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- Strong second-quarter earnings helped stocks reach new highs in August, despite underlying economic and policy uncertainty.
- Despite persistent inflation, a weakening labor market is likely to push the Federal Reserve (Fed) to cut interest rates in September. Rate cuts are historically supportive of stock and bond prices, as well as a catalyst for increased borrowing and corporate spending.
Second-Quarter Earnings Drove Stock Market Performance Amid Low Volatility
U.S. stocks continued their upward march in August, reaching new highs amid generally low volatility. The S&P 500 increased nearly 2% for the month, the Nasdaq Composite was up 1.7%, and the small-cap Russell 2000 index jumped nearly 7.1%, its best monthly showing of the year. International markets also advanced, with the MSCI EAFE Index, which tracks developed markets, rising 4.3% and the MSCI EM Index, which follows emerging markets, up 1.3%. Bonds also contributed to portfolio gains in August, and with spreads at historic lows, corporate bonds continue to offer attractive yields.1
U.S. markets got off to a shaky start in August due to soft employment numbers and the implementation of broad reciprocal tariffs. Strong second-quarter earnings and expectations for interest rate cuts helped fuel a quick recovery and positive investor sentiment. Eighty-one percent of S&P 500 companies beat their earnings estimates for the quarter, the highest percentage since the third quarter of 2023.2 This widespread earnings strength shows that companies are adjusting to tariffs and their associated higher costs. It also suggests that many companies have the positive momentum needed to justify their elevated valuations, easing investor concerns. Earnings from the “Magnificent Seven” technology stocks were mixed, but strong results from several data storage-focused “hyperscalers” helped drive a late-August rally.
Source: MarketDesk
Rate Cuts Expected Amid Softening Labor Market
Despite positive market performance in August, uncertainties surrounding monetary policy and concerns about the Federal Reserve’s (Fed) independence persisted. The month began with a weak employment report, showing that only 73,000 jobs were added in July, along with unexpected, significant downward revisions to the May and June figures.3 The subsequent dismissal of the Bureau of Labor Statistics Commissioner by the White House, and repeated attacks on the Fed, added to political instability. Later in the month, the July Consumer Price Index indicated a modest year-over-year increase of 2.7%, while the Producer Price Index rose by 0.9%, suggesting that companies are passing tariff costs onto consumers. Additionally, second-quarter U.S. GDP was revised upward to 3.3%, compared to a first-quarter contraction of 0.5%.
At the Fed’s annual Economic Policy Symposium in August, Fed Chair Jerome Powell signaled a willingness to cut interest rates in September. The Fed’s mandate aims to balance inflation stability with full employment. Until July, a strong employment outlook and persistent, above-target inflation supported the case for keeping interest rates steady. However, the weakening job market has now shifted the Fed’s focus toward monetary easing. Consequently, markets anticipate a rate cut at the September Fed meeting, with the possibility of further easing in the coming months.
Source: Federal Reserve & CME
Remain diversified and focused on long-term goals
A long-anticipated decline in interest rates is expected to create a more supportive and attractive environment for both individual and corporate borrowers, as lower financing costs can stimulate new investment, expansion projects, and broader economic activity. In fixed income markets, declining rates typically bolster bond prices, enhancing total return potential while also improving the relative appeal of bonds as a dependable source of income. This dynamic is particularly relevant in the current environment, where select sectors may present compelling opportunities for yield without materially increasing risk exposure. For investors, these shifts underscore the importance of maintaining a diversified and balanced portfolio, one that can withstand short-term fluctuations driven by policy decisions, trade tensions, and the possibility of a government shutdown. By remaining disciplined and focused on long-term objectives, investors can avoid being swayed by temporary volatility and instead position themselves to benefit from more durable economic and market trends.
1 Morningstar
2 FactSet
3 Y Charts
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International and foreign securities are subject to additional risks such as currency fluctuations, political instability, differing financial standards, and the potential for illiquid markets.
Fixed income investments have several other asset-class specific risks. Inflation risk reduces the real value of such investments, as purchasing power declines on nominal dollars that are received as principal and interest. Interest rate risk comes from a rise in interest rates that causes a fixed income security to decline in price in order to make the market price-based yield competitive with the prevailing interest rate climate. Fixed income securities are also at risk of issuer default or the markets’ perception that default risk has increased.
The “Magnificent Seven” refers to a group of seven high-performing, influential stocks in the technology sector. Alphabet (GOOGL; GOOG), Amazon (AMZN), Apple (AAPL), Meta Platforms (META), Microsoft (MSFT), NVIDIA (NVDA), and Broadcom (AVGO).
Comparative Index Descriptions: Historical performance results for investment indices have been provided for general comparison purposes only, and generally do not reflect the deduction of transaction or custodial charges, the deduction of an investment management fee, nor the impact of taxes, the incurrence of which would have the effect of decreasing historical performance results. It should not be assumed that your account holdings do or will correspond directly to any comparative indices. An investor cannot invest directly in the indices shown, and accurate mirroring of the indices is not possible.
The Standard & Poor’s (S&P) 500 Index is an index of 500 stocks seen as a leading indicator of U.S. equities and a reflection of the performance of the large cap universe, made up of companies selected by economists. The S&P 500 is a market value weighted index and one of the common benchmarks for the U.S. stock market.
The Russell 2000® Index is a capitalization-weighted index designed to measure the performance of a market consisting of the 2,000 smallest publicly traded U.S. companies (in terms of market capitalization) that are included in the Russell 3000® Index.
The MSCI EAFE Index is a stock market index that measures the performance of large- and mid-cap companies across 21 developed markets countries around the world. Canada and the USA are not included. EAFE is an acronym that stands for Europe, Australasia, and the Far East.
The MSCI Emerging Markets is a global stock market index that tracks the performance of large and mid-cap companies across 24 emerging markets. It is maintained by MSCI, formerly Morgan Stanley Capital International, and is used as a common benchmark for global emerging market stock funds.
The NASDAQ Composite Index measures all NASDAQ domestic and international based common type stocks listed on The NASDAQ Stock Market. CSP2025220
