From the period August 1 – August 31, 2025.

Executive Summary

U.S. equity markets remain near record highs, even as softer economic data emerges. Signs of a weakening labor market have strengthened expectations for Fed rate cuts—fueling optimism in risk assets. Yet, that same softness also raises concerns about a downturn in the economy. 

What Piqued Our Interest

Markets Near Highs, But Warning Signs Emerge

Equities continued their climb in August, with the S&P 500 rising 2.03%, the Dow Jones gaining 3.42%, and Small Cap stocks rebounding with a 7.14% surge in the Russell 2000 Index. Despite these gains, the underlying data reflects a more cautious economic environment. The University of Michigan’s consumer sentiment index, as well as the Conference Board’s Leading Economic Index, both declined in their most recent release.

Meanwhile, equity valuations remain stretched. The S&P 500’s forward price-to-earnings (PE) ratio sits around 22.5, well above historical norms, suggesting markets may be vulnerable to downside surprises. Concentration risk also remains elevated, with the top 10 stocks in the index comprising almost 40% of the value, driving a disproportionate share of returns. 

Labor Market Softening Sets Stage for Rate Cuts

Most notably, the labor market showed further signs of slowing in August. Following a disappointing July payrolls report, the Bureau of Labor Statistics’ JOLTS report showed that both job openings and voluntary quits have declined below pre-pandemic levels. This softening trend, coupled with downward revisions to earlier employment data, points to weakening labor demand.

This has shifted expectations around monetary policy, as investors increasingly anticipate a rate cut in September—particularly as inflation readings have remained tolerable. However, a complicating factor is the potential impact of recently enacted tariffs, especially on manufacturing inputs and consumer goods. While their inflationary impact has been modest so far, the lagged nature of pass-through costs could challenge the Fed’s ability to cut rates aggressively. Policymakers must now weigh a slowing labor market against the potential for renewed price pressures driven by trade policy.

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September Seasonality and Valuation Risks

Historically, September has been one of the weakest months for U.S. equities, and given current stretched valuations, markets may be more susceptible to volatility. Portfolio rebalancing, tax planning, and post-summer positioning often amplify price movements during this period.

Though August saw broadening participation, especially among Small Caps and international stocks, investors have the right to be cautious. With macro indicators softening and monetary policy at an inflection point, the path forward may be less straightforward than recent gains suggest.

Market Recap

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U.S. Equities: All major indexes posted gains in August. The Russell 2000 (+7.14%) and Dow Jones (+3.42%) outperformed, while the S&P 500 rose modestly (+2.03%). The Nasdaq 100 (+0.92%) lagged, consistent with a broader shift away from growth-dominated leadership.

International Equities: Developed markets (MSCI EAFE) surged 4.26%, while emerging markets rose 1.28%. The MSCI ACWI ex-US gained 3.47%, as global investors responded favorably to a weakening U.S. dollar and expectations for global rate cuts.

Fixed Income: The Bloomberg US Aggregate Bond Index gained 1.20%, supported by a pullback in Treasury yields. High-yield corporate bonds rose 1.25%, while municipal bonds posted a modest gain of 0.87%.

Commodities & Real Assets: The Bloomberg Commodity Index returned 1.93%, while the MSCI US REIT Index rallied 4.38%, though remains down -1.40% year-over-year, reflecting persistent stress in commercial real estate.

 Year-to-Date Leaders: Growth stocks continue to dominate YTD performance, with the Nasdaq 100 (+11.98%) and Russell 1000 Growth (+11.33%) leading. International developed equities remain strong performers as well (MSCI EAFE +22.79%).

Wealth Enhancement Perspective

August reinforced the dichotomy between market performance and underlying economic data. While the artificial intelligence tailwind remains intact, and resilience of asset prices is encouraging, risks tied to tariffs, inflation, and employment warrant close attention. With September historically volatile, and policy at a crossroads, this is a prudent time to reassess portfolio exposures.

For long-term investors, volatility can present opportunities. Rebalancing, tax-loss harvesting, and deploying cash selectively may enhance long-term outcomes. Despite the strong returns, investors should look beyond the “Magnificent 7” and consider asset classes that have lower correlation to traditional stocks and bonds. Staying diversified, disciplined, and focused on fundamentals will be key as we move toward year-end.

This information is not intended as a recommendation. The opinions are subject to change at any time and no forecasts can be guaranteed. Investment decisions should always be made based on an investor's specific circumstances.

There is no guarantee that asset allocation or diversification will enhance overall returns, outperform a non-diversified portfolio, nor ensure a profit or protect against a loss. Investing involves risk, including possible loss of principal.

2025-9093