Market and Economic Update - Strong earnings and Fed optimism lifted stocks, but autumn may bring seasonal volatility
Stock markets reached new record highs in August, and bonds also helped investor portfolios. This happened even though there were concerns about tariffs, the Federal Reserve (Fed), and technology companies. Early in the month, new U.S. tariffs started affecting most major trading partners after a 90-day waiting period ended. Later, a federal court ruled that these “reciprocal tariffs” are illegal, which could lead to a Supreme Court case.
Markets dropped in the middle of the month because investors worried the Fed might keep interest rates high to fight inflation. Recent inflation reports showed that companies are starting to charge consumers more because of tariff costs. But markets recovered quickly thanks to better-than-expected company earnings and growing confidence that the Fed will lower rates in September.
Economic data was mixed. GDP growth (which measures how fast the economy is growing) for the second quarter was revised up from 3.0% to 3.3%. However, the monthly jobs report showed fewer new jobs were created, and previous months were revised downward. This led to uncertainty in the markets.
1. Markets Climbed Higher on Healthy Earnings
While daily news can move markets in the short term, company earnings and stock prices relative to their value often matter for long-term returns. Stock valuations are high compared to history, but we believe this makes sense because companies have continued to grow their profits at a good pace.
The latest earnings season (Q2 2025) shows that 81% of S&P 500 companies beat expectations.1 This is the highest percentage since late 2023, showing that the economy and companies have been doing better than many thought. It also shows how well companies can adapt to tariffs and higher costs while still finding ways to grow.
2. Seasonal Factors to Watch For
Historically, September has been one of the weakest months for the equity markets, a trend that dates back to the 1920s. Major indices, such as the S&P 500, have often posted negative returns during this month. This pattern is often attributed to post-summer rebalancing by institutional investors, tax-loss harvesting as investors sell underperformers to offset gains, and cautious positioning ahead of the Q3 earnings season. While it’s important to note that this trend doesn’t guarantee negative returns every year, it’s clear that September tends to be a seasonally challenging period for equities. September’s historical weakness may provide useful context for understanding what might come next.
3. The Fed is Expected to Cut Rates
Consumer-focused businesses had mixed results as household spending patterns changed. Tariffs made this worse as companies passed more costs to consumers. Combined with weaker jobs data, markets started expecting the Fed to cut interest rates starting in September.
Fed Chair Jerome Powell gave his clearest signal yet that the central bank is ready to start cutting interest rates again. The Fed has two main jobs: keep inflation steady and unemployment low. They’ve kept rates high because of stubborn inflation and a strong job market. Early signs of job market weakness could push the Fed toward careful rate cuts.
4. Fed Rate Cuts Can Create Opportunities Across Asset Classes
Potential Fed rate cuts could create opportunities across different types of investments. Lower interest rates can support economic growth, make borrowing cheaper for companies, and increase the value of future cash flows. For bonds, lower rates boost the prices of existing bonds that were issued at higher rates.
Bond yields (the income they provide) have stayed in a narrow range this year. Even if short-term rates fall as the Fed cuts, many bond types have provided good income levels. These levels have been well above historical averages and has helped balanced portfolios.
The Bottom Line
Markets reached new all-time highs in August despite policy concerns. Strong earnings and economic growth have continued to support portfolios despite ongoing uncertainty.
1https://advantage.factset.com/hubfs/Website/Resources%20Section/Research%20Desk/Earnings%20Insight/EarningsInsight_082925.pdf
It’s not possible to invest directly in an index. The S&P 500 Total Return Index is a market-capitalization-weighted index of the 500 largest U.S. publicly traded companies. The Russell 2000 Index tracks the performance of approximately 2,000 small-cap U.S. companies. The EAFE Index tracks the performance of large- and mid-cap companies in 21 developed countries. MSCI Emerging Markets Index (EM) tracks the performance of large- and mid-cap companies across emerging market economies.
The Nasdaq Composite Index is a market capitalization-weighted index that includes over 3,000 stocks listed on the Nasdaq Stock Market, primarily representing technology companies. The Bloomberg US Aggregate Bond Index, or the Agg, is a bond market index representing intermediate term investment grade bonds traded in the United States. The Dow Jones Industrial Average is a stock market index of 30 prominent companies listed on stock exchanges in the United States. The 10-year Treasury yield represents the interest rate investors can expect to receive for holding a U.S. Treasury bond with a 10-year maturity.