Otso Monthly – May 2025
Overview
May was a good month for the market. The market largely rose on the belief that trade tensions might [finally] be near an end. However, the optimism was largely based on hopes of trade relief rather than many significant agreements being reached.
During May, the benchmark increased around 5.5% in USD terms from open to close (and 5.2% in AUD). Otso US Opportunity (hereafter Otso) increased 7.7% in USD terms (and 7.3% in AUD). It was a welcome positive month, given that both the benchmark and the fund had suffered under trade tensions in March and April.
What happened in May?
What then happened in May and why was it so positive for the market? We can see that the S&P500 increased steadily throughout May, with a short pull back.
The primary positive news was that the US and China intended to further discuss tariffs and trade tensions cooled. While the US and China formalized meetings in June, progress underlay the positive market movements. Similarly, a federal appeals court ordered a stay on President Trump’s tariffs, which raised hopes that the Trump administration would be forced to pare back tariff hikes.
Earnings also progressed well. By month-end 95 % of S&P 500 constituents had reported and 78 % beat EPS expectations, delivering blended year-on-year earnings growth of 12.5 %, the second straight quarter of double-digit expansion. Mega-cap platforms (Apple, Microsoft, Alphabet, Meta) reiterated AI-driven cap-ex plans, while Nvidia’s 28 May results smashed revenue estimates and sent its shares up 4 % after hours, propelling the Nasdaq to its best May in more than two decades. Semiconductor, software, travel-leisure and auto names all caught a bid; defensives such as managed care, staples and utilities lagged.
Economic data also pointed towards inflation relief. The April CPI (released 15 May) rose only 0.2 % m/m and 2.3 % y/y, extending 2025’s cooling inflation streak; April non-farm payrolls (out 2 May) beat at +177 k with unemployment steady at 4.2 %. Together they reinforced a narrative of resilient but slowing growth that allows earnings to expand even as the Fed stays patient. Consumer-confidence surveys improved, the ISM services gauge re-accelerated, and housing starts stabilised, partially offsetting a sub-50 ISM manufacturing print. Together, this raised hopes that the Federal Reserve might be more inclined to cut rates and that the US would side-step stagflation concerns.
The positioning going forward
The market performed well in May 2025. However, Much of the positive sentiment was based on future expectations. For example, there was optimism that tariffs would be less severe, and that inflation would continue cooling to enable the Federal Reserve to cut rates. However, markets appeared to factor in a good case scenario. This leaves the market negative news.
The portfolio going into June aimed to address downside risk. This involved reducing exposure to levered positions, including through reducing short put positions, ensuring that long persons were covered with calls, and undertaking a small exposure to VIX (via., selling relevant out of the money cash secured puts). The goal will be to closely monitor risk exposure, including in the lead up to the end of President Trump’s 90 day tariff negotiation deadline.