August Market Commentary

August 2025 Economic & Market Update: Navigating a Shifting Landscape

August confirmed that the U.S. economy is in a state of transition. Equity markets hit record highs, led by technology and AI, while the labor market showed its sharpest slowdown in years, and inflation remained above target due to tariff pressures. These crosscurrents have shifted the Federal Reserve’s stance toward rate cuts, with September now widely expected to take the first step in a new easing cycle. Investors face a landscape of opportunity to broaden their investments beyond tech into banks, cyclicals, and smaller companies, but also heightened risks from a weakening job market and tariff-driven inflation.

Markets & Earnings: Tech at the Front, Signs of Broadening

U.S. equities delivered substantial gains in August. The S&P 500 climbed 3.2% to a record high, the Dow Jones rose 2.8%, and the NASDAQ advanced 4.1%, closing in on its peak. (1). Bond yields fell as investors priced in slower growth and Fed rate cuts, with the 10-year Treasury yield down to 4.22% and the 2-year at 3.6%.

Earnings season reinforced market momentum. Over 80% of S&P 500 firms beat estimates, producing 11.8% year-over-year earnings growth, the third straight quarter of double-digit gains. Tech, AI, and semiconductors led the charge, further boosted by a U.S.–Europe trade agreement that alleviated supply chain concerns.

Yet risks lurk under the surface. The rally remains concentrated in a handful of tech names, leaving valuations stretched. A recent MIT Media Lab study, The GenAI Divide, warned that while billions are flowing into generative AI, only 5% of firms report meaningful returns. This mirrors past “next big thing” cycles where valuations ran well ahead of fundamentals.

Encouragingly, there are signs of broadening. Industrials and materials gained from investment incentives and tax breaks, while banks and smaller companies may benefit if interest rates decline. A rotation into cyclicals and financials could emerge later this year if the Fed follows through with rate cuts.

Economic Fundamentals: Transition in Motion

The U.S. economy grew at a 3.3% annualized rate in Q2, rebounding from a contraction in Q1, with consumer spending increasing by 1.6%. But growth for the first half averaged just 1.4%, showing weak momentum outside tech-driven sectors. Policymakers are steering toward an investment-led model, reducing consumer stimulus and encouraging business spending on equipment and software.

Still, headwinds remain:

• Manufacturing stayed soft, with industrial production down 0.1% in July and durable goods orders falling 2.8%, mainly from transportation.
• The trade deficit widened as imports surged 7.1%, reflecting tariff-driven costs in goods like furniture and electronics.
• Global context was mixed. Europe made modest gains on trade deals, while China and Japan struggled with domestic challenges.

Most striking, the August labor report (released Sept. 5) showed a decisive cooling: just 22,000 payroll jobs added versus 75,000 expected, and the unemployment rate rose to 4.3%, the highest since 2021. Losses were broad-based in manufacturing and wholesale trade, while health care and social assistance posted modest gains. Worker “job hugging” underscored caution, with employees clinging to current roles in an uncertain economy.

Inflation also stayed stubbornly above the Fed’s 2% target. CPI rose 2.9% year-over-year, core CPI 3.1%, while the Fed’s preferred PCE measure posted 2.6%. Tariffs imposed in April pushed prices higher in everyday goods like vehicles, electronics, toys, and even bananas (+5% since spring). Housing and rents are cooling, but wholesale prices rose 3.3%, leaving households squeezed. Analysts view tariff-driven inflation as temporary, but its uneven impact is expected to be a near-term drag on consumer spending.

Fed Policy Outlook: Pivoting to Rate Cuts

The Federal Reserve has shifted its emphasis from price stability to supporting employment, as labor market softness and slowing growth outweigh concerns about mostly stable inflation. Policymakers have signaled a likely 0.25% cut in September, with markets pricing in as much as 1% of reductions by early 2026.

Bond yields have already adjusted, with a steepening yield curve (See Exhibit A) reflecting growth concerns rather than inflation fears. Lower rates could buoy equities, encourage rotation into financials and cyclicals, and ease borrowing costs for households and businesses. Still, the Fed remains cautious, balancing its mandate against the risk of reigniting price pressures if tariffs continue to filter through supply chains.

                                           Exhibit A.

• Dark Red Yield Curve as of 12/31/2024
• Bright Red Yield Curve as of 9/11/2025

Key Takeaways for Investors

August 2025 revealed an economy at a crossroads: soaring stock markets driven by technology and AI optimism versus a labor market showing its most pronounced slowdown in years. Inflation remains sticky, mainly due to tariffs, but the Fed is reprioritizing full employment and signaling a readiness to cut rates. For investors, the challenge is balancing the promise of a broader market rally with the risks of an economy losing momentum.

Your updated portfolio reports are available in your eMoney vault. If you’d like to review your report or discuss your portfolio and financial plan, we’re always happy to schedule a conversation, whether in person, over the phone, or on Zoom.

With Labor Day behind us, we begin to prepare for year-end reviews, focusing on tax mitigation. Topics include retirement account contributions, Roth conversions, capital gains tax management, estate planning, and charitable giving.

As always, thank you for your continued trust.

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1. The Dow, NASDAQ, S&P 500 are unmanaged groups of securities considered to be representative of the stock market in general