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September Market Commentary: Lower Rates, Higher Inflation? Thumbnail

September Market Commentary: Lower Rates, Higher Inflation?

Markets & Economy

August Recap and September Outlook

August dropped a curveball. The jobs report released in early September showed not only weak hiring but also ugly revisions to prior months. June was revised to a net loss of 13,000 jobs, marking the first labor market contraction since late 2020. Unemployment has now climbed to 4.3%, the highest since 2021. While summer brought record-breaking heat, the job market has been slipping into an icy stall.

Fed Chair Jerome Powell had already hinted that a rate cut was on the table for September. The real question is how deep: a cautious 25 basis points or a more aggressive 50. The shift also sets the stage for more cuts in 2025.

With inflation still lingering, Powell appears ready to put jobs and full employment ahead of the Fed’s 2% inflation target. All eyes are now on the August inflation numbers.

Let's dig into the data:

  • Inflation (CPI): Up 2.7% year-over-year through July, with a 0.2% monthly increase.
  • Jobs: Only 22,000 payrolls added in August, far below the already low forecast of 75,000.
  • Manufacturing: Still in decline, with 78,000 fewer jobs compared to a year ago.
  • Interest rate expectations: The CME FedWatch tool shows investors pricing in rate cuts down to 3.5 to 3.75% in 2025, about 75 basis points below today’s levels.

What Does It All Mean?

Lower rates are designed to get money moving again, pushing companies and consumers to spend, hire, and invest. That can be fuel for asset prices, which is good news for investors. Markets seem to be leaning into optimism, even with inflation risks hanging around.

The bigger picture is about timing. If this is the start of a new growth cycle built on lower rates and stable inflation, 2026 could look surprisingly strong. Businesses might pick up hiring and investment, and consumers could feel wealthier and spend more.

We are already seeing some early signs. Small-cap stocks and homebuilders, both sensitive to interest rates, are rallying hard. Consumer confidence is showing up in discretionary and retail stocks too.

Economists are also debating the shape of the recovery. The “Nike swoosh” outlook calls for a slow but steady climb from here. The K-shaped recovery paints a grimmer picture, where wealthier households ride the wave of higher asset prices while middle and working-class families struggle to keep up. The danger is that this divergence masks the real drag underneath the economy.

Meanwhile, the bond market could be flashing a warning. If Treasury bonds sell off and yields rise, mortgage costs and other borrowing rates could climb, cutting into consumer spending power.

Chart of the Month: Labor Freezes Up

The labor market did not just cool, it froze. July’s weak numbers were confirmed, August was worse, and revisions pulled prior months down further. For the first time since 2021, there are now more unemployed Americans than open jobs. 

Source: Bureau of Economic Analysis (data), Axios (visual)

August Equity Market Highlights

  • S&P 500: +1.91%
  • Dow Jones Industrial Average: +3.20%
  • S&P MidCap 400: +3.26%
  • S&P SmallCap 600: +6.89%

Source: S&P Global. All performance as of August 31, 2025.

Nine of eleven S&P 500 sectors posted gains. Materials led the pack, up 5.59%, while Information Technology lost its crown after months on top. Utilities dragged behind, down 2.03%. Earnings surprised to the upside and Q2 results may hit record levels. Market breadth improved, with 337 stocks rising and 168 falling, and the indexes hit five record closing highs.

August Bond Market Highlights

  • 10-year Treasury yield: 4.23% (down from 4.36%)
  • 30-year Treasury yield: 4.94% (up from 4.89%)
  • Bloomberg U.S. Aggregate Bond Index: +0.38%
  • Bloomberg Municipal Bond Index: +0.47%

The Takeaway

Yes, the Fed is cutting rates. But that does not mean the path forward is clear. Tariffs remain up in the air, with legal fights still ahead. Equity markets are celebrating the return of rate cuts, but uncertainty continues to hang over the broader economy.

As we head into the final quarter of the year, this is the moment for smart financial housekeeping. Rebalance portfolios, capture tax-loss harvesting opportunities, and maximize retirement contributions before December 31. For those turning 60 to 63 this year, expanded catch-up contributions mean you can add more to your retirement accounts than ever before.

Charitable giving should also be front of mind. Beyond the tax perks, this is a chance to align your wealth with your values and support causes that matter to you.

And with the recent legislation, estate planning is a little more straightforward. If you have been putting it off, now is the time to get your plan in place.

Closing out the year with clarity and purpose sets you up for a stronger 2026, financially and beyond.

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