It was a strong summer for the markets as stocks hit new all-time highs. In fact, this was the third best summer for the S&P 500 (US large cap stocks) over the last 40 years. The US economy has remained incredibly resilient. Corporate earnings have been strong and better than expected. The S&P 500 is up 14% through 9/26/25. International stocks (as measured by the MSCI EAFE) are up about 24% and have outperformed US stocks by a wide margin. A weaker US dollar, which has been a tailwind, may continue to benefit international stocks. Growth stocks have continued to outperform but returns have been broadening out to other areas of the market. Small cap stocks have been rallying after underperforming for the first half of the year, with the Russell 2000 index up about 10% through 9/26/25. Returns this year have demonstrated the benefits of having a globally diversified, balanced portfolio. A portfolio that’s well diversified can help manage risk and improve overall resilience over time.
Federal Reserve
The Federal Reserve cut interest rates by 0.25% at their meeting in September and projected two more cuts for the rest of this year. This was the first interest rate cut since December of last year. Fed cuts generally only influence short-term interest rates. Bonds have performed well this year as interest rates have declined (bond prices move inversely to interest rates). The 10-year US Treasury (which serves as a baseline for loans including mortgages and other long-term debt) began the year at about 4.58% and is now at about 4%. These 10-year bonds are generally not impacted by Fed rate cuts and instead are influenced by supply and demand as well as other economic factors. High quality US bonds (as measured by the Bloomberg US Aggregate Bond Index), which should serve as the core of a fixed income portfolio, are up about 6% year-to-date. Lower interest rates should reduce borrowing costs for consumers and businesses. Yields for money market funds and CDs will likely drop along with the Fed funds rate. It remains to be seen how mortgage rates will react in the short term. When the Fed cut interest rates in the latter part of last year, long-term interest rates rose. An interest rate cut could fuel fears about inflation and our nation’s deficit. Additionally, tariffs are still making their way through the inflation data which may complicate the outlook for the Fed.
Equity valuations are elevated compared to historical levels, but earnings have continued to stay strong. Trade deals between the US and other countries have helped to ease tariff concerns although uncertainty around this remains. Historically, in non-recession scenarios, interest rate cuts are typically positive for equity markets which have performed well. Tax incentives in the OBBB may provide support to individuals and businesses. Some signs of cracks have been starting to show in the labor market, which has been softening, with signs that hiring momentum has slowed. With markets near all-time highs, we could see more volatility ahead until we have more clarity around the tariffs and the outlook for the economy.
Disclosure
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