September 2025
US Economy: Confidence wavers.
The Q2 GDP rebound—driven by the “import halt”—was revised up to 3.3% from 3.0%, supported by stronger-than-expected consumer spending. However, the Fed’s preferred inflation gauge, Core PCE, rose to 2.9%, while consumer confidence declined for the eighth consecutive month. These trends, combined with a cooling labor market, strengthen expectations for a Fed rate cut in September.
US Stocks: Small caps lead the rally.
Equities advanced again in August, with the S&P 500 hitting a new all-time high on robust earnings and resilient data. Materials (+5.8%) and energy (+3.6%) outperformed as investors rotated into cyclical sectors ahead of anticipated Fed easing. Small-cap stocks led the charge (+7.1%), benefiting from attractive valuations and optimism that lower rates will unlock capital for smaller firms.
Foreign Stocks: Dollar weakness boosts returns.
The US dollar fell 2.3% in August, extending its year-to-date decline to roughly 10%, driven by expectations of Fed cuts and fiscal uncertainty. This weakness supported non-US equity performance for US-based investors. Japanese equities rebounded strongly (+7.6%) following progress on tariff reductions between the US and Japan.
Fixed Income: Rates ease, bonds benefit.
Interest rates declined amid labor market softness, including a downward revision of 258,000 jobs, increasing the likelihood of a September Fed cut. Most bond sectors performed well, with Agency MBS among the strongest. The average outstanding 30-year mortgage rate remains at 4.3%, while new loans hover near 6.5%, reducing prepayment risk for investors.
Real Assets: Gold and infrastructure shine.
Lower rate expectations and a weaker dollar supported real assets broadly. Gold remains the standout performer (+31.4% YTD) as an “uncertainty hedge,” while infrastructure equities (+18.0% YTD) also delivered strong gains. Conversely, oil (-3.8% YTD) lagged on oversupply concerns and global growth worries.
Alternatives: Private credit outperforms.
Diversifying strategies have understandably trailed equities in 2025, but private credit has delivered steady returns with low volatility—middle-market direct lending up roughly 6% YTD (a 9% annualized pace). Meanwhile, digital assets were mixed: Bitcoin fell 7%, while Ethereum surged 17% on record network activity and regulatory clarity that reinforced its role as the leading platform for tokenized finance and digital innovation.
Source of data: Bloomberg
Equities Total Return
| AUG | YTD | 1 YR | |
|---|---|---|---|
| U.S. Large Cap | 2.0% | 10.8% | 15.9% |
| U.S. Small Cap | 7.1% | 7.0% | 8.1% |
| U.S. Growth | 1.3% | 11.1% | 22.0% |
| U.S. Value | 3.4% | 9.8% | 9.1% |
| Int’l Developed | 4.6% | 22.8% | 13.8% |
| Emerging Markets | 3.4% | 19.8% | 17.6% |
Fixed Income Total Return
| AUG | YTD | 1 YR | |
|---|---|---|---|
| Taxable | |||
| U.S. Agg. Bond | 0.4% | 5.0% | 3.1% |
| TIPS | 1.5% | 6.4% | 4.9% |
| U.S. High Yield | 1.2% | 6.2% | 8.2% |
| Int’l Developed | (0.4%) | (1.2%) | (1.4%) |
| Emerging Markets | 0.1% | 3.6% | 6.2% |
| Tax-Exempt | |||
| Intermediate Munis | 0.9% | 3.7% | 3.5% |
| Munis Broad Mkt | 0.9% | (0.0%) | (0.0%) |
Non-Traditional Assets Total Return
| AUG | YTD | 1 YR | |
|---|---|---|---|
| Commodities | 1.9% | 7.1% | 11.8% |
| REITs | 3.3% | 4.1% | (1.4%) |
| Infrastructure | 1.5% | 17.7% | 19.2% |
| Hedge Funds | |||
| Absolute Return | 0.8% | 3.4% | 4.3% |
| Overall HF Market | 1.1% | 4.1% | 5.3% |
| Managed Futures | 1.4% | (6.2%) | (5.3%) |
Economic Indicators
| AUG-25 | FEB-25 | AUG-24 | |
|---|---|---|---|
| Equity Volatility | 15.4 | 19.6 | 15.0 |
| Implied Inflation | 2.4% | 2.4% | 2.2% |
| Gold Spot $/OZ | $3448.0 | $2857.8 | $2503.4 |
| Oil ($/BBL) | $68.1 | $73.2 | $78.8 |
| U.S. Dollar Index | 120.7 | 128.1 | 122.9 |
Our Take
It is easy to be caught by surprise as the leaves start to change color, and the nights get a little cooler when it feels like summer has just begun. Autumn “frost” can sneak up on the markets as well. Some measure of complacency inarguably set in over the summer as we hit consecutive all-time highs in the US equity markets. Certainly, a rebound after early April was validated by strong corporate earnings and it remains the general assumption that the Fed will cut rates in September, potentially buoying markets, even if neither unemployment nor inflation have budged all that much. Still, the first few days of September underscore that market moving uncertainty of some kind is always simmering in the background.
The latest flashpoint is President Trump’s effort to remove Lisa Cook from the Federal Reserve Board of Governors, after seemingly moving on from Fed Chair Jerome Powell. The historical perception of the Federal Reserve’s independence is increasingly being questioned—and possibly compromised. The recent firing of the BLS head statistician further adds to the perception, right or wrong, that seemingly independent institutions are being politicized.
With that said, the Fed has been perceived, historically, as an independent entity (other than during periods of geopolitical or financial stress) with the charge of smoothing economic cycles. The risk of politicizing independent financial institutions is the potential erosion of the credibility and reliability of the US Treasury and the US dollar, the market consequences likely being a weaker dollar and higher long-term interest rates. Whether the president can fire Fed governors is probably headed to the Supreme Court at some point. In the meantime, investors haven’t reacted strongly to the firing, and it’s possible they won’t until they perceive imprudent and/or politically influenced policies are implemented.
Here are some other key fundamental areas we are paying careful attention to in the near-term:
US interest rates: All eyes are on The Federal Reserve and its Chair, currently Jerome Powell. The Fed’s “dot plot” forecast still shows two 25 basis point rate cuts in the Fed funds rate in 2025. If the Fed disappoints at the September meeting, opting not to lower its target rate, it will likely test enthusiastic investor expectations and ratchet up the political ire.
Inflation: US inflation remains stubbornly higher than the Federal Reserve’s 2% target, and projections don’t look any better with core PCE projected to be near 3% by year-end. Two factors are cause for concern: tariffs, which drive up import prices (especially since the dollar has weakened); and ongoing government deficits, which are projected to rise in the next decade due to the OBBB Act.
US consumer: Much of the early 2025 strength in consumer spending came from people buying early to front-run US import tariffs. With that behind us, lower- and middle- income households seem to be paring back on spending due to rising costs and cuts to social programs although higher income households have been more resilient. Recent earnings calls echoed this trend—Walmart and Target noted trade-down behavior and weaker discretionary sales, and Home Depot cited slower big-ticket projects.
Labor market: A strong US job market has been a cornerstone for the case of continued strength in consumption. As long as people have jobs, spending levels are not likely to drop off significantly, nudging the economy towards growth. However, the downward revision in job creation over the last several months suggests less stability than previously thought.
Corporate margins: Tariffs are also weighing on industrials and select retailers. Caterpillar warned of $1.5–$1.8 billion in added costs this year, while GM projected $4–$5 billion, underscoring the pressure on margins if trade tensions persist thus risking derailing the strength in the equity markets.
So far, 2025 has been kind to risk assets and that may continue: international stocks still look attractive, especially if a weaker dollar adds a tailwind while US large caps have held up on hopes that AI will boost productivity like the late ’90s tech boom. Still, with valuations stretched and policy and geopolitical risks rising, a “frosty” fall is possible. At the risk of sounding like a broken record (and yes, some of you may not even know what that means in this digital-download age), rebalancing remains prudent after summer highs. New dollars may be best allocated to short-term fixed income or cash where yields remain compelling for now and diversifiers that may take advantage of a pending uptick in volatility. Looking forward, we are also actively evaluating private infrastructure, private real estate, and activist strategies.
