Monthly Market Update for August 2025: Record Highs and Rate Cut Rumors

August was another strong month for the markets, with both stocks and bonds finishing higher. In fact, we saw record highs in several areas, even as headlines about tariffs, Federal Reserve policy, and tech valuations continued to stir uncertainty.

Markets dropped in the middle of the month because investors worried the Fed might keep interest rates high to fight inflation. Recent inflation reports showed that companies are starting to charge consumers more because of tariff costs. But markets bounced back when companies reported better earnings than expected and investors became more confident the Fed would lower rates in September.

Economic data was mixed. GDP growth (which measures how fast the economy is growing) for the second quarter was revised up from 3.0% to 3.3%. But the jobs report showed fewer new jobs were created, and previous months were revised down. This led the White House to fire the head of the Bureau of Labor Statistics.

Despite these challenges, market swings remain low compared to history. August's strong performance shows why investors should stay balanced and think long-term.

Strong Earnings Results Supported Market Gains

While daily news can move markets in the short term, company earnings (profits) and stock prices are what matter for long-term returns. Stock prices are high, but this makes sense because companies keep growing their profits at a healthy rate.

The latest earnings season showed that 81% of S&P 500 companies beat profit expectations. This is the highest percentage since late 2023, showing the economy and companies are stronger than many thought.1 It also shows how companies adapt by adjusting to tariffs and finding ways to grow despite uncertainty.

Many investors focus on the Magnificent 7, a group of very large technology companies worth trillions of dollars. These companies now make up over one-third of the S&P 500 index. Their earnings were mixed overall, but some did better than expected. Despite worries about an "AI bubble," these results helped drive the market higher in late August.

The Fed is Expected to Lower Interest Rates

Consumer companies had mixed results because people are changing their spending habits. Tariffs make this worse as companies pass higher costs to customers. Combined with weak job data, markets started expecting bigger rate cuts starting in September.

Fed Chair Jerome Powell gave the clearest signal yet that the central bank is ready to start cutting interest rates again. The Fed has two main jobs: keep inflation steady and unemployment low. They've kept rates high because of stubborn inflation and a strong job market. Early signs of job market weakness could push the Fed toward careful rate cuts.

Lower Fed rates can help different types of investments

The possibility of Fed rate cuts could create opportunities across different investments. Lower rates can help economic growth, make it cheaper for companies to borrow money, and make future company profits worth more today. For bonds, lower rates increase the prices of existing bonds that pay higher interest.

Bond yields (the interest they pay) have stayed in a narrow range this year, with 10-year Treasury bonds generally between 4.0% and 4.5%. Even if short-term rates fall as the Fed cuts, many bond types are paying good income. The U.S. bond index yields 4.4%, investment-grade corporate bonds 4.9%, and high-yield bonds 6.7%. These are well above historical averages.

For overall portfolios, investors should keep focusing on managing different risks and returns. Issues like tariffs, Fed policy, and potential government shutdowns are just some challenges ahead. Rather than reacting to each event, holding a portfolio that can handle these swings while providing income and long-term growth is the best way to reach financial goals.

The Bottom Line

August delivered record highs and strong earnings, but it’s worth remembering that September has historically been a seasonally weaker month for markets. This makes it a smart time to review portfolios, consider locking in some of the gains we’ve seen, and ensure your strategy is positioned to weather short-term volatility while still keeping focus on long-term growth.

As always, contact us with any questions or if you would like to dive into our market outlook further!

1.https://advantage.factset.com/hubfs/Website/Resources%20Section/Research%20Desk/Earnings% 20Insight/EarningsInsight_082925.pdf Powered by Clearnomics 3

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