S&P 500’s Best May Rally Since 1990: What’s Next for Investors?

By: Sayan

Published on: Jun 09, 2025

Introduction

In May 2025, the S&P 500 surged by an impressive 6.15%, marking its strongest May performance since 1990. This milestone could be more than a one-off spike—in fact, historical patterns suggest it may herald further gains over the coming year. In this article, we’ll unpack what drove the rally, examine the data from past May rallies, and explore strategies both active and passive investors can consider as they navigate potential volatility.

A Historic May Rally

• 6.15% Monthly Gain: May’s rally is the first time the S&P 500 has climbed more than 6% in May since 1990.


• Seventh 5%+ May Since 1985: Only seven Mays have produced returns above 5% in the last four decades.


• Drivers of the 2025 Rally: Easing trade-war concerns provided a catalyst, reversing April’s steep sell-off after proposed tariffs created one of the worst two-day losses in market history.

Lessons from Past May Breakouts

According to Carson Investment Research’s Ryan Detrick:

• Average 12-Month Gain: In the six prior instances where May returns exceeded 5%, the S&P 500 went on to gain nearly 20% over the following year.


• No Negative Follow-Throughs: None of those six rallies ended with a negative 12-month return, despite occasional pullbacks.


• 1990 Caveat: After May’s 9.2% jump in 1990, the market fell almost 20% from July to October before finishing roughly 8% higher a year later.

What to Expect Over the Next 12 Months

While history offers encouraging signals, investors should weigh these considerations:

1. Small Sample Size: Six data points across 40 years limit statistical confidence.


2. Different Market Conditions: The 1990 rally leaned on falling interest rates; this year’s bounce reflects easing trade tensions and elevated valuations.


3. Valuation Risks: The cyclically adjusted price-earnings (CAPE) ratio remains elevated even after analysts trimmed forward earnings estimates.

Strategies for Active Investors

• Selective Stock Picking: Focus on high-quality companies with strong balance sheets and sustainable growth prospects.


• Risk Management: Implement stop-loss orders and position sizing to guard against sudden reversals.


• Sector Rotation: Consider overweighting sectors poised to benefit from economic stimulus or consumer spending.

A Passive Investor’s Perspective

For those who prefer index funds:

• Stay Fully Invested: Attempting to time entry and exit based on short-term rallies can backfire.


• Dollar-Cost Averaging: Regular contributions smooth out the impact of market swings.


• Rebalance Periodically: Maintain your target allocation to manage risk without market timing.

Conclusion

May 2025’s rally in the S&P 500 is a rare event with promising historical follow-through, but no two market cycles are identical. Active investors should exercise discipline and diversification, while passive investors may find comfort in staying the course. Ultimately, combining historical insight with prudent risk management will position you to navigate whatever the next 12 months bring.