September 2025 Market Chartbook

Sean Gross, CFP®, AIF® | Co-Founder & CEO

Click here to view our September 2025 Market Chartbook.

Q4 2025 Market Update: Managing Mixed Economic Indicators

Sean Gross, CFP®, AIF® | Co-Founder & CEO

Market volatility is an inherent aspect of investing, and 2025 has certainly demonstrated this reality. Though downturns—like the tariff-induced selloff—can feel unsettling, they often present chances to purchase assets at better prices. Conversely, when markets rebound and reach new peaks, investors may experience anxiety despite solid underlying fundamentals. In either case, maintaining portfolios designed to endure various market phases while keeping long-term financial objectives in mind becomes increasingly crucial.

Entering the year's fourth quarter, investors confront mixed signals. During Q3, the S&P 500 hit fresh all-time highs, buoyed by robust corporate earnings and artificial intelligence excitement. Simultaneously, the labor market has deteriorated notably since early summer, sparking worries about economic fundamentals and consumer financial stability. Yet GDP growth has remained solid, and inflation has been relatively contained.

Such market conditions highlight the value of long-term investment strategies and financial planning. Instead of responding to news cycles and economic data releases, investors should maintain well-designed portfolios capable of adapting to market transitions. This demands comprehension of the fundamental trends that will influence markets in coming quarters.

Primary Market and Economic Factors in Q3

• During Q3, the S&P 500, Nasdaq, and Dow Jones Industrial Average posted gains of 7.8%, 11.2%, and 5.2% respectively, all achieving new record highs in September. For the year through Q3, they have advanced 13.7%, 17.3%, and 9.1%.
• The Bloomberg U.S. Aggregate Bond Index increased 2.0% during Q3 and has risen 6.1% year-to-date. The 10-year Treasury yield closed the quarter at 4.15% after touching 4.02% in September.
• International developed market equities (MSCI EAFE) climbed 4.2% while emerging market stocks (MSCI EM) advanced 10.1% in the quarter.
• Gold surged to a record high of $3,841 per ounce, marking a 16% quarterly increase.
• Bitcoin finished at $114,641, below its August high.
• The U.S. Dollar Index dropped to 96.63 in September before closing at 97.78 for the quarter. Year-to-date, the dollar has fallen 9.9%.
• The Bureau of Labor Statistics' latest report showed just 22,000 net new jobs in August. Since May, monthly job gains have averaged only 26,800.
• The Federal Reserve reduced rates by 0.25% to a 4% to 4.25% range at its September meeting.

For long-term investors, overall market valuation levels represent a critical consideration. Beyond simply examining market prices, valuations reveal what investors receive for those prices in terms of earnings, cash flow, sales, dividends, and other corporate fundamentals. While elevated valuations indicate investor optimism, they also suggest expectations may be excessive in certain market segments.

Market valuations approaching historical peaks

The above chart illustrates this through the Shiller price-to-earnings ratio for the S&P 500. The current 38x reading significantly exceeds the 35-year average of 27x and nears levels last observed during the dot-com bubble. This metric offers a longer-term view than traditional P/E ratios by incorporating a ten-year earnings history adjusted for inflation.

These valuation levels aren't surprising given the powerful rally of the past two quarters. The S&P 500 has surged 34% since April 8, producing a double-digit annual gain. Technology stocks across multiple sectors have driven the market higher, just as they led the decline. The Magnificent 7 stocks, for example, have jumped 61% from their lows. Though investors increasingly question whether corporate artificial intelligence spending will yield positive returns, this has undeniably been a major catalyst for the broader market and business investment.

Importantly, valuations don't forecast near-term market direction and shouldn't be used for market timing. Rather, they function as essential inputs for asset allocation decisions. While broad market valuations are elevated, this doesn't apply uniformly across all market segments. Small-caps, value stocks, and international equities currently trade at more attractive valuations than large-caps, growth stocks, and U.S. equities. This presents opportunities for investors with diversified perspectives and extended time horizons.

Federal Reserve reduces rates as employment weakens 

In September 2025, the Federal Reserve lowered interest rates by 0.25%, continuing its easing cycle after maintaining steady rates throughout much of the year. This move reflects the Fed's effort to balance persistent inflation above the 2% target against a deteriorating labor market. Markets widely anticipated this rate cut, which has provided support in recent months.

Multiple factors distinguish this easing cycle as unique. Historically, the Fed has reduced rates in response to economic crises or recessions. While some weakness exists today, overall growth remains solid. Recent cuts therefore represent something distinct: an effort to normalize policy following the aggressive tightening cycle that commenced in 2022. This explains why the Fed is easing policy despite ongoing economic expansion and markets trading at record levels.

The deteriorating job market has been perhaps the most significant factor influencing the Fed's decision. Though the 4.3% unemployment rate remains historically low, job creation has decelerated sharply. August added merely 22,000 new payrolls, well below the 123,000 average from earlier in the year.

More striking still are payroll revisions which indicate 911,000 fewer jobs were created during the twelve months through March than initially reported, as the chart above demonstrates. The Bureau of Labor Statistics annually revises payroll figures based on more precise data than available during monthly job reports. While these numbers remain preliminary, a revision of this scale would mark the largest in history, revealing the job market has been weaker than previously understood.

Consequently, the Fed is reducing rates because, according to the latest FOMC statement, it "judges that downside risks to employment have risen." For investors, rate cuts generally support both stocks and bonds when the economy maintains strength.

Policy uncertainty and market volatility currently subdued

Following substantial volatility from tariffs and taxes earlier this year, economic policy uncertainty measures have improved. The VIX index of stock market volatility hovers near 16.3, below the long-run average of 18, while the MOVE index of bond market volatility has declined to 78, beneath the 87 average.

Long-term investors understand that calm market periods can shift rapidly. Recent years have witnessed numerous episodes of heightened volatility stemming from inflation, trade conflicts, Washington policy, the Fed, recession concerns, geopolitical tensions, and more. The current government shutdown represents just the latest event that could disturb markets short-term, even if long-term effects prove limited. Similarly, tariff policy outcomes and inflation impacts remain uncertain.

For investors, this uncertainty may feel uncomfortable, yet it's also what generates long-term portfolio results. Recent years also illustrate the gap between investor fears and actual market performance. Rather than treating uncertainty as something to avoid, successful long-term investors recognize it as a market characteristic that creates opportunities to position portfolios for future years.

The bottom line? With Q4 beginning, markets are trading near record highs amid conflicting economic data. This environment emphasizes the critical importance of maintaining proper asset allocation, a flexible investment approach, and remaining focused on long-term financial objectives.

August 2025 Market Chartbook

Sean Gross, CFP®, AIF®

Co-Founder & CEO

Click here to view our August 2025 Market Chartbook.

August 2025 Market Review: Stocks Hit Records Amid Fed Policy Shifts and Strong Corporate Results

Sean Gross, CFP®, AIF®

Co-Founder & CEO

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.

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[1]https://advantage.factset.com/hubfs/Website/Resources%20Section/Research%20Desk/Earnings%20Insight/EarningsInsight_082925.pdf   

Navigating AI Investment Opportunities While Managing Portfolio Concentration

Sean Gross, CFP®, AIF®

Co-Founder & CEO

Today's investors face a compelling dilemma: how to capitalize on artificial intelligence's transformative potential while maintaining prudent portfolio diversification as markets reach record levels. Although it may be appealing to concentrate investments in recently successful companies, achieving long-term financial objectives demands a balanced approach that weighs both growth opportunities and risk considerations.

Large-cap technology companies, particularly those positioned to benefit from AI developments, are frequently grouped under the "Magnificent 7" designation. This collection includes Apple, Microsoft, Nvidia, Amazon, Alphabet, Meta, and Tesla, which collectively account for approximately 35% of the S&P 500's market capitalization and rank among the eight most valuable companies globally. Many of these firms are also classified as "hyperscalers" because of their substantial computing infrastructure investments designed to support expanding AI applications.

During market cycles characterized by concentrated leadership among a limited number of stocks, investors benefit from examining historical precedents, current market valuations, and strategic asset allocation. Learning from similar periods of market concentration in the past can inform more effective decision-making regarding long-term investment strategies.

Technological advancement serves as a long-term market catalyst

While artificial intelligence and railroad development may appear unrelated, historical analysis reveals that revolutionary technologies typically follow comparable trajectories. During the 1860s, railroad companies commanded American markets in ways that mirror today's technology sector dominance. The Pennsylvania Railroad once held the distinction of being the world's largest corporation and, together with other railroad enterprises, represented a substantial portion of total market value. This naturally generated investor excitement and elevated valuations that would resonate with contemporary market participants.

This cyclical pattern has emerged repeatedly throughout financial history. The dot-com surge of the 1990s, when investors concentrated almost entirely on internet-based companies, offers perhaps the most relevant modern comparison. However, examining earlier periods reveals similar dynamics with the telegraph, electric power, and telephone industries that revolutionized urban centers and spawned numerous enterprises. Throughout the 20th century, electronics and computing innovations transformed every aspect of personal and commercial life, even preceding internet development.

These technological waves consistently followed a predictable sequence: initial doubt, swift implementation, market excitement, and ultimate integration throughout the broader economy. Railroad systems didn't vanish but evolved into essential components of transportation and logistics networks, supporting overall economic activity. Although many dot-com enterprises collapsed during the late 1990s and early 2000s downturn, numerous survivors emerged as today's technology industry leaders.

Regarding long-term investment strategy, success requires focusing beyond individual corporations to consider new technologies' impact on entire markets and economic systems. The genuine value of innovation lies in enhanced productivity and operational efficiency across all business sectors. The critical distinction is that while individual company stock prices may fluctuate rapidly, the complete economy-wide benefits require considerably more time to materialize.

Historical evidence demonstrates that valuations carry equal weight with growth prospects

 

Currently, the primary question isn't whether artificial intelligence will prove significant, but rather whether existing valuations reflect reasonable expectations. With the S&P 500 trading at 22.5 times earnings, approaching the historical peak of 24.5x, investors are accepting premium pricing that presumes these trends will maintain their current momentum.

What factors explain elevated valuations for the Magnificent 7? Initially, recent data indicates that U.S. private AI investment totaled $109 billion in 2024, with additional hundreds of billions committed for the current year. This figure surpasses the complete gross domestic product of numerous nations and significantly exceeds comparable international investments. During recent quarters, investors have responded favorably to announcements of increasingly substantial AI infrastructure expenditures. This represents a notable change from less than twelve months ago when investors questioned whether these major corporate investments would generate returns.

Additionally, widespread adoption of AI tools by businesses and individual users has created escalating demand for computational capacity. This explains why "hyperscalers" such as Microsoft and NVIDIA have experienced dramatic market capitalization increases, with both companies achieving valuations exceeding $4 trillion. This trend also accounts for why new data center development and the electrical power required for their operations have captured investor attention.

These corporations are perceived as constructing the foundational infrastructure that enables other enterprises to implement AI technologies, similar to how railroad companies built transportation networks that supported all 19th-century businesses. While this generates substantial long-term value, the timeframe for achieving investment returns remains uncertain.

The difficulty lies in markets frequently overestimating how quickly transformative technologies will produce profits, even when long-term potential appears genuine. The 1990s provide a relevant cautionary example. During that period, some investors concluded that conventional valuation measures no longer applied to internet companies. When actual results failed to meet projections, the Nasdaq declined 78% from its peak, and numerous firms either failed or were acquired. Nevertheless, the internet did reshape the economy, simply not within the timeline or manner that peak valuations suggested.

Managing growth potential alongside concentration concerns

Correspondingly, while the Magnificent 7 companies may have guided markets upward, they have also led during downturns. For instance, during 2022 when interest rates increased rapidly due to inflationary pressures, these stocks declined approximately 50% on average.

Given that the Magnificent 7 now comprises such a significant portion of major market indices, virtually all investors maintain positions in these stocks within their portfolios. For those who have emphasized technology investments, their portfolio weightings may exceed intended levels.

Maintaining excessive portfolio allocation in a limited number of investments is commonly termed "concentration risk," representing the antithesis of diversification. While these companies have exhibited growth and profitability, having substantial portfolio dependence on a small group of corporations, regardless of their success, can generate volatility as market trends shift. Even exceptional companies may experience periods of relative underperformance.

For context, consider the equal-weighted S&P 500 illustrated in the accompanying chart, which assigns identical significance to each company irrespective of market capitalization. This methodology has historically produced different return characteristics compared to the standard market-capitalization weighted index, occasionally outperforming when large companies encounter difficulties.

Since mega-cap technology companies have delivered strong recent performance, some investors may find it unexpected that an equal-weighted index has still generated superior returns over the past three decades. This underscores the importance of looking beyond recent market drivers and current headlines.

This observation doesn't suggest investors should completely avoid technology stocks. Instead, it emphasizes the significance of maintaining balance and appropriate asset allocation strategies.

The bottom line? Current AI developments present both opportunities and risks for investors. Investment success depends not on selecting winning stocks, but on maintaining flexible, diversified portfolio strategy that aligns with long-term financial objectives.