Key Observations
- Shifting sentiment and increased expectations for a rate cut in September helped propel small-cap stocks ahead of large-cap during the month.
- Tariff revisions, a weaker U.S. dollar, and strong local earnings propelled international equities higher.
- Treasury yields fell, core bonds gained and high yield spreads tightened.
Market Recap
Equities moved higher in August, though leadership shifted beneath the surface. The S&P 500 rose 2.0% and remains up 10.8% year-to-date, but the more notable move came from small caps. The Russell 2000 surged 7.1% in August, erasing earlier weakness as investors grew more comfortable with the prospect of Federal Reserve rate cuts. The rotation also showed up at the sector level. Materials and health care were stand-out sectors within the S&P 500, while technology lagged as A.I. enthusiasm gave way to concerns about rising costs and capital intensity. While the market’s muscle memory to reward growth is still present, August favored value and cyclicals.
Outside the U.S., international equities extended their lead. Developed markets, represented by the MSCI EAFE, advanced 4.3% in August and are now up an outsized 22.8% year-to-date. Japan performed well, notably driven by tariff revisions and structural improvements to its economy, while Germany and France trailed the pack. Emerging markets posted a modest 1.3% gain for the month, but remain up 19.0% for the first eight months of the year. Strength in China, supported by targeted policy action, and in Brazil, fueled by strong corporate earnings and attractive valuations, helped offset weaker performance elsewhere.
Fixed income markets also benefited from a shift in tone. Treasury yields fell across the curve after a disappointing unemployment report and dovish messaging out of the Fed’s Jackson Hole summit. Core bonds rose 1.2% in August and high yield added 1.2% with spreads grinding tighter.
August highlighted the breadth of participation across asset classes. Risk assets pushed higher, credit remained firm, and real assets gained as well. Beneath the headline returns, however, leadership is rotating. Investors are shifting toward areas tied to policy support, lower valuations, and real cash flow, while the expensive corners of the growth trade are being tested. This changing mix is worth watching as markets transition from momentum-driven gains to a backdrop increasingly defined by fundamentals.
Outlook and the Fed
During the summer, calls for continued quantitative easing by the Fed grew louder as economic data started to come in weaker than expected. Specifically, cracks have started to emerge in the labor market with the most recent report showing payrolls barely increasing and the unemployment rate climbing to its highest level since October 2021. The unemployment rate rose from 4.2% in July to 4.3%[1] in August and revisions by the Bureau of Labor Statistics showed monthly job growth was weaker than originally reported. The other side of the Fed’s duel mandate, inflation, ticked up slightly in the last few months. Despite the expectations of many economists, tariffs have not yet contributed to a dramatic price increase for the consumer. Most recently, the Consumer Price Index (CPI) report showed that year-on-year inflation through August rose from 2.7% to 2.9% with core prices rising from 3.0% to 3.1%[2].
The Fed will be meeting September 16-17 and is expected to cut the Fed Fund’s rate by 25 bps, with another 25 to 50 bps of additional easing during the remainder of the year. For investors it is important to maintain a well-diversified portfolio across all asset classes. In an environment where broader market forces and geopolitical events, not just interest rates are front and center, active management is crucial for navigating a smoother ride. Given the Fed’s anticipated rate cuts, we have continued to move our clients from short-term treasuries and cash into longer duration, high quality fixed income portfolios that lock-in attractive yields for longer.
Sources
[1] Bureau of Labor Statistics. As of September 1, 2025
[2] Bureau of Labor Statistics. As of September 1, 2025
Disclosures
The information provided is illustrative and for educational and informational purposes only and does not constitute investment advice and it should not be relied on as such. It should not be considered a solicitation to buy or an offer to sell a security. It does not take into account any investor's particular investment objectives, strategies, tax status or investment horizon. You should consult your attorney or tax advisor.
The views expressed in this commentary are subject to change based on market and other conditions. This document may contain certain statements that may be deemed forward looking statements. Please note that any such statements are not guarantees of any future performance and actual results or developments may differ materially from those projected. Any projections, market outlooks, or estimates are based upon certain assumptions and should not be construed as indicative of actual events that will occur. Certain targets within the presentation are estimates based on certain assumptions and analysis made by the advisor. There is no guarantee that the estimates will be achieved.
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Diversification does not ensure a profit or guarantee against loss. Asset Allocation may be used in an effort to manage risk and enhance returns. It does not, however, guarantee a profit or protect against loss. Index returns are unmanaged and do not reflect the deduction of any fees or expenses.
Comparisons to any indices referenced herein are for illustrative purposes only and are not meant to imply that actual returns or volatility will be similar to the indices. Index returns reflect all items of income, gain and loss and the reinvestment of dividends and other income. You cannot invest directly in an Index.
S&P 500 is a capitalization-weighted index designed to measure performance of the broad domestic economy through changes in the aggregate market value of 500 stocks representing all major industries.
Russell 2000 consists of the 2,000 smallest U.S. companies in the Russell 3000 index.
MSCI EAFE is an equity index which captures large and mid-cap representation across Developed Markets countries around the world, excluding the U.S. and Canada. The index covers approximately 85% of the free float-adjusted market capitalization in each country.
MSCI Emerging Markets captures large and mid-cap representation across Emerging Markets countries. The index covers approximately 85% of the free-float adjusted market capitalization in each country.
Bloomberg U.S. Aggregate Index covers the U.S. investment grade fixed rate bond market, with index components for government and corporate securities, mortgage pass-through securities, and asset-backed securities.
Bloomberg U.S. Corporate High Yield Index covers the universe of fixed rate, non-investment grade debt. Eurobonds and debt issues from countries designated as emerging markets (sovereign rating of Baa1/BBB+/BBB+ and below using the middle of Moody’s, S&P, and Fitch) are excluded, but Canadian and global bonds (SEC registered) of issuers in non-EMG countries are included.
FTSE NAREIT Equity REITs Index contains all Equity REITs not designed as Timber REITs or Infrastructure REITs.
Bloomberg Commodity Index is calculated on an excess return basis and reflects commodity futures price movements. The index rebalances annually weighted 2/3 by trading volume and 1/3 by world production and weight-caps are applied at the commodity, sector and group level for diversification.
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