Markets entered September with a cautiously optimistic tone following a mixed August that was marked by softening labor data, persistent inflation pressures, and renewed speculation around Federal Reserve policy direction. The S&P 500 posted modest gains last month, driven largely by strength in AI-related tech, semiconductors, and mega-cap growth stocks. At the same time, small-caps, cyclicals, and international equities lagged amid rising global uncertainty. Volatility picked up in the latter half of the month as investors reassessed the timing and magnitude of potential policy shifts.
Bond yields remain elevated, although they’ve recently edged lower as investors grow increasingly confident that the Fed will begin easing before year-end. The 10-year Treasury yield is now hovering around 4.25%, down from recent highs, reflecting a mix of softer economic data and rising expectations of an imminent rate cut. Credit spreads, meanwhile, have widened modestly, indicating a degree of caution returning to fixed income markets.
The Federal Reserve remains the primary driver of market sentiment. While inflation data from August showed some re-acceleration in headline prices—driven in part by tariffs, shelter costs, and energy costs—core inflation continues to moderate slowly. This dynamic has complicated the Fed’s decision-making. While the labor market is showing clear signs of cooling, Fed officials remain publicly cautious, reiterating their data-dependent stance. Markets are now pricing in 50-75 bps of rate cuts by the end of 2025, though some uncertainty remains.
Meanwhile, second-quarter earnings season wrapped up on a mixed note. The standout performers remained concentrated in tech, particularly firms tied to AI infrastructure, cloud services, and digital automation. However, margins remained under pressure in consumer-facing sectors like retail, transportation, and manufacturing, where inflation and tepid demand continue to weigh on profitability. Guidance for the remainder of the year has been conservative in several non-tech sectors, pointing to potential headwinds.
In the months ahead, markets will remain highly sensitive to inflation trends, central bank signals, and geopolitical developments. While hopes of a soft landing persist, elevated valuations and policy uncertainty warrant caution. Investors should stay agile, focusing on quality assets and diversification as volatility remains a key theme. A data-driven, balanced approach will be essential as the economic and political landscape continues to evolve through year-end.
This update was included in Issue 2 of the Ballast Magazine. Read the full issue here: https://ballastplan.com/connect/