August 2025 Market Commentary

Investor attention in August 2025 was dominated by the Federal Reserve, overshadowing the strong conclusion to Q2 earnings season. President Trump, frustrated by the Fed’s reluctance to lower interest rates amid a resilient economy, shifted from public criticism to direct confrontation. Unable to secure enough support to remove Fed Chair Powell, the president targeted other Fed governors in search of potential vulnerabilities.

On August 25, 2025, President Trump announced—via letter and social media—that he had removed Fed Governor Lisa Cook "for cause," citing alleged mortgage fraud, specifically that she had falsely declared two properties as primary residences to obtain favorable loan terms. Under the Federal Reserve Act, governors serve long, fixed terms and may only be removed "for cause," a legal standard historically applied to serious misconduct. Governor Cook filed a lawsuit to block her removal, and the Federal Reserve pledged to abide by the courts’ ruling. Regardless of the Supreme Court outcome, the September FOMC meeting looms, and the typically slow pace of the judiciary raises questions about her voting rights at the meeting. If removed, Trump could secure a majority on the Fed’s seven-member Board of Governors—already strengthened by his appointees and the nomination of economic adviser Stephen Miran. A majority would not only influence monetary policy direction but also shape succession plans, impacting the Fed’s long-term orientation.

The month’s market activity mirrored these developments, producing a rollercoaster in investor sentiment. The S&P 500 posted its fourth consecutive monthly gain, rising 1.9%, while the Dow Jones Industrial Average led the majors with a 3.2% increase. The Nasdaq Composite climbed 1.6%, supported by technology gains but tempered by late-month weakness in AI and semiconductor stocks. Mid-month, investors rotated away from tech toward more attractively valued sectors—energy, healthcare, and consumer staples—an encouraging sign, as broad market participation supports long-term stability. According to S&P Dow Jones Indices, 9 of 11 sectors in the S&P 500 gained in August, up from 6 in July, highlighting improved market breadth. Despite persistent inflation concerns and late-month tech sell-offs, August 2025 was broadly positive for U.S. equities, with small- and mid-cap names outperforming and most sectors contributing to gains. The decline in technology and AI megacaps, however, serves as a cautionary note heading into historically weaker September trading.

In fixed income, August saw a pivot toward lower yields, reflecting optimism over potential Fed rate cuts. The benchmark 10-year Treasury yield fell from mid-month highs near 4.34% to roughly 4.22–4.23% by month-end. Soft economic data, including weaker-than-expected job reports, combined with dovish remarks from Fed Chair Powell at Jackson Hole, bolstered expectations for easing monetary policy. Credit spreads tightened sharply, with investment-grade corporate bond spreads narrowing to around 78 basis points—levels not seen since July 1998—highlighting strong demand and favorable credit conditions. Mortgage-backed securities (MBS), commercial MBS (CMBS), and preferreds outperformed comparable-duration Treasuries, while investment-grade corporates and high-yield bonds slightly lagged.

Macro-level Treasury market volatility reached multi-year lows. The MOVE index, measuring Treasury volatility, fell to its lowest reading since early 2022, despite ongoing inflationary pressures, high debt levels, and uncertainty surrounding Fed policy and fiscal politics. This calm likely reflects increased consensus among investors and policymakers, as well as broader use of volatility-suppression strategies. Still, longer-term yields remain elevated, and analysts caution that tariff-driven inflation and ongoing fiscal deficits could limit the decline in yields even amid easing expectations. A recent Reuters poll suggests slight upward pressure on long-term Treasury yields as markets adjust to sustained debt issuance and policy uncertainty.

The U.S. labor market showed clear signs of cooling in August 2025, with key indicators pointing to slower hiring and declining labor force participation. Nonfarm payrolls increased by 75,000 jobs, slightly above the preliminary estimate of 73,000. While positive, this represents a significant deceleration from the average monthly gain of 123,000 recorded during the same period last year. The unemployment rate rose to 4.3%, the highest since 2021, signaling a softening labor market.

Wage growth remained modestly positive, with real average hourly earnings rising 1.3% year-over-year (July 2024 to July 2025), outpacing inflation and indicating slight improvements in workers’ purchasing power. However, corporations remain cautious in hiring new employees amid ongoing tariff uncertainty and economic risks.

The labor force participation rate declined to 62.2%, the lowest since November 2022, reflecting fewer individuals actively seeking employment. Structural factors—including an aging population and changes in immigration policy—continue to weigh on participation.

Unemployment ticked higher in July to 4.1%, essentially unchanged from a year ago. For August, the rate is anticipated to rise to 4.3%, marking the highest level since 2021 and confirming a continuation of labor market cooling. Contributing factors include slower job creation, an increase in jobless claims, and fewer job openings. Notably, for the first time since the COVID-19 pandemic, the number of unemployed individuals has surpassed available job openings, suggesting a shift toward a more balanced labor market.

In August 2025, U.S. inflation showed signs of moderation, with key indicators remaining broadly aligned with the Federal Reserve’s target range, though underlying pressures persist. The Consumer Price Index (CPI) for July increased 2.7% year-over-year, slightly below consensus expectations, and rose 0.2% month-over-month. Core CPI, which excludes food and energy, advanced 0.3% monthly, bringing the annual rate to 3.1%.

Shelter costs remain the largest contributor to CPI inflation. Owners’ equivalent rent and rents each rose 0.3% month-over-month, and because shelter represents roughly one-third of the CPI basket, even modest increases significantly influence overall inflation.

The Federal Reserve’s preferred measure, the Personal Consumption Expenditures (PCE) Price Index, held steady at 2.6% year-over-year, in line with expectations. Core PCE rose 0.3% monthly, translating to a 2.9% annual increase, the highest since February. Certain sectors experienced notable price pressures: the medical care index rose 0.7%, driven by dental services (+2.6%) and hospital services (+0.4%). Shelter costs also contributed, with owners’ equivalent rent and rent up 0.3%. In contrast, goods such as gasoline and recreational vehicles saw price declines, helping moderate overall inflation.

U.S. consumer sentiment reflected growing concerns over inflation, economic uncertainty, and shifting spending patterns. The University of Michigan Consumer Sentiment Index fell to 58.2 in August, down from 61.7 in July and 67.9 a year earlier. This 5.7% month-over-month decline and 14.3% year-over-year drop highlight a significant erosion in confidence. Both components of the index contributed: Current Economic Conditions declined to 61.7, a 9.3% decrease from July, while Consumer Expectations fell to 55.9, down 3.1% from the previous month.

Inflation expectations also rose for both short-term and long-term horizons, signaling skepticism about the Fed’s ability to balance its dual mandate. The decline in sentiment is mirrored by changes in consumer behavior. Middle-income households ($50,000–$100,000) have become more cautious, delaying discretionary spending, prioritizing budget-friendly purchases, and mirroring behaviors typically seen among lower-income groups. Affluent consumers, however, remain relatively resilient, continuing to spend on luxury goods and services.

In July 2025, the Conference Board's Leading Economic Index (LEI) for the U.S. declined by 0.1%, reaching a level of 98.7. This slight decrease follows a 0.3% drop in June and marks a continuation of the downward trend observed earlier in the year. Over the six months from January to July 2025, the LEI fell by 2.7%, a more rapid pace compared to the 1.0% decline during the previous six-month period from July 2024 to January 2025. The LEI is a composite of ten leading indicators designed to signal future economic activity. In the most recent period, only four of these components advanced, indicating that weaknesses among the leading indicators have become more widespread. Notably, pessimistic consumer expectations for business conditions and weak new orders continued to weigh down the index. Conversely, stock prices remained a key positive support for the LEI.

Despite the LEI's decline, the Coincident Economic Index (CEI), which measures current economic activity, rose by 0.2% in July to 114.9. Between January and July 2025, the CEI increased by 0.9%, up from 0.6% over the previous six months. This suggests that while leading indicators point to potential economic slowdown, current economic activity remains relatively stable. Looking ahead, the Conference Board projects U.S. real GDP growth to be 1.6% year-over-year in 2025, with a further slowdown to 1.3% in 2026. These projections reflect the anticipated impact of the current economic trends indicated by the LEI and CEI.

September does not feature a regular FOMC meeting; instead, the spotlight turns to the Jackson Hole Economic Policy Symposium, an annual gathering hosted by the Federal Reserve Bank of Kansas City since 1978. Held each August in Jackson Hole, Wyoming, the symposium is one of the most influential global forums for discussions on monetary policy, financial markets, and the broader economy. It convenes central bankers, finance ministers, academics, and leading economists from around the world, providing a platform for thought leadership on long-term economic challenges and a highly visible venue for the Federal Reserve to signal policy intentions to markets.

At the 2025 symposium, Fed Chair Jerome Powell delivered his final Jackson Hole address, setting the tone for monetary policy heading into the fall. Powell signaled that the Federal Reserve is prepared to lower interest rates by 25 basis points in September, contingent on incoming economic data—a dovish pivot that boosted expectations of imminent easing. He also introduced refinements to the Fed’s policy framework, emphasizing a balanced approach when inflation and employment objectives diverge, and stepping back from the asymmetric “makeup” strategies adopted during the pandemic era.

While the symposium’s broader theme focused on labor markets in transition, including the impact of demographics, productivity, and emerging technologies, Powell centered his remarks on near-term policy calibration. He also underscored the Fed’s independence, resisting mounting political pressure for deeper cuts, particularly from the Trump administration. Markets responded favorably: equities rallied, bond yields fell, and the U.S. dollar softened. Some observers noted, however, that Powell did not address longer-term structural shifts in the global economy.

Market expectations shifted sharply following the symposium. According to the CME FedWatch Tool, investors now price in a 97% probability of a single 25bps cut to the target rate at the September 17 FOMC meeting. Looking ahead, the October 29 FOMC meeting carries roughly a 50/50 chance of a second 25bps reduction. By the final December FOMC meeting, markets are split between a target range of 3.75%–4% (50bps lower than today) and 3.5%–3.75% (75bps lower), reflecting the Fed’s data-dependent approach and lingering uncertainty over the pace of policy easing.

Historically, September is the weakest month for U.S. equities. Following the S&P 500’s four consecutive months of gains and multiple record highs, investors must remain attentive to underlying economic and corporate data. Second-quarter earnings generally exceeded expectations, demonstrating resilience despite ongoing tariff concerns, which have yet to significantly impact corporate profits. The anticipated start of interest rate cuts is expected to provide additional support, particularly for mid- and small-cap companies that have struggled more in the current interest rate environment.

However, risks remain. Markets are digesting political pressures on monetary policy, including the administration’s attempts to influence the Federal Reserve, the firing of the former Bureau of Labor Statistics (BLS) director, and discussions of a potential 10% government stake in Intel Corporation. Typical September pullbacks, combined with the close of the third quarter, often set the stage for a fourth-quarter rally. Most analysts currently project the S&P 500 to finish 2025 in the 6,500–6,900 range, with several firms revising their targets upward. Notably, Jefferies, historically conservative, was the last major institution to raise its year-end target above 6,000, moving from 5,600 to 6,600.

While our focus remains long-term, September will be closely watched for warning signs following last month’s strong market performance. Opportunities are emerging as the market breadth increases, and we are prepared to take advantage of volatility and brief market pullbacks leading into the next FOMC meeting. Investors are increasingly cautious about government influence over agencies that are intended to operate independently. An independent, apolitical Federal Reserve is critical for maintaining stability in the labor market, price levels, and credit and business cycles that extend across multiple administrations. At the same time, a Fed that is paralyzed—cutting too little, too late—can be just as detrimental as one pressured to meet short-term policy directives from a President in the final term of office.