September 5, 2025
Financial markets achieved record highs during August, with both equities and fixed income delivering positive returns for investors. This performance materialized despite ongoing concerns regarding trade policy, central bank autonomy, and technology sector valuations. The month opened with new tariff measures taking effect on major trading partners following the conclusion of a 90-day grace period. Subsequently, a federal appeals court determined these "reciprocal tariffs" violated legal standards, potentially setting up a Supreme Court review.
Mid-month turbulence emerged as investors worried the Federal Reserve might maintain elevated interest rates longer to combat inflation. Recent inflation data, including the Producer Price Index, indicated businesses were beginning to transfer tariff expenses to customers. Nevertheless, market optimism returned quickly thanks to stronger-than-anticipated corporate earnings and increased confidence the Fed would reduce policy rates at its September gathering.
Economic data presented a mixed picture. Second-quarter GDP growth received an upward revision from 3.0% to 3.3%, representing a substantial recovery from the first quarter's 0.5% contraction. Conversely, the monthly employment report revealed a sharp drop in job creation, with significant downward adjustments to previous months' figures. This prompted the White House to dismiss the Bureau of Labor Statistics Commissioner, contributing to the uncertain atmosphere.
Nevertheless, market volatility remained subdued compared to historical norms. August's robust results across asset classes highlighted the value of maintaining diversified portfolios with long-term perspectives.
Primary Market and Economic Developments
- The S&P 500 advanced 1.9% during August, while the Dow Jones Industrial Average climbed 3.2% and the Nasdaq increased 1.6%. For the year, the S&P 500 has gained 9.8%, the Dow has risen 7.1%, and the Nasdaq has appreciated 11.1%.
- The Bloomberg U.S. Aggregate Bond Index posted a 1.2% gain in August. The 10-year Treasury yield concluded the month lower at 4.2%.
- International developed markets surged 4.1% in U.S. dollar terms via the MSCI EAFE index, while emerging markets advanced 1.2% according to the MSCI EM index. Year-to-date, the MSCI EAFE index has climbed 20.4% and the MSCI EM index 17.0%.
- The U.S. dollar index finished the month lower at 97.8.
- Bitcoin declined in August, closing the month at 109,127 following a "flash crash" on August 24.
- Gold prices reached a new all-time high of $3,487 at month-end.
- The Consumer Price Index increased 2.7% year-over-year in July, matching economist forecasts.
- The employment report revealed only 73,000 new jobs were created in July. Major downward revisions to May and June data indicated the labor market performed much worse than initially reported. The unemployment rate held steady at 4.2%.
Strong corporate earnings drove market gains
Although daily news cycles and headlines may influence short-term market movements, underlying factors such as corporate earnings and asset valuations determine long-term portfolio performance. While equity valuations appear elevated relative to historical benchmarks, this is justified by companies that maintain robust earnings growth trajectories.
Recent earnings season data reveals that 81% of S&P 500 companies surpassed analyst projections, according to FactSet. This represents the highest beat rate since the third quarter of 2023, indicating that economic conditions and corporate fundamentals have proven more resilient than anticipated.[1] These results also highlight corporate adaptability as businesses navigate tariff implementation, manage increased costs, and identify growth opportunities amid policy uncertainties.
Significant investor attention has focused on the Magnificent 7, a collection of mega-cap enterprises, some with market capitalizations exceeding multiple trillions. This group now comprises more than one-third of the S&P 500, making their performance crucial for broader market direction. While earnings outcomes were varied across this group, several of these "hyperscalers" delivered results above expectations. Despite concerns about an "AI bubble," these outcomes helped fuel a market rally during August's latter half.
Rate reduction expectations build for the Fed
Meanwhile, consumer-oriented companies reported varied outcomes reflecting shifting household expenditure patterns. This situation has intensified with tariff implementation, as firms transfer a larger share of tariff expenses to end users. When combined with disappointing employment data, markets began pricing in more substantial rate reductions starting in September.
Federal Reserve Chair Jerome Powell delivered his clearest indication yet that the central bank stands ready to resume interest rate cuts after this year's pause, speaking at their annual Jackson Hole, Wyoming conference. The Fed operates under a "dual mandate" to maintain price stability and full employment. Recently, they have maintained relatively elevated interest rates due to persistent inflation and robust job market conditions. Therefore, initial indicators of labor market weakness could influence Fed decision-making toward cautious rate reductions.
Lower rates may unlock opportunities across investments
The possibility of further Fed rate cuts may generate opportunities across multiple asset categories. Beyond supporting broad economic expansion, reduced interest rates can improve corporate borrowing conditions, lower barriers to new initiatives, and enhance the present value of future earnings streams. For fixed income, declining interest rates increase the value of existing bonds that were issued with higher coupon rates.
Bond yields have traded within a tight range this year, with the 10-year Treasury yield typically moving between 4.0% and 4.5%. Even as short-term yields may fall with Fed rate cuts, numerous bond sectors continue offering attractive income levels. The U.S. aggregate bond index currently yields 4.4%, investment-grade corporate bonds 4.9%, and high-yield bonds 6.7%. These rates exceed long-term averages and strengthen diversified portfolios.
For comprehensive portfolios, investors should maintain focus on balancing various risk and return components. Issues including tariffs, Fed policy, and potential government shutdown risks in Washington represent just some challenges investors will encounter in coming months. Instead of responding to individual events, maintaining a portfolio capable of weathering these fluctuations while delivering both income and long-term appreciation remains the optimal approach for achieving financial objectives.
The bottom line? August delivered record market highs despite numerous policy uncertainties. Solid earnings and economic expansion continue supporting portfolios through persistent volatility.
[1]https://advantage.factset.com/hubfs/Website/Resources%20Section/Research%20Desk/Earnings%20Insight/EarningsInsight_082925.pdf