200 rebounded nearly 18% from the April low after Trump placed a 90-day pause on reciprocal tariffs, including a pause for China in May.

Information Technology crowned itself the standout sector in Australia, rising 19.8% over the month, with gold stocks also performing well, rising 10.5%.

An RBA “dovish” rate cut by -25bps to 3.85%, and solid earnings updates boosted technology stocks. The top performer in the sector, Life360 ((360)) rallied 51.9% (no, you didn’t read that incorrectly).

TechnologyOne ((TNE)), which usually sells off post-earnings, rose 21.6% for a 12-month return of 137.6%, pipping Life360 ((360)) at 124.7% and Pro Medicus ((PME)) at 135.3%.

In the ASX50, Pro Medicus rose 22.9% in May with the share price up 80% from April lows, and WiseTech Global ((WTC)) moved up 21%, with Xero ((XRO)) and Seek ((SEK)) also featuring in the ASX50’s highest one-month total returns.

Solid earnings momentum assisted Australian technology shares, with tailwinds from the US Nasdaq Composite Index gaining 9.56% in May offering support; the highest Nasdaq return since November 2023.

The AI trade featured in May, having previously fallen foul of concerns regarding China’s DeepSeek model and potential over-investment in infrastructure such as data centres. US hyperscalers’ March quarter earnings results were better than feared, reinforcing the extent of capital spending in AI cloud services and infrastructure at US$330bn in 2025, up 34% on 2024.

Data centre stocks like Goodman Group ((GMG)) featured in the ASX50 highest total returns at 9.8%. Elsewhere, DigiCo REIT ((DGD)) came back into favour, up 27.9%, alongside NextDC ((NXT)), which announced its first AI-related contract in Melbourne.

In such a risk-on environment, defensive sectors like Utilities became the worst performers in May, up only 0.3%, followed by Consumer Staples, up 1.2%, and Healthcare at 1.4%.

At an industry level, Macquarie details Consumer Services were among the worst cyclical groups, with shares in IDP Education ((IEL)) and Aristocrat Leisure ((ALL)) sold off on earnings downgrades, by -12% and -6%, respectively.

IDP has since downgraded again, with shares down a breathtaking -48% on June 3. It’s almost hard to fathom, but its share almost reached for $40 in late 2021. By early June those shares were trading closer to $4.

If anything, this former high flier and crowd favourite has turned into the unfortunate poster child of a company caught in the crossfire of global politics on student immigration.

Not all stocks were in favour

While investors threw caution to the wind and embraced risk in May, there are discernible patterns of money flows into stocks and sectors.

The Momentum factor made a decisive come back, up 6.2%, with Pro Medicus the standout. Growth rose 4.9%, lagging momentum according to Macquarie but ahead of Value at 2.3%. The gap in the US was even more pronounced where Growth outperformed Value by 7.4ppts.

Are the markets trying to tell us something about economic growth? Food for thought.

UBS highlights the worst performers for the Small Ords as Coronado Global Resources ((CRN)), down -43.6%, weighed down by falling coal prices and too high a debt burden on a geared balance sheet, causing cash flow concerns.

Nufarm ((NUF)) didn’t feel the love either, falling -38.2% on a disappointing earnings report, while OFX Group ((OFX)) declined by -36.3% as its business model struggled, triggering yet another profit warning.

A strong uranium spot price and a notable global shift in the US, Europe and Asia back to nuclear energy has boosted the performance of Australia’s U3O8 stocks.

Boss Energy ((BOE)) was noted by Citi at the end of May, having risen over 70% since last December’s bottom compared to Paladin Energy ((PDN)). Boss rose 25.2% in May, while the list of Small Ords top performers included other uranium stocks. Bannerman Energy ((BMN)) shares went up 20.7%, NexGen Energy ((NXG)) up 18.9%, and Deep Yellow ((DYL)) up 18.5%.

How did May’s earnings shape up?

FNArena’s corporate results monitor shows 52 companies having reported post the February results season, generating 21 misses (40.4%), 18 beats (34.6%), and 13 companies reporting in line results (25%).

Macquarie detailed an additional 4.2ppts of May gains came from price-to-earnings valuation expansion, with a fall in earnings per share of -0.4ppts offset by dividends of 0.4ppts.

Post the May rally, this broker adds the ASX200 is trading on a forward valuation of 18.8x, which is back to the highs seen at the Trump election victory in November 2024.

Clearly, the “pain trade” has been for higher stock prices.

Interestingly, as is equally apparent beneath the surface in Australia, the rally has a narrow breadth, Macquarie highlights.

US investors are back at 88%-plus equities exposure, and individual investors are net bearish again, with more stocks trading below their 200-day moving average than those trading above it.

ASX100 Best and Worst Performers of the month (in %)

ASX200 Best and Worst Performers of the month (in %)

ASX300 Best and Worst Performers of the month (in %)

ALL-TECH Best and Worst Performers of the month (in %)

All index data are ex dividends. Commodities are in USD.

Australia & NZ

The World

Metals & Minerals

Energy

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