FINANCIAL BLOG

Sunday, October 12 marked the third anniversary of this bull market. Three years ago, the S&P 500 closed at 3,577 as investors feared inflation would become entrenched after wholesale prices unexpectedly accelerated. After a sharp sell-off that morning, stocks rallied and closed nicely higher that day.

We believe corporate America will follow up an outstanding second quarter earnings season with another good one in the third quarter. Support from a resilient economy, tariff mitigation measures, artificial intelligence (AI) investment, and currency should offset increasing tariff costs.

U.S. equity markets have bucked the weak September seasonality trend (thus far) and rallied to fresh highs this month, with the S&P 500 holding onto a 2.7% monthly gain as of September 26. The melt-up has been underpinned by the Federal Reserve (Fed) delivering on rate cut expectations without any hawkish surprises, earnings optimism, and continued support of the artificial intelligence (AI) secular growth theme.

During last week’s press conference after the Federal Reserve’s (Fed) rate decision, Chairman Jerome Powell warned his audience there is no risk-free path for interest rates right now. Inflation is above target and growth appears resilient. We think that the soft labor market will eventually weaken inflation pressures, so the Fed is making the right call even though it may not look right from all angles.

Global bond markets have sold off recently due to uncertainty surrounding key political changes most notably in France and Japan. Japan’s Prime Minister, Shigeru Ishiba, resigned last week, which adds a potential shift in fiscal policy to concerns about slowing monetary policy normalization.

Some of you reading this title might think this commentary is about September seasonality. Sure, seasonality is part of our playbook and is getting a lot of attention right now. We would not be surprised if volatility were to pick up some this month — even though seasonality isn’t as much of a concern during positively trending markets.

The winning streak for stocks continued in August, as the S&P 500 posted its fourth consecutive month of gains. It was an informative month for investors, as we learned that the labor market may not be as solid as expected, tariffs have had a minimal impact on inflation and margins thus far, corporate America and the consumer remain resilient, and the Federal Reserve (Fed) is likely ready to cut rates later this month.

As central bankers, economists, and policymakers gathered last weekend in Wyoming’s Grand Teton National Park for the 2025 Jackson Hole Economic Symposium, the Federal Reserve (Fed) found itself at a critical juncture marked by political pressures, personnel changes, and internal divisions over monetary policy direction.

Second quarter earnings season, which winds down this week and next, has met some of the highest expectations. Strong beat rates, big upside earnings surprises, and increases in estimates during the past four weeks were consistent themes that gave investors very little to complain about.

We’re all ready to put the tariff talk to bed. But don’t worry. While this commentary provides an update on the tariff situation, there’s more happening on the policy front than just tariffs. Whatever policy we highlight, it’s clear that the stock market is sailing through those choppy, even unprecedented waters.

Last week was one for the ages in terms of the number and magnitude of events and data points for investors to digest. A Federal Reserve (Fed) meeting, the monthly jobs report, and the peak week of earnings season would be enough to qualify as a busy week.

We believe this more complex macro environment will force the Federal Reserve (Fed) to maintain its cautious stance on monetary policy for longer than markets originally expected. One factor adding to the complexity is the post-pandemic impact on economic and financial models. Another obvious factor is dynamic trade policy.

Within fixed income markets, a tug of war has unfolded between two opposing forces, much like the classic tale of Dr. Jekyll and Mr. Hyde. The benevolent Dr. Jekyll emerges when economic data suggests weakness, which leads to lower interest rates and relief for borrowers.

If “tariff” isn’t the word of the year for stock investors so far, then perhaps it’s “uncertainty.” Uncertainty around trade policy dominated the path of the stock market in the first half and will continue to play a large role in the second half. Tariffs influence the key drivers of stock market performance: economic and corporate profit growth, inflation, and interest rates.

With investor focus now squarely back on U.S. equities as new all-time highs are in sight, we dig into why strategic allocations should still consider, despite recent outperformance and multiple expansion, diversification into international equities.

There have been plenty of catalysts supporting the broader market’s recovery from the correction lows set last month. Oversold conditions fueled by indiscriminate selling left the S&P 500 with washed-out market breadth and a hard reset of its lofty valuation. First quarter earnings season came in much better than feared, and most companies unexpectedly did not pull forward guidance.

There has been no shortage of trade policy curveballs thrown at the market since the White House announced shockingly high reciprocal tariffs on April 2. Stocks fell sharply and interest rates spiked on that news, prompting President Trump to pivot to a 90-day reciprocal tariff pause.

First quarter reporting season was solid, but results didn’t offer much of a confidence boost in the outlook for the rest of the year. It wasn’t corporate America’s fault — tariff uncertainty makes it very difficult for most companies to offer an outlook that they can have confidence in. Analysts did get enough guidance to take estimates down for the rest of the year to credible levels, which is a positive step in restoring market confidence.

Investor sentiment dramatically changed after Treasury Secretary Scott Bessent and other members of the Trump administration announced a temporary pause on tariffs with China. Was that sentiment shift warranted and did anything materially change? Estimates of the effective tariff rate continue to vary and have wide confidence intervals.

A busy week of earnings, trade negotiations, and monetary policy meetings left the S&P 500 down around 0.5%. Buyer fatigue appeared to be setting in at this stage of the recovery as risk appetite from positive trade headlines faded by Friday.