August carried strong momentum across the markets, with both stocks and bonds moving higher. In this edition of Insights, we dive into three themes that stood out:
- Trade policy is shifting uncertainty to reality, with new agreements reshaping global supply chains and costs.
- The Federal Reserve is signaling a dovish tilt, reinforcing expectations for lower interest rates.
- U.S. equity valuations look expensive by traditional metrics, but strong earnings growth, particularly from leading technology firms, continues to offer a compelling opportunity for long-term investors.
Monthly Market Wrap
A broad range of asset classes was supported by easing inflation concerns, growing confidence in central bank support, and a strong earnings season.
Fixed Income Markets
- Global Bonds rose 1.5%, as rates declined following a moderation in global economic data and growing expectations for broader central bank policy easing, particularly from the U.S.
- U.S. Taxable Bonds gained 1.2% following the growing expectation for the Federal Reserve to adjust its policy toward rate cutting at an upcoming meeting.
- U.S. Tax-Exempt Bonds increased by 0.9%, as strong demand from investors in high-tax states absorbed the elevated municipal supply.
- Floating-Rate Loans added 0.6%, as investors remained interested in their elevated income potential.
- International Bonds increased 1.7%, as a more dovish Federal Reserve led to a growing expectation for a weaker U.S. dollar relative to foreign currencies.
Equity Markets
- Global Equities advanced 2.5%, as easing inflation concerns and central bank support boosted investment sentiment.
- U.S. Large-Cap Equities continued to deliver, rising 2.1%, supported by a strong conclusion to the corporate earnings season and a sustained growth narrative surrounding artificial intelligence.
- U.S. Mid-Cap Equities advanced 2.5%, with momentum building after the Jackson Hole Symposium, where Chair Powell shared that the Fed’s focus would remain supportive of the labor market.
- U.S. Small-Cap Equities led the way with a 7.1% gain, as smaller, domestically focused businesses signaled a healthier, more diversified economic expansion, which particularly benefited this segment of the market.
- International Equities climbed 3.5% following the U.S. clarification and implementation of reciprocal trade agreements with Europe and Japan at lower tariff rates than anticipated.
- Emerging Market Equities gained 1.3%, after a mid-month trade extension between the U.S. and China provided more time for negotiations toward a broader deal.
Year-to-date, international equities have been the strongest performer, up 21.6%. For investors, we continue to believe that this broad-based strength reinforces the value of global diversification as a means to participate in growth while helping to cushion against uncertainty.
Global Trade Adjustments
Tariff policies and trade agreements remain a central focus for the global economy in 2025. Several notable developments occurred recently:
- A temporary U.S.-China tariff truce extended negotiations another 90 days.
- A new U.S.-EU trade deal capped most EU goods, including autos, at a 15% tariff while eliminating EU tariffs on U.S. industrial exports.
- An agreement with Japan introduced a reciprocal 15% tariff on Japanese imports, paired with Japanese investment in the U.S. economy.
- Tariff-free trade across North America for most goods was preserved under the U.S.-Mexico-Canada Agreement (USMCA).
- Significant new tariffs on both India and Brazil, with a 50% tariff on a broad range of goods from India and a 40% tariff on most Brazilian imports, bringing the total to 50%.
As trade rules have become clearer, “tariff uncertainty” mentions have declined notably on recent corporate earnings calls. Still, companies are actively mitigating the financial impact through several strategies:
- Supply Chain Adjustments: Roughly three-quarters of companies stated on earnings calls that they either negotiated with suppliers or reconfigured their supply chains.
- Price Increases: Many are passing some portion of the tariff costs directly onto their customers.
- Internal Cost-Cutting: Nearly half of companies are reducing hiring, trimming staff, or investing in productivity tools such as artificial intelligence.
The financial markets’ initial reaction to the 2025 tariffs was volatile. While equities have since recovered from the sharp drop earlier this year, with the S&P 500 reaching new highs, the broad economic impact has been more uneven.
Large, resilient technology and communication companies, less directly exposed to tariff costs, have led the rebound since April, while smaller and more tariff-sensitive businesses have lagged until recently.
The overall effect has also increased volatility and uncertainty in the fixed-income market, with tariff unease influencing the Federal Reserve’s policy decisions and the trajectory of bond yields.
For investors, tariffs remain a double-edged sword. On one hand, they create a cost and uncertainty for many businesses, but resilient sectors continue to find opportunities. On the other hand, the Fed has shifted its outlook to provide a more accommodative policy by resuming rate cuts (note: this is discussed more in the subsequent section). This environment underscores the value of balanced portfolios that diversify across various asset classes, geographies, and sectors, rather than relying too heavily on any single component of the market.
The Fed Tilts Dovish
There has been no change to the Federal Reserve’s rate policy in 2025. However, in his speech at the annual Jackson Hole Symposium, Fed Chair Jerome Powell noted that the “baseline outlook and shifting balance of risks may warrant adjusting our policy stance.”
Markets widely interpreted this statement as signaling a likely 0.25% interest rate cut at the September meeting. Powell described GDP growth as having slowed and acknowledged that the labor market was showing signs of softening in both supply and demand.
Notably, Powell suggested that recent tariffs were not expected to cause sustained inflationary pressure, a dovish assessment that further supported expectations for an imminent rate cut.
Financial markets responded swiftly. Equities rallied, with rate-sensitive sectors such as small-cap stocks, homebuilders, and regional banks leading the advance. This is because lower interest rates reduce borrowing costs for companies and consumers, which can stimulate economic activity and boost profits.
In the bond market, Powell’s comments spurred a classic reaction to a dovish central bank: Bond yields fell and prices rose, with high-yield bonds performing the best. This reflects the market’s belief that the Fed’s policy would become more accommodative and future borrowing costs would decline.
For investors, a shift toward easier monetary policy provides support for both stocks and bonds. But it also reflects a slowing economy, a reminder that portfolios should stay balanced across asset classes, with both growth-oriented and defensive exposures.
An Expensive Stock Market (for the Right Reasons)
U.S. equity valuations, particularly for the S&P 500, look elevated by traditional measures such as the price-to-earnings ratio (how much investors are paying for each dollar expected of company earnings). The current S&P 500 P/E ratio is 22.3x, based on estimated earnings for the next 12 months.
Much of this premium comes from the exceptional profitability and growth rates of a handful of large technology firms, often referred to as the “Magnificent 7.” Looking at an equal-weighted index, which reduces the impact of the Magnificent 7, the valuation is a less lofty 17.2x.
Looking further ahead, we expect growth expectations to narrow in 2026, with the broader market projected to deliver results closer to those of the technology leaders.
For now, U.S. earnings growth of nearly 12% remains the strongest among global peers, helping to justify the higher multiples.
Elevated valuations are not without risk, but they are underpinned by real earnings strength. While leading technology names have driven much of the performance, the potential for other sectors to catch up makes a diversified approach to equities especially important, in our view.
We believe that broad exposure can enable investors to benefit from today’s leaders while positioning them for tomorrow’s opportunities.
Closing Thoughts
Markets today are navigating a transition: trade rules are becoming clearer, Fed policy is tilting toward support, and corporate earnings remain strong despite higher valuations. At the same time, risks remain present.
Periods like this remind us that progress often happens beyond the headlines. Market swings and policy shifts are inevitable, but portfolios built on diversification and discipline are designed to weather these cycles.
At Sage, our focus remains on helping our clients stay focused on what is most relevant to them – their goals, time horizon, liquidity needs, risk tolerance, and unique circumstances.
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Disclosures
The information and statistics contained in this report have been obtained from sources we believe to be reliable but cannot be guaranteed. Any projections, market outlooks, or estimates in this letter are forward-looking statements and are based upon certain assumptions. Other events that were not taken into account may occur and may significantly affect the returns or performance of these investments. Any projections, outlooks, or assumptions should not be construed to be indicative of the actual events that will occur. These projections, market outlooks, or estimates are subject to change without notice. Please remember that past performance may not be indicative of future results. Different types of investments involve varying degrees of risk, and there can be no assurance that the future performance of any specific investment, investment strategy, product, or any non-investment-related content referred to directly or indirectly in this newsletter will be profitable, equal to any corresponding indicated historical performance level(s), be suitable for your portfolio or individual situation or prove successful. Due to various factors, including changing market conditions and/or applicable laws, the content may no longer reflect current opinions or positions. All indexes are unmanaged, and you cannot invest directly in an index. Index returns do not include fees or expenses. Actual client portfolio returns may vary due to the timing of portfolio inception and/or client-imposed restrictions or guidelines. Actual client portfolio returns would be reduced by any applicable investment advisory fees and other expenses incurred in managing an advisory account. Moreover, you should not assume that any discussion or information contained in this newsletter serves as the receipt of, or as a substitute for, personalized investment advice from Sage Financial Group. To the extent that a reader has any questions regarding the applicability above to his/her situation or any specific issue discussed, he/she is encouraged to consult with the professional advisor of his/her choosing. Sage Financial Group is neither a law firm nor a certified public accounting firm, and no portion of the newsletter content should be construed as legal or accounting advice. A copy of Sage Financial Group’s written disclosure statement discussing our advisory services and fees is available for review upon request.
