Key Points:
- The U.S. economy grew faster than initially expected in the second quarter with Q2 GDP rising 3.3%
- Stocks pushed to all-time highs during the month with the S&P500 up almost 10.8% for the year.
- Bonds and international stocks are having a strong year, rewarding globally diversified balanced investors.
Strong corporate earnings continued to propel stocks to new all-time highs in August despite fears of a slowing economy. The S&P500 saw its fourth consecutive month of positive returns with a 2% gain in August. The Dow Jones Industrial Average was up 3.4% while the tech-heavy NASDAQ Composite saw a 1.7% return. Materials (+5.8%) and healthcare stocks (+5.4%) led the market higher while utilities (-1.6%) were the only negative sector of the market. The S&P500 is now up 10.8% for the year when accounting for dividends.
Small cap stocks saw a surge in August, rising 7.1% as the market began pricing in rate cuts in the near future. Small cap companies are more interest rate sensitive and have lagged since the Fed raised rates to combat inflation. Emerging weakness in the labor market may push the Federal Reserve to start cutting interest rates as early as September, despite inflation remaining above the Fed’s 2% target. The US economy grew faster than previously reported in the second quarter as GDP was revised up to 3.3% (annualized) from 3%. Consumer spending has remained strong amid fears of a cooling labor market. Business investment so far this year is robust, but the impact of tariffs still remains a concern.
International stocks continue to be the darlings of the market in 2025. Developed markets gained 4.3% for the month and are up 22.8% for the year for US investors. Emerging market equities are up 19% year to date as depreciation of the US Dollar and compelling valuations have driven international investment.
The investment grade bond market is up 5% for the year. The Treasury Yield curve steepened as short rates dipped reflecting expected cuts to the Fed Funds Rate. Longer maturity yields increased as inflation fears, tariff uncertainty and fiscal deficits has bond traders requiring additional compensation (yield) to taking on duration risk. 2025 is shaping up to be a good year for globally diversified balanced investors after several years of underwhelming returns in bonds and foreign stocks.