September 2025 Market Commentary

September delivered one of the rare upside surprises for the third quarter. The S&P 500 and NASDAQ posted their strongest September gains in years. The S&P 500 advanced 3.5%, its best September in nearly 15 years. The rally was concentrated in large-cap, technology, and AI leaders, helping the index notch roughly 28 record closes by mid-month. Market breadth remained a concern as small-cap and mid-cap stocks lagged, though participation began to improve with the Federal Reserve’s dovish policy shift. Meanwhile, the NASDAQ 100 gained 5.5%, hitting multiple all-time highs on strength in the “Magnificent 7” technology names. The Dow Jones Industrial Average rose a modest 1.9%, reflecting its heavier exposure to industrials and manufacturers, which limited its participation in the AI-driven rally. Overall, momentum was supported by stronger-than-expected earnings, easing policy fears, and continued enthusiasm for AI adoption.

Sector performance highlighted the leadership of growth-oriented industries. Communication services advanced 12.75% in the third quarter, while technology gained 12.4%. Energy rose 5.8%, and consumer cyclicals increased 8.9%, as discretionary spending proved resilient despite tariffs. Healthcare stocks delivered a positive 4.5% return but lagged other areas. The only sector in negative territory was consumer defensives, which fell 2.7% as risk-on sentiment and tariff pressure weighed on their lower-margin, high-volume business models.

The Federal Reserve added to the quarter’s momentum with its first rate cut in over a year, lowering the target federal funds rate by 25bps to 4.00%–4.25%. Chair Jerome Powell described the decision as navigating a “challenging situation,” balancing persistent inflationary pressures with a cooling labor market. Inflation remains above the Federal Reserve’s 2% target. By contrast, employment data weakened. The Bureau of Labor Statistics’ (BLS) preliminary annual benchmark revision revealed that between April 2024 and March 2025, the U.S. economy created 911,000 fewer jobs than previously reported. This adjustment underscores a softer labor market than headline figures initially suggested. With its dual mandate under strain, the Federal Reserve appears willing to tolerate slightly higher inflation to safeguard employment. According to the CME FedWatch tool, markets now price in two additional rate cuts, or 50bps in total, by year-end, with more expected in 2026.

Falling short-term rates contributed to a steeper U.S. Treasury yield curve over the summer. Long-term yields also declined, though less sharply, widening the spread between ten-year and two-year yields to 0.56 percentage points by quarter-end, up from 0.38 at the start of the year. Many strategists expect this steepening to continue as additional Fed cuts push short-term yields lower, while long-term rates remain relatively stable. Market volatility also eased, with equity volatility dropping as tariff-related shocks subsided, while bond market volatility fell below its five-year average.

In September 2025, U.S. labor market indicators revealed signs of softening. The BLS reported a modest increase of 22,000 nonfarm payroll jobs for August, well below the anticipated 50,000 and a sharp slowdown from July’s revised 79,000. Private-sector employment, as per the ADP National Employment Report, declined by 32,000 jobs in September, the largest drop since March 2023. This was driven primarily by a 19,000-job loss in leisure and hospitality, partly offset by a 33,000-job gain in education and health services. Small businesses shed 40,000 jobs, while large firms added 33,000.

In August, real average hourly earnings for all employees rose 0.7% year-over-year, despite a 0.3% decrease in the average workweek. Wage growth has slowed, with average hourly wages up 3.7% year-over-year versus 4.0% in 2023–2024. The slowdown is particularly evident among lower-paid workers, whose wages are more sensitive to labor conditions.

The unemployment rate rose to 4.3% in September, the highest in nearly four years, up from 4.1% in August. In response to uncertainty, more Americans are turning to gig work. Independent studies (McKinsey Global Institute, Upwork, MBO Partners) estimate that between 42 million and 70 million Americans—over 25% of the workforce—participate in the gig economy in some capacity. At the same time, growing adoption of autonomous services (Waymo, UberEats, DoorDash, Amazon) may put additional pressure on gig workers.

The Consumer Price Index (CPI) for August rose 2.94% year-over-year, up from 2.7% in June and July. Shelter costs increased 3.6% year-over-year, the largest contributor to CPI. Core CPI (excluding food and energy) rose 3.11%. The PCE price index, the Fed’s preferred inflation measure, rose 2.7% year-over-year in August, while core PCE increased 2.9%.

Consumer sentiment softened: The Conference Board’s Consumer Confidence Index declined to 94.5, while the University of Michigan’s Consumer Sentiment Index dropped to 55.1. This suggests households are more cautious about discretionary purchases, adding to the Fed’s cautious outlook.

The Conference Board Leading Economic Index® (LEI) for the U.S. fell 0.5% in August, signaling modest economic headwinds. However, the Coincident Economic Index (CEI), which measures current conditions, rose 0.2%. Overall, the economy continues to grow, but momentum is easing.

The U.S. economy rebounded strongly in Q2 2025, with real GDP rising 3.8% (BEA data). This followed a 0.6% contraction in Q1. Notably, several private-sector estimates suggest AI-related capital expenditures contributed roughly 1% to U.S. GDP growth in the first half of 2025—surpassing consumer spending as a primary driver. While encouraging, economists caution this contribution may be volatile given ongoing trade policies and global conditions.

October marks the start of Q4, a pivotal period as investors prepare for year-end. With the holiday shopping season approaching and a key Fed meeting at month-end, markets face a mix of earnings scrutiny and policy speculation.

Valuations remain elevated: The S&P 500 ended September at more than 23x forward earnings, similar to late-2024 levels. Q3 earnings season is especially important for large-cap tech and AI leaders. Markets will be looking for evidence that heavy AI-related investment is translating into sustained profitability.

Beyond marquee names, companies powering the AI ecosystem—such as those tied to data center energy demand and grid modernization—may represent areas of opportunity. Nuclear energy may gain renewed traction as a long-term solution, while grid-scale batteries could play a near-term role in addressing storage gaps. Meanwhile, lower interest rates should eventually broaden market leadership, with small- and mid-cap firms potentially benefiting from improved access to capital.

** This commentary is provided for informational and educational purposes only and should not be construed as investment advice, an offer, or a solicitation to buy or sell any security. The views expressed are based on current market conditions and are subject to change without notice. Past performance is not indicative of future results. Index performance is shown for illustrative purposes only; indices are unmanaged, do not reflect fees or expenses, and are not directly investable. Any forward-looking statements are not guarantees of future performance and involve risks, uncertainties, and assumptions. Investors should consult with a qualified financial professional before making any investment decisions.