SEPTEMBER 2025 MARKET INSIGHTS

By: DOUGLAS A. RILEY, CFA, PORTFOLIO MANAGER

Probably the biggest takeaway from the recently concluded Jackson Hole economic conference was Fed Chair Jerome Powell all but guaranteeing a cut in the Fed Funds rate at the September 17^th Federal Reserve Board meeting. Underpinning the dovish pivot was a tacit acknowledgement that the Fed is focused on signs of weakness in the labor market while seemingly downplaying inflation risk. As of September 2^nd, the market-based probability of at least a 25-basis point cut was 91.7%^[1]. Prior to the meeting the Fed will have plenty of new economic data to digest on both the labor and inflation fronts, beginning with the August Employment Report on Friday (September 5^th) plus a lot more over the next two weeks. At this point, we think only a surprisingly large jump in inflation data or an outsized gain in jobs would derail a rate cut, neither of which seems likely.

Bond markets responded to cooling employment data but warmer than expected inflation data from both the Producer Price Index (PPI) and Consumer Price Index (CPI) by posting modest gains in August. The market appears to be echoing the Fed with employment of greater concern than inflation. The yield on the US 10-year Treasury Note fell by -14 basis points, fully reversing July’s rise to finish the month at 4.23%^[2]. Accordingly, the Bloomberg US Treasury Index returned 1.06% for the month and the Bloomberg Aggregate Bond Index returned 1.20%^[2]. Corporate credit spreads contracted slightly to 30 basis points matching the lowest monthly closing level of the year^[2]. The US dollar slipped modestly in August along with falling yields, bringing the year-to-date decline for the Bloomberg Dollar Spot Index (BBDXY) to -8.31%^[2].

Non-Farm Payrolls were up only 73 thousand in July, and the numbers for both May and June were revised sharply lower, resulting in a three-month average of just 35 thousand new jobs^[2]. Additionally, the June JOLTS report showed softness in both the Job Openings and Hires components. Finally, the ISM Services Index for July printed below expectations, barely clinging to the 50 level, with the employment component negative in four of the last five months^[2]. The Core PPI accelerated on a year-over-year basis for the third consecutive month to 3.7%^[2]. Similarly, the Core CPI increased to 3.1% year-over-year in July from 2.8% in April^[2]. The Fed’s preferred inflation measure, the Core PCE (Personal Consumption Expenditures) Index rose 2.9% year-over-year, after troughing at 2.6% in April^[2].

Stocks got the better of bonds in August, led by small caps and international equities. Small caps were the big equity winners domestically. The Bloomberg 2000 Index (B2000) gained 7.13% in August, moving it into positive territory for the year with a return of 5.80%^[2]. The Bloomberg World Ex-US Index (WORLDXU) returned 3.81% in August and continued to outpace the US with a year-to-date total return of 21.53%^[2]. The Bloomberg 1000 Index (B1000) returned 2.04% in August and is up 10.80% year-to-date2. Value led growth with the Bloomberg 1000 Value Index (B1000V) returning 4.30% compared to 1.23% for the Bloomberg 1000 Growth Index (B1000G)^[2]. Year-to-date the B1000V is up 10.38% through August, nearly matching the 10.98% return for the B1000G^[2]. With 97% of firms reporting second quarter earnings the average sales surprise was 2.0%, which was the best showing since the second quarter of 2023, and the average sales growth rate was 6.0%, down from 6.7% in the first quarter^[2]. Earnings growth came in at 13.6% with a 9.2% surprise, the latter being the best in nine quarters^[2]. Expectations for the third and fourth quarters appear muted, tempered by the potential for margin pressure as higher cost (tariffed) inventory begins to flow through.

The gains in non-US stocks this year have been impressive, but precious metals have been on a tear. The Spot Gold price (GLDS CMDTY) is up 31.38% year-to-date after gaining 4.80% in August^[2]. Spot Silver (SILV CMDTY) jumped 8.19% in August, bringing its year-to-date gain to 37.43%^[2]. Putting those gains in perspective, through August Artificial Intelligence proxy, Nvidia Corp., is up 29.72% and the Bloomberg Bitcoin Index (BITCOIN) is only up 15.96%^[2]. Central bank buying is certainly part of the gold price appreciation story, and silver is in a supply deficit. But investors increasingly appear to be hedging their bets against inflation, dollar weakness and other global risks with the grandaddy of safe havens. Geopolitical risk is elevated again, with little coming out of Trump’s meeting with Putin in Alaska regarding Ukraine, a more hawkish Europe and a fraying US-India relationship.

In the closing days of August, a US Federal Court of Appeals upheld a ruling by the Court of International Trade declaring that the Reciprocal Tariffs enacted by the Trump administration under the International Emergency Economic Powers Act (IEEPA) were illegal. However, the court effectively passed the buck, declining to issue an injunction thereby leaving the tariffs in place pending appeal to the Supreme Court. We would not hazard a guess as to how the Supreme Court might rule. Some scholars argue that the statute confers sufficient authority to the President to support the imposition of tariffs, but most seem to agree that the IEEPA lacks such an explicit grant of authority. One possibility, speculative of course, is that the Supreme Court could find a way to wiggle out of a definitive judgment and place the onus on Congress to clarify the statute.

Despite the S&P 500 Index hitting a new all-time intra-day high on the final trading day of August, investor sentiment, as indicated by the AAII Investor Sentiment Survey, is not excessively bullish. Moreover, there seems to be broad consensus that any “dip” in the market, which many see as likely, should be bought. That, combined with a Fed rate cut could be the buoy for equities, but September has historically not been kind to the stock market.

[1] https://www.cmegroup.com/markets/interest-rates/cme-fedwatch-tool.html

[2] Source: Bloomberg