Market Commentary – August 2025
Equities moved higher in August, with U.S. markets reaching new all-time highs. The S&P 500 gained 2.03% for the month, bringing its year-to-date (YTD) return to 10.04%. Notably, the equal-weighted S&P 500 outperformed the traditional cap-weighted index, showing that strength extended beyond the “Magnificent 7.” The Dow rose 3.42% in August, lifting its YTD gain to 7.74%, while the Nasdaq advanced 1.65% for the month and 10.68% YTD. Smaller companies were standouts: Mid-Caps climbed 3.39%, and Small-Caps surged 7.06%—their strongest monthly performance since late 2024. International equities continued to lead, with the MSCI EAFE up 4.27% in August and more than 21% YTD.
In fixed income, markets reflected shifting expectations for Fed policy following weaker employment data. Treasury yields declined at the short end of the curve, with the 2-year falling 33 basis points. The 10-year eased 13 bps, while the 30-year rose modestly by 4 bps. Credit spreads—compensation for taking on credit risk—remained well below long-term averages. Investment-grade spreads were largely unchanged, while high-yield spreads narrowed by 4 bps.
The macroeconomic backdrop grew more complex. The labor market softened, with July Non-Farm Payrolls adding just 73,000 jobs, well below expectations. In addition, May and June figures were revised down by a combined 258,000 jobs. The unemployment rate edged up to 4.2%, raising concerns about a weakening jobs market. At the same time, inflation remained sticky. The Fed’s preferred measure, PCE, rose 2.6% year-over-year in July, matching June’s pace, while Core PCE ticked up to 2.9%. With inflation still above the 2% target and employment weakening, the Fed faces a difficult balancing act. Markets now assign about a 90% probability of a 0.25% rate cut at the September meeting, expectations reinforced by Chair Powell’s dovish remarks at Jackson Hole acknowledging both inflation risks and labor market challenges.
Corporate earnings remain a bright spot. S&P 500 earnings grew 11.7% in the second quarter, marking a third straight quarter of double-digit gains, with 81% of companies beating estimates. Growth was concentrated in AI-related companies: Communication Services led with 46% earnings growth, followed by Information Technology at 22%. Collectively, the “Mag 7” companies reported 26% earnings growth for Q2.
Looking ahead, markets enter September with positive momentum, broader leadership, and strong earnings. However, September has historically been a challenging month for equities. With a softening labor market, tariff uncertainty, and other macro headwinds, markets may rely heavily on expected Fed rate cuts to sustain their momentum.