September 2, 2025
Labor Day typically marks the end of summer and the beginning of the fall season. As college and pro football get geared up, the smell of pumpkin spice is not too far away. What was supposed to be a sleepy week ahead of the three-day weekend turned out to be anything but. Starting with the firing of one of the Fed Governors, rolling into Nvidia earnings, and finishing up with the Fed’s inflation gauge, there were plenty of things for investors to figure out. The consistent chatter against various Fed officials has generally been ignored by the markets. Evidently, the “big deal” was the earnings from Nvidia. They were spectacular; however, there was some evidence of slowing growth and some pressure on profitability, which ultimately pushed the stock lower on the week. To wrap up the week before the long holiday weekend, inflation data remains a bit higher than desired, and consumer spending remains strong, begging the question: Should the Fed cut rates? The coming week will be packed with important data, culminating with employment on Friday. Of course, every employment report is “the most” important one, but this one likely will set the tone for the Fed meeting in two weeks. Will the fall chill in the air impact traders on Wall Street during the typically weak September? So far, this has been a Teflon market.
The data of the past week belies the discussion about cutting rates. The consumer looks strong as spending has barely slowed. Inflation has been relegated to second tier data. Employment, according to the comments by Powell at Jackson Hole, is showing signs of weakening. To compound this particular report, revisions to the prior 18 months will occur as well on Friday. So what was originally thought to be “good” monthly data just a few months ago could turn out to be rather weak. There is a possibility that revisions go higher, indicating a strong jobs market. If so, what will the Fed do with the new data points? Obviously, weaker revisions would support cutting rates, but higher revisions could force the Fed to hit the pause button again. Unfortunately, the jobs report is very backward-looking and when it is revised every few years, it makes it tough to rely on the current data point. Much of the economic data is rarely left as reported, making modeling the US economy nearly impossible. Since monetary policy reacts to these data points, by the time a decision is reached to raise/cut rates, it is already too late. It has long been suggested that the Fed should focus solely on modest but steady monetary growth and stop trying to tweak a nearly $30 trillion economy.
The yield spread between 2 and 10-year bonds widened to their highest level in three months. The shortterm rates are “controlled” by the Fed, and since it is widely believed they will cut in a couple of weeks, rates there have declined a bit. Longer-term rates reflect concerns about inflation. Since inflation has remained stubbornly high and impacted some by the tariffs, yields on the long-term bonds have risen a bit. A broad basket of commodities and their price changes usually is a good indicator of future inflation. However, those prices, while volatile, are roughly where they were at the start of the year. If the impact of tariffs is indeed “transitory” or minimal, it would give the Fed an additional reason to cut rates. There will be one more inflation report before the Fed meeting that will be closely watched.
For the first time since the fourth quarter last year, small stocks are performing meaningfully better than the SP500. During the month of August, small stocks doubled the return on the SP500. There is a very strong argument to be made that this could continue for months if not years, but that argument could have been made anytime over the last 3-5 years. Will this “dawn” actually see small stocks have their day in the sun, or like a winter sunrise in Alaska, provide a bit of light before returning to darkness? The earnings report and discussion from Nvidia is beginning to lead some investors to wonder if there is really a pot of gold at the end of the AI rainbow. Nearly 50% of the revenue of Nvidia comes from five companies. Some are indicating that they may be slowing their capital spending on data centers, which could slow earnings growth further. Since these companies are so heavily intertwined, if one begins to falter or slow its spending, it could have a ripple effect around the technology landscape.
Only four trading days this week, but two weeks’ worth of economic reports. Plenty of Fed chatter as well this week, culminating in the jobs report on Friday. Not a good week to oversleep at the beach!
The opinions expressed in the Investment Newsletter are those of the author and are based upon information that is believed to be accurate and reliable but are opinions and do not constitute a guarantee of present or future financial market conditions.