As we head into the final stretch of 2025, investors—and your team here at LCM—are balancing encouraging economic and market signs with a healthy dose of lingering uncertainty.
In his comments at Jackson Hole last Friday, Federal Reserve Chair Jerome Powell suggested that interest rate cuts could come as early as September thanks to a softening labor market and a shifting balance of risks. Those words were, of course, exactly what the markets wanted to hear. Wall Street celebrated nearly across the board, with the S&P 500 ending the day at a record closing high and rate-sensitive small caps rallying sharply.
That said, whether the jubilation continues will depend on key data still to come—particularly the September 5th jobs report which is sure to influence the Fed’s next move. Though as of today, (August 29), the CME Fedwatch has put the odds of a Fed rate cut next month at 88%. Not bad at all!
Here’s what we’re seeing today—and how we expect things to evolve as we move toward year-end:
Equities: strong earnings and expanding growth
Corporate earnings have been a clear source of strength this quarter. With more than 95% of S&P 500 companies reporting, profits are on pace to rise nearly 13%—more than double what analysts expected in April, according to FactSet Research. Looking further ahead, consensus still calls for double-digit earnings growth into 2026.
What makes this more compelling is that this rally is broadening globally, reaching far beyond the ‘Magnificent Seven’ (Nvidia, Microsoft, Apple, Alphabet, Amazon, Meta, and Tesla), which account for about a third of the S&P 500’s combined market capitalization:
Banks are trading above key averages.
Homebuilding stocks are strengthening.
Global autos, chemicals, and consumer discretionary companies are showing fresh momentum.
Japan’s Nikkei has moved decisively higher.
Chinese credit growth and money supply are turning up.
Luxury stocks in Europe are showing signs of life.
AI continues to be a pivotal and confidently anchored theme in today’s market landscape. After two years of fueling investment and stock performance, companies are now poised to demonstrate the real value of their AI investments—solidifying AI not as a speculative frontier, but as a core driver of sustainable growth.
Nvidia, comprising nearly 8% of the S&P 500’s market capitalization and about 4% of its net income, remains a dominant force—its influence not fleeting, but foundational. While free cash flow is moderating for Nvidia and other major tech giants, this does not signal retreat. Rather, it reflects a healthy maturing of AI-driven growth into more stable, steady returns.
Overall, the data tells us that global growth may be picking up again, setting a welcome stage for equities.
Fixed Income: attractive yields and steady demand
The bond markets, too, were inspired by Powell’s Jackson Hole comments. US Treasury yields moved lower across maturities as existing bonds became more attractive, pushing prices higher and yields lower. The result: the 10-year Treasury yield fell to around 4.26% and, as of August 28, is down to 4.20%, while the 2-year yield dropped to 3.70% and is now sitting at 3.66%. That stability provided a backdrop for gains across a wide range of fixed income sectors, from Treasuries and investment-grade corporates to municipals, senior loans, and emerging markets.
Municipal bonds (Munis) continue to stand out with trends that make them highly attractive for some tax-sensitive investors:
Intermediate Munis are yielding ~4% tax-exempt, about 100 bps above inflation.
Long-term Munis are closer to ~5%, nearly 200 bps of real return.
Strong demand has continued despite heavy new issuance this summer.
Mortgage-backed securities, commercial mortgage-backed securities, and preferreds outperformed along with Treasuries, while corporates and emerging markets lagged slightly. This rally points to improving stability in credit markets as investment grade and high yield spreads remain near the lows.
We anticipate high-quality fixed income will continue to present some attractive entry points over the next 12 months. We also acknowledge the downside economic risks—slower growth, tariffs pressuring consumer spending, and weaker business investment—that are likely to keep demand for safe and income-generating assets strong. If spreads begin to widen, that could create even more appealing opportunities. Longer duration bonds will prove useful if growth slows, reinforcing their role in a diversified portfolio.
The Economy: encouraging signals with risks in view
The economic picture is showing both resilience and fragility:
Inflation has cooled, but the labor market is softening.
Durable goods orders declined in July, yet core capital goods orders and shipments rose.
Consumer confidence has flattened, wages are growing moderately, and home prices are edging lower on a month-over-month basis.
The tariff shock complicated the picture even more as companies and individual consumers rushed purchases to get ahead of the impact. That effect is fading, and the pause in US-China tariffs and new trade agreements with Japan and the EU are offering buyers some breathing room. The recently passed US tax bill should also support capital expenditures, particularly in technology, to help sustain growth into 2026.
We continue to monitor inflation data, employment reports, and credit spreads closely. Initial jobless claims have stabilized in recent weeks, but any significant deterioration in the labor market could push the Fed to take more aggressive action. Political and trade uncertainty remain wildcards, but so far, financial conditions have stayed relatively immune to the chaos.
Turning conditions into opportunity
Equities are strong, fixed income is steady, and the US economy is holding up. But the road ahead still hinges on a host of uncertainties—whether inflation re-accelerates, the labor market weakens further, or global trade tensions flare again. These factors could shift sentiment quickly, reminding us that stability and volatility often go hand in hand in today’s markets.
Uncertainty will always be part of the investment landscape. That’s why we’re here. At LCM, our focus is on turning current conditions, whatever they may be, into opportunities—helping you stay aligned with your long-term goals while managing risks with discipline and care. If you’d like to discuss how we can position your portfolio in this environment, please don’t hesitate to reach out. We are always here to help.
