Wall Street Prepares for May Amid Economic Uncertainties

After a turbulent April, Wall Street enters May under the shadow of an old adage: “sell in May and go away.” The month began with steep losses primarily tied to trade tensions; however, there were some rebounds later on. In May, Wall Street faces a challenging landscape filled with operational hurdles.

Overall, the S&P 500 experienced a decline of 1.8% in April, while the Dow Jones fell 3.7%. The Nasdaq Composite and the Russell 2000 dropped 0.9% and 4%, respectively.

Rising tariff tensions, the potential for renewed inflation, less dovish signals from the Federal Reserve, and geopolitical disturbances in the Middle East and Eastern Europe have unsettled investors. Worries regarding global growth are tangible, worsened by the fact that the U.S. economy contracted for the first time since early 2022.

U.S. Economy Contracts for the First Time in Three Years

According to the Bureau of Economic Analysis (BEA), the U.S. economy shrank at an annualized rate of 0.3% in Q1 2025. This figure surpassed the 0.2% decline projected by economists surveyed by Bloomberg and marked a notable shift from the 2.4% growth seen in Q4 2024.

Imports Surge Ahead of Tariffs, Impacting GDP

A significant rise in imports contributed to this contraction. Imports increased at an annualized rate of 41.3%, as businesses aimed to stockpile goods before new tariffs proposed by the Trump administration. This surge negatively affected GDP, contributing a substantial 5% to the quarter’s overall figures.

Final Domestic Demand Shows Strength

Despite the overall downturn, domestic demand proved resilient. Final sales to domestic purchasers—a crucial gauge of both consumer and business demand—rose at a 3% annualized rate, slightly up from the 2.9% growth recorded in the prior quarter.

Inflation Pressures Grow

Inflation accelerated during the first quarter. The Personal Consumption Expenditures (PCE) price index climbed 3.6%, compared to a 2.4% rise in Q4 2024. Core PCE, which excludes fluctuating food and energy prices, rose 3.5%, surpassing the 3.2% forecast, and up from 2.6% in the previous quarter. Economists and the Fed anticipate that tariffs will further elevate inflation and hinder future growth.

Private Payroll Growth Slows Drastically

Compounding economic concerns, ADP reported that private sector payrolls increased by just 62,000 jobs in April, well below the anticipated 115,000. The report characterized the labor market as being in a “difficult” environment, creating confusion among businesses.

Markets Respond to Economic Data: Will the Fed Cut Rates?

Investors reacted negatively to the disappointing GDP and payroll data. If the U.S. economy continues to present consecutive weak reports that could trigger economic issues, the timeline for future Federal Reserve rate cuts might be expedited. In this context, several ETFs stand out for potential gains in an otherwise challenging May.

ETFs to Watch

Invesco Aerospace & Defense ETF PPA – Zacks Rank #3 (Hold)

Despite market difficulties, Aerospace & Defense ETFs have shown stability. This sector remains strong and is well-positioned moving forward due to ongoing geopolitical tensions, increased defense budgets, and solid valuations. The PPA fund rose 3.8% in the past month (as of April 30, 2025).

iShares Currency Hedged MSCI Japan ETF EWJ – Zacks Rank #3

Japanese stocks have performed notably this year. Though the Bank of Japan has recently hiked rates, they remain relatively low. Increases in dividends and share buybacks have been significant, with the average payout ratio for the fiscal year ending March 2025 likely at 36%, up 3 percentage points from the previous year.

The EWJ ETF gained 4.7% in April.

Invesco S&P International Developed Low Volatility ETF IDLV – Zacks Rank #3

Wall Street’s volatility has contrasted with the comparatively stable growth in international markets. Growing trade uncertainties under the current U.S. administration, alongside inflation concerns, have benefited international markets. Many of these markets are undervalued next to U.S. stocks.

The ETF IDLV offers a yield of 3.05% annually and charges 25 basis points in fees, gaining 5.2% in April.

Vanguard Communication Services ETF VOX — Zacks Rank #3

Meta META constitutes approximately 20% of the fund, and Alphabet GOOGL accounts for about 12%. Both companies reported strong earnings this season. Meta is optimistic about its Q2 outlook even amid tariff-related advertising concerns.

Alphabet, however, anticipates a slight impact on its advertising business this year, yet it plans to allocate $75 billion in capital expenditure despite existing tariff challenges. The VOX ETF rose 3.6% in the last week but declined 1.8% in April.

VanEck MSCI International Quality ETF QUAL — Zacks Rank #3

Quality stocks are characterized by strong value traits, including robust balance sheets and high returns on capital. These stocks help reduce volatility compared to traditional funds and tend to perform better during market fluctuations. The QUAL ETF increased by 3.9% in the past week but fell slightly by 0.2% in April.

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