Equity markets ended September broadly higher, defying the traditional “September effect.” Gains were fueled by optimism surrounding the Federal Reserve’s policy pivot and continued enthusiasm around artificial intelligence (AI) investments. The S&P 500 rose 3.7% for the month, bringing its year-to-date (YTD) return to 14.8%. Mid- and small-cap stocks lagged their large-cap counterparts, with the S&P 400 Mid Cap Index up 0.5% and the S&P 600 Small Cap Index gaining 1.0%. International equity performance was mixed: developed markets (MSCI EAFE) rose 1.9% in September, while emerging markets (MSCI EM) surged 7.2%. Both developed and emerging markets continue to outpace U.S. equities on a YTD basis, up 25.1% and 27.5%, respectively.
The Treasury yield curve flattened modestly in September as rates declined across maturities. The 2-year Treasury yield fell 1 basis point, the 10-year dropped 8 basis points, and the 30-year decreased 20 basis points. Credit markets remained resilient, as investment-grade and high-yield spreads tightened slightly and remain near historical lows. Falling yields and narrower spreads supported fixed income returns. The Bloomberg U.S. Aggregate Bond Index gained 1.1% for the month and is now up 6.1% YTD.
Economic data in September pointed to a cooling but still resilient U.S. economy. The August Non-Farm Payrolls report showed a modest gain of just 22,000 jobs, well below expectations, while the unemployment rate ticked up to 4.3%. Inflation remains elevated and above the Federal Reserve’s 2% target. The Personal Consumption Expenditures (PCE) Price Index—the Fed’s preferred inflation gauge—rose 2.7% year-over-year in August, slightly higher than July’s reading. Core PCE, which excludes food and energy, held steady at 2.9%.
Despite mixed signals from employment and inflation data, the Federal Reserve officially began its rate-cutting cycle in September, lowering the federal funds rate by 25 basis points to a range of 4.00%–4.25%. Policymakers also signaled the potential for two additional cuts before year-end.
AI-related developments remained a major catalyst for market optimism. Several high-profile announcements reinforced investor enthusiasm in the technology sector, including:
- Nvidia’s $5 billion investment in Intel to co-develop data center and PC chips
- Nvidia’s commitment of up to $100 billion in OpenAI to build data centers powered by Nvidia chips
- OpenAI and Oracle’s $300 billion agreement for OpenAI to purchase computing capacity from Oracle
While these deals helped fuel rallies across the AI ecosystem, they also raised concerns about the growing interconnectedness within the space—creating potential vulnerabilities if any major participant falters.
As the final quarter of 2025 begins, investors face renewed uncertainty amid the potential for a government shutdown. While markets have historically been resilient during past closures, a prolonged instance could disrupt the release of key economic data, leaving the data-dependent Federal Reserve temporarily “flying blind.” Meanwhile, furloughs could pressure household cash flows as government employees await delayed paychecks, weighing on a vital driver of economic growth—consumer spending.
Brendan Moleski, CFA
Head Trader & Investment Analyst