Monthly Market Update – August 2025

Key Takeaways

• EVERYONE IS A WINNER Most major global stock, bond, and real asset indexes, in virtually all size and style delineations, saw positive returns in August. The broad-based rally was driven by better-than-expected economic growth, impressive Q2 corporate earnings, and expectations for a September Fed rate cut.
• EXCEPTIONAL EARNINGS S&P 500 companies reported earnings growth of +11.7% for the second quarter of 2025, marking three straight quarters of double-digit profits growth. That was more than double the Wall Street consensus expectations for +4.8% growth on June 30. And 81% of actual earnings beat estimates.
• RECESSION RISK RECEDES Economic data has been largely coming in better than expected, with the Citigroup Economic Surprise Index reaching its highest level in almost two years. And despite some softness in the labor and housing markets, the market-implied probability of a recession in the next year has dropped to just 18%.
• BUSINESS SPENDING STRONG Durable Goods Orders excluding Transportation increased +1.0%, well above expectations for a +0.2% reading and up from the prior month’s +0.3% level. Importantly, Core Capital Goods Orders, a proxy for business spending, rose +1.1%, exceeding all Wall Street forecasts.
• AI INVESTMENT SURGES Technology companies have poured hundreds of billions of dollars into Artificial Intelligence (AI), primarily for building electricity intensive data centers. Morgan Stanley & Co. estimates that global AI capital expenditures will be roughly $3 trillion on data centers, chips, and servers through 2028. 
• CLEANUP IN AISLE TWO A couple areas where the economy is seeing some slowdown are the labor market and housing. The August Employment Situation report showed continued deterioration in job growth and a tick up in the unemployment rate, continuing a several-month trend. Earlier in the month, building permits and residential construction data showed continued weakness there. Both should see improvement with rate cuts.
• VALUATION ≠ CATALYST The Top 50 S&P 500 companies (dominated by Technology and Communication Services stocks) trade at a Forward P/E near 30, which is far above the 10-year average P/E of 24. Cyclical stocks collectively trade at a forward P/E of 19.2, far below the overall market multiple. First Trust wonders if the upcoming Fed rate cut could be the catalyst needed to help spur those attractively valued stocks higher.
• SEPTEMBER SEASONALITY STINKS Historically, September is the worst performing month of the year, the only month with an average S&P 500 decline (a little more than -1% over the past 100 years). In the shorter period since 1991, September has been evenly split between gains and losses, but remains the weakest month of the year. Most of the weakness in September tends to occur in the back half of the month.

Market Summary

Asset Class Total Returns

Source: Bloomberg, as of August 31, 2025. Performance figures are index total returns: US Bonds (Barclays US Aggregate Bond TR), US High Yield (Barclays US HY 2% Issuer-Capped TR), International Bonds (Barclays Global Aggregate ex USD TR), Large Caps (S&P 500 TR), Small Caps (Russell 2000 TR), Developed Markets (MSCI EAFE NR USD), Emerging Markets (MSCI EM NR USD), Real Estate (FTSE NAREIT All Equity REITS TR).

EVERYONE IS A WINNER

Asset classes around the world saw solid returns in August. Most major stock, bond, and real asset indexes, in virtually all size and style delineations, gained during the month. Many major global equity indexes are at, or near, all-time highs. And for bonds, credit spreads are at, or near, record lows. Beyond all the winning, some of the undertones in August were noteworthy in that the leaders and laggards saw some distinct reversals from July’s results. The broad and solid returns were driven by better-than-expected economic growth, impressive second-quarter corporate earnings results, expectations for a September Federal Funds rate cut, and short- and intermediate-term Treasury bond yields that have trended down. The few areas of the market that saw declines, mainly lower oil prices and a declining US dollar, were tailwinds for many of the other winning asset classes.

For US stocks, the benchmark S&P 500 Index made five more record highs (now 20 so far this year) on the way to a +2.0% total return, its fourth straight positive month. What stood out in August was the breadth of the gains. The small cap Russell 2000 Index returned +7.1% in August, also marking four winning months, and was its best month since November. That was the largest, and only third, monthly outperformance for the Russell over the S&P since July 2024. The technology-heavy Nasdaq Composite Index was a laggard in August but still returned +1.7% to extend its winning streak to five months. It still leads major US equity indexes for the year, but was held back in August by the Information Technology sector, which was only up +0.3% for the month – the third worst performing US sector. The counter-trend nature of August was also evident when looking at the best performing sector, Health Care, which gained +5.4% despite being the worst performing sector in 2025, at a just barely positive +0.8% even after the August gains. Again, underscoring the broad-based nature of the August rally, breadth was impressive with 10 of the 11 S&P 500 sectors positive.

Overseas stocks also reversed trend from the prior month, as developed market international stocks beat emerging market stocks after trailing them in July. They also ended a three-month underperformance streak to the S&P 500. The MSCI EAFE Index jumped +4.3% in August after falling -1.4% the prior month. It closed just -1.5% below its August 22 all-time high and leads all major global equity indexes in 2025 with a +22.8% total return. Developed international markets were led by particularly strong performance in Japan, which extended its multi-month rally, as the MSCI Japan Index rose +4.3% in local currency, or +7.0% in US dollar terms. The MSCI UK and MSCI Europe ex-UK indices also had solid gains, up +3.4% and +3.7%, respectively, in dollar terms. Switching to the MSCI Emerging Markets Index, it was up +1.5% to extend its winning streak to 8 straight months and put it up +19.0% in 2025. Strong performance in China led the contributors after US and China extended their trade truce until November 10, helping export-oriented firms, and the Chinese government announced it would aim to triple China’s semiconductor chip supply in 2026, boosting Chinese tech stocks. Emerging market laggards included South Korean stocks, weighed down by tax reforms, and Indian equities, which were challenged by the imposition of a 50% US tariff.

In bond markets, US Treasury yields saw a fairly stark steepening in the yield curve in August. Investors expecting rate cuts have bid up 2-year Treasurys, weighing down the yield on those notes by -34 basis points – the largest monthly decline since August 2024 – and leaving it at 3.62%. Meanwhile, investors expecting higher rates over time have sold 30-year Treasurys, boosting that yield by +3 basis points to 4.93%. That put the spread between the 2-year and 30-year yields—what is known as the yield curve—near its widest level since early 2022. The benchmark 10-year Treasury yield was near the middle of those two, with a decline of -15 basis points to 4.23%. Dovish comments from Federal Reserve Chairman Jerome Powell at the Fed’s annual Jackson Hole symposium had a big impact on pushing those yields lower. He suggested the balance of economic risks had shifted from inflation concerns to a weakening labor market, pointing to the substantial downward revisions in the July employment report. Futures markets immediately priced in a higher likelihood of a Fed cut on September 17, as well a slightly lower terminal rate.

Fixed income credit markets saw investment grade spreads tighten further (the difference between federally backed Treasury yields and riskier corporate bond yields). Strong corporate earnings, tame inflation reports, and increased odds for a Fed rate cut helped push those spreads tighter. With yields down and spreads tighter, the Bloomberg US Aggregate Bond Index enjoyed a +1.2% total return in August. It has had positive returns in 6 of the last 8 months, for a year-to-date total return of +5.0%. Non-US debt was further supported by a weaker US dollar, and the Bloomberg Global Aggregate Bond ex US Index returned +1.7%. It has also been up for 6 of the last 8 months and enjoys a year-to-date total return of +9.0%.

After the U.S. Dollar Index (USD) rebounded +3.2% in July, its best monthly return since April 2022, it fell back again in August, retreating -2.2%. The greenback has declined in four of the last six months now and is down nearly -10% for the year. That puts it at the worst performance through August in any year since 1986. Crude Oil was the other conspicuous loser in a month of winners, dropping -7.6%. Record US production and little geopolitical progress (Russia/Ukraine, Israel/Palestine) weighed on crude prices.

Source: Bloomberg. Data as of August 31, 2025.
Price Returns for Equity, Total Returns for Bonds.
* The term basis points (bps) refers to a common unit of measure for interest rates and other percentages in finance. One basis point is equal to 0.01%. Bond prices and bond yields are inversely related. As the price of a bond goes up, the yield decreases.

EXCEPTIONAL EARNINGS

According to data from FactSet, S&P 500 companies reported earnings growth of +11.7% for the second quarter of 2025. That marks a third straight quarter of double-digit profits growth and is more than double the Wall Street consensus expectations of +4.8% growth on June 30. The results were broad-based as well and support the corresponding broad-based price gains the companies have seen. Impressively, 81% of S&P 500 companies reported actual earnings per share (EPS) above estimated EPS — the highest number since Q3 2023. Additionally, 50 S&P 500 companies issued positive EPS guidance for Q2 – above the 5-year and 10-year averages. Recession and tariff concerns have declined dramatically over the last couple of months. FactSet searched all the S&P 500 earnings conference calls transcripts from June 15 to August 7 for the term “recession” and found a quarter-over-quarter decline of -87% compared to Q1 2025. The aggregate earnings per share (EPS) picture for the S&P 500 reveals a path of steady progress despite any headwinds from trade friction. According to data from Strategas, the aggregate S&P 500 EPS on the tariff “Liberation Day” was $65.52, but by the end of August the aggregate EPS was more than $1 higher at $66.84. Furthermore, Wall Street analysts haven’t lowered EPS estimates more than normal for S&P 500 companies for the third quarter. During July and August, analysts actually increased EPS estimates slightly for the third quarter. The Q3 bottom-up EPS estimate (an aggregation of the median EPS estimates for Q3 for all S&P 500 companies) increased by +0.5%, to $67.66 from $67.32, from June 30 to August 28. In a typical quarter, Wall Street analysts usually reduce earnings estimates during the first two months of a quarter. Q3 2025 marks the first time Wall Street analysts have increased EPS estimates in aggregate during the first two months of a quarter since Q2 2024 (+0.3%).

Corporate Earnings Shine in Second Quarter

Q2 2025 S&P 500 Earnings Growth (Year-over-Year)

Source: FactSet.

RECESSION RISK RECEDE

In stark contrast to headlines and projections just a few months ago, the US economy is nowhere near recession territory. Beyond the dramatic decline of recession being cited on Q2 earnings calls (mentioned above), the weight of the evidence in high-frequency economic data has been largely coming in better than expected, with the Citigroup Economic Surprise Index reaching its highest level in almost two years. While there is some softness in the labor and housing markets, the overall economic backdrop remains strong. The market-implied probability of a recession in the next year is only about 18%, down considerably from 2022-2023 levels. The economy is currently in an environment of accelerating growth and mildly accelerating inflation, which is generally conducive for risk assets. Second quarter US Gross Domestic Product (GDP) was revised up to +3.3% and estimates for the third quarter are on pace for 2.5% to 3% according to the NY Fed Nowcast and the Atlanta Fed GDPNow forecast. Inflation is showing a slight uptick in recent months, and Hedgeye has a base case estimate of 2.8% year-over-year CPI for August. Just before the end of the month, the Bureau of Economic Analysis (BEA) reported that the Core Personal Consumption Expenditure (PCE) Index (the Fed’s preferred inflation gauge) came in little changed from the prior month and in line with expectations. With growth steady and inflation tame, the market-implied probability of recession in the next year has receded to just 18% and Bloomberg economist consensus estimates, as well as Goldman Sachs’s estimate, have declined to 30%.

Market Pricing of US Recession Retreat

Probability of a US Recession in the Next 1-year

Source: Haver Analytics, Datastream, Worldscope, Bloomberg, Goldman Sachs Global Investment Research. Data as 9/2/2025.

BUSINESS SPENDING STRONG

The Commerce Department reported Durable Goods Orders for long-lasting items such as televisions and appliances but excluding transportation equipment like aircraft, increased +1.0%, well above expectations for a +0.2% reading and up from the prior month’s +0.3% level (revised up from the originally reported +0.2%). More impressive, the important Core Capital Goods Orders (capital goods excluding volatile sectors like transportation and defense), a proxy for business spending, rose +1.1%, exceeding all Wall Street forecasts (median expectation was +0.2%) and up sharply from the -0.6% decline the prior month (revised up from -0.8%). Core Capital Goods Shipments, which are factored into GDP, rose +0.7%, beating expectations for a +0.2% gain and is up from the +0.4% reading the month before (revised up from +0.3%). The bottom line from the report is that business spending suggests companies are moving forward on investment plans as trade and tax policy uncertainty diminishes.

Business Spending Exceeded All Forecasts in July

Durable Goods ex Transportation and Core Capital Goods Jump in July

Source: Bloomberg, Commerce Department.

AI INVESTMENT SURGES

One area of business spending in particular is garnering a lot of attention. Capital Group notes that Technology companies have poured hundreds of billions of dollars into Artificial Intelligence (AI), despite concerns about future returns on their investment. Most of that spending has been directed at building electricity intensive data centers. The boom has benefited certain semiconductor, industrial, and power generation companies. Morgan Stanley & Co. estimates that global AI capital expenditures will be roughly $3 trillion on data centers, chips, and servers through 2028. Capital Group poses the question of whether all that spending could lead to a bust that rivals the dot-com blowup in 2000? It can’t be dismissed, but Capital Group points out that the 1990s PC and internet revolution was different from today’s AI tech story. The former was about hardware, connectivity, networks, and information, whereas AI is about extracting accumulated knowledge. And unlike the dot-com bubble, today’s companies have abundant cash flow and robust earnings. It’s possible that the biggest winners of the AI spending cycle may not even exist yet. Early internet pioneers like Cisco built the internet infrastructure that gave rise to companies like Netflix, Amazon, and Google. Today’s AI-infrastructure buildout could similarly pave the way for a new generation of businesses to flourish.

Investments in AI have Surpassed Dot-Com Era

Technology and Research & Development Spend as a Percent of GDP

Source: Capital Group, U.S. Census Bureau, Bureau of Economic Analysis, Haver Analytics. As of August 20, 2025.

CLEANUP IN AISLE TWO

Job creation was at stall-speed again in August, adding to recent signs of the labor market weakening. Nonfarm payrolls increased by just +22,000 for the month, while the unemployment rate ticked up to +4.3% from +4.2% the prior month. Economists surveyed by Bloomberg were looking for a mild slowdown in payrolls to 75,000 after the July increase of 79,000 (which was revised higher by +6,000 from the initial report). More concerning is that prior month revisions also showed a net loss of -13,000 jobs in June after the prior estimate was lowered by -27,000. That marks the first negative month of payrolls since December 2020. While the pace of hiring was slow, average hourly earnings increased +0.3% for the month, meeting expectations, though the annual gain of +3.7% was slightly below the forecast for +3.8%. Residential construction payrolls also continued to slide lower, marking five straight months of decline now. That corroborates the other area of economic softening, the housing market. The housing market remains out of sync with the broader economy as high mortgage rates and home prices pressure affordability and demand. Sales of existing and new single-family homes have been sluggish in recent months. Building Permits, one of the leading economic indicators tracked by the Conference Board and indicator of future construction activity, sank -2.8% in July, falling short of expectations and down from the prior month’s -0.1% decline. As discussed above, most economic indicators indicate continued expansion, but Fed officials have expressed concern about a labor slowdown. This jobs report is likely to keep the Fed on track for a widely anticipated interest rate cut on September 15 and has increased the odds for additional cuts at both the October and December Fed meetings. Two or three rate cuts would likely provide immediate tailwinds to alleviate these areas of weakness in the economy.

Hiring Slowdown Continued in August

August Nonfarm Payrolls far less than expected and Unemployment Rate ticks up again

Source: Bloomberg, Bureau of Labor Statistics. Data as of 9/5/2025.

VALUATION ≠ CATALYST

Investment manager First Trust writes about how the best stocks in the world are “priced for perfection” and points out that the Top 50 S&P 500 companies (dominated by Technology and Communication Services stocks) trade at a Forward Price to Earnings (P/E) multiple near 30 which, as the chart below shows, is far above the 10-year average P/E of 24. Meanwhile, the remaining Bottom 450 S&P 500 stocks, while not “cheap” at 23 Forward P/E, fall right at the 10-year average P/E. The more reasonably valued Bottom 450 include some relatively attractively valued constituents like Cyclicals stocks in the Financial, Energy, and Industrial sectors, which collectively trade at a forward P/E of 19.2, far below the overall market multiple. But First Trust also points out that the conundrum that an attractive P/E is not necessarily alone a catalyst for stock prices to move higher. They contend that the Fed lowering rates in an economy that remains resilient could provide the catalyst for companies with attractive valuations and solid growth prospects to move higher. With value stocks outperforming growth stocks in August, for the first time in four months, perhaps investors collectively have come to the same conclusion.

S&P 500 Forward Price to Earnings (P/E)

Forward P/E is the price of a stock divided by estimated forward earnings

Source: Capital IQ, First Trust. Data from 1/1/2015 to 8/1/2025.

SEPTEMBER SEASONALITY STINKS

Long-term historical market patterns don’t show September in a favorable light. Historically, it is the worst performing month of the year, with the S&P 500 declining an average of a little more than -1% during the month over the past 100 years or so, per Charles Schwab data (see chart below). Morgan Stanley & Co looks at the more recent period since 1957 and also shows that September is the only month with a negative average S&P 500 return. However, they point out that September has been evenly split between gains and losses since 1991, although it remained the weakest month of the year during this period. The S&P 500 declined in 7 of the past 11 Septembers, including every year from 2020-2023. Their work also shows that most of the weakness in September tends to occur in the back half of the month. As of this publishing, with the most recent close of September 4, the S&P made a fresh new all-time high. So, some profit taking in a seasonally weak period wouldn’t be surprising. But with all the positives discussed above, solid and better-than-expected economic growth, solid and better-than-expected earnings growth, solid and better-than-expected business spending, combined with steady and mild inflation, along with expected Fed rate cuts, the outlook is still very conducive for risk assets. Moreover, the late fall / early winter months turn into the most seasonally favorable months for investors.

Wake Me Up When September Ends

Average S&P 500 Performance by Month, 1928 – 2025

Source: Bloomberg, Charles Schwab.

Asset Class Performance

The Importance of Diversification. Diversification mitigates the risk of relying on any single investment. It offers many long-term benefits, such as lowering portfolio volatility, improving risk-adjusted returns, and helping investments to compound more effectively.

Source: Bloomberg.

Asset‐class performance is presented by using market returns from an exchange‐traded fund (ETF) proxy that best represents its respective broad asset class. Returns shown are net of fund fees for and do not necessarily represent performance of specific mutual funds and/or exchange-traded funds recommended by The Retirement Planning Group. The performance of those funds may be substantially different from the performance of the broad asset classes and to proxy ETFs represented here. US Bonds (iShares Core US Aggregate Bond ETF); High‐Yield Bond (iShares iBoxx $ High Yield Corporate Bond ETF); Intl Bonds (SPDR® Bloomberg Barclays International Corporate Bond ETF); Large Growth (iShares Russell 1000 Growth ETF); Large Value (iShares Russell 1000 Value ETF); Mid Growth (iShares Russell Mid-Cap Growth ETF); Mid Value (iShares Russell Mid-Cap Value ETF); Small Growth (iShares Russell 2000 Growth ETF); Small Value (iShares Russell 2000 Value ETF); Intl Equity (iShares MSCI EAFE ETF); Emg Markets (iShares MSCI Emerging Markets ETF); and Real Estate (iShares US Real Estate ETF). The return displayed as “60/40 Allocation” is a weighted average of the ETF proxies shown as represented by: 30% US Bonds, 5% International Bonds, 5% High Yield Bonds, 10% Large Growth, 10% Large Value, 4% Mid Growth, 4% Mid Value, 2% Small Growth, 2% Small Value, 18% International Stock, 7% Emerging Markets, 3% Real Estate.

* The term basis points (bps) refers to a common unit of measure for interest rates and other percentages in finance. One basis point is equal to 0.01%. Bond prices and bond yields are inversely related. As the price of a bond goes up, the yield decreases.

Chris Bouffard is CIO of The Retirement Planning Group (TRPG), a Registered Investment Adviser. He has oversight of investments for the advisory services offered through TRPG.

Disclaimer: Information provided is for educational purposes only and does not constitute investment, legal or tax advice. All examples are hypothetical and for illustrative purposes only. Past performance of any market results is no assurance of future performance. The information contained herein has been obtained from sources deemed reliable but is not guaranteed. Please contact TRPG for more complete information based on your personal circumstances and to obtain personal individual investment advice.