August 2025 Financial Markets

Source: Segal Marco Advisors

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Macroeconomics

July’s monthly CPI increase of 0.2 percent kept annual inflation to 2.7 percent as the impact of current and anticipated price increases from tariffs continued to slowly seep into the economy. The Fed’s preferred measure of inflation, Core PCE (Personal Consumption Expenditures), increased by 0.3 percent in July with an annualized rate of 2.9 percent. The PPI (Producer Price Index), was up 0.9 percent for the month, and 3.3 percent year over year, suggesting that higher supply chain costs have yet to fully flow to the consumer sector. As anticipated, the Fed held benchmark rates steady at 4.25–4.50 percent in August, with a future rate cut anticipated as developing softness in certain key economic indicators are beginning to become apparent.

The ISM Manufacturing PMI survey results declined slightly to 48.7 in August with a decrease in employment, production and inventories that was accompanied by an increase in new orders and prices.

The health of the labor market weakened as evidenced by the recent BLS Job Openings and Labor Turnover (JOLTS) report that indicated July openings of 7.18 million, down slightly from June’s 7.36 million. Both hires and total separations (quits, layoffs and discharges) remained relatively stable despite June revisions that had job openings revised downwards by 80,000 and total separations revised upwards by 281,000. The Conference Board Consumer Confidence Index survey fell slightly in August to 97.4 with declines in both the expectations component based on short-term outlook and the present situation component based on current labor market.

Equity markets

U.S. equities had a fourth consecutive month of positive returns with the S&P 500® up 2.0 percent reaching another all-time high on August 28. On a sector basis for the month, Materials (5.8 percent) was the top contributor and Utilities (-1.6 percent) was the weakest. Despite the continuing surge in AI demand, the tech sector returned a modest 0.3 percent. Russell 2000 small-cap U.S. stocks (7.1 percent) surged in a broadening market rally, with Russell midcap stocks (2.5 percent) outpacing Russell 1000 large caps (2.1 percent). Russell 3000 all-cap value index (3.4 percent) outperformed Russell 3000 all-cap growth index (1.3 percent) on a relative basis during the month.

International equity markets were also positive with developed (EAFE 4.3 percent) ahead of emerging regions (EM 1.3 percent) on a relative basis. Within developed markets, Pacific (5.9 percent) outperformed Europe 3.4 percent) on a regional basis with the highest returns from Singapore (7.1 percent) and Japan (7.0 percent). Within emerging markets, Latin America (8.2 percent) outperformed Eastern Europe (0.9 percent) and Asia (0.7 percent) and on a regional basis, with the highest returns from Columbia (12.0 percent), Chile (11.2 percent) and Brazil (10.4 percent).

International markets have outperformed the U.S. S&P 500^® (10.8%) year to date through August 31, helped by the weakened U.S. Dollar as the MSCI EAFE (22.8 percent) was significantly ahead of the MSCI EAFE Local Currency (11.6 percent) and the MSCI EM (19.0 percent) was ahead of the MSCI EM Local Currency (16.1 percent).

Fixed income markets

Fixed income markets were mostly positive with the Bloomberg U.S. Aggregate Index up 1.2 percent. The U.S. Treasury yield curve steepened in anticipation of a rate cut as two-year U.S. Treasuries declined 33 bps to 3.6 percent and 30-year Treasuries increased 4 bps to 4.9 percent, reflecting market worries over a longer-term inflation scenario and rising government debt. High-yield and mortgage-backed securities both had tighter spreads, while investment-grade corporate spreads widened marginally.

Looking ahead

Market uncertainty remains due to the U.S. trade deal impacts and tariff policies continuing to evolve. With employment showing signs of softening, the Fed will more likely adopt a less restrictive rate policy posture at the upcoming September 16–17 meeting, while continuing to focus on the data and inflation to guide further cuts later in the fall.