August 2025
Market Commentary
August Crosscurrents
Earnings Resilience Supports Market Valuation
August was another strong month across markets with broad-based gains. The S&P 500 rose 1.9%, its fourth consecutive monthly advance gain and 20th all-time high year-to-date. The Nasdaq was up 1.58%, its fifth straight month gain, and the small-cap Russell 2000 climbed 7.0%, its best month since November 2024.
S&P 500 stocks received a tailwind from a quarterly earnings season that far outpaced analysts’ estimates coming in nearly 12% year-over-year compared to the 4.8% expected at the beginning of the season, according to FactSet. The market also cheered a broadening of earnings growth, outside of technology & communication services and the strength of corporate profit margins, now at 12.5% their highest level since 2021- despite cost pressures from tariffs. Today, the S&P 500 earnings estimates for the remainder of 2025 and 2026 have been steadily climbing during a period when traditionally EPS revisions are more prevalent – a positive backdrop for stocks showcasing the resilience of Corporate America.
Rate Cut Expectations Ignite Late Month Rally
Beneath the top-line index returns, a meaningful shift in the tides occurred in August. Market leadership shifted away from large-cap growth technology to small-cap value-oriented sectors of the market – a reversal last seen in the first quarter of 2025, but which was short-lived.
With the Fed increasingly eschewing inflationary pressures and focusing on signs of a weakening labor market, market observers readied for a restart of a rate cutting cycle. At the annual Jackson Hole conference last month, it was a more dovish than expected Chair Powell that cemented near-term rate cut expectations. In turn, markets rallied and specifically small-cap stocks. This segment of the market would feel immediate interest expense relief, as it relies heavily on variable short-term financing, and would benefit disproportionately from the economic support of an interest rate cut from the Fed.
Market Leaders Cede to Laggards
The catch-up rally was apparent in many “unloved” and left behind areas of the market. At the sector level, year-to-date market leading sectors like technology underperformed in August, up by only .27%, while lagging sectors such as healthcare rose 5.25% - which despite its outsized August gain, remains basically flat on the year.
Reversals of fortune happened within the large-cap tech arena as year-to-date underperformers, Apple & Alphabet each climbed nearly 12% in August while AI darlings Microsoft and Nvidia fell 4.9 and 2.1% respectively. U.S. stocks also lagged the rest of world as measured by the MSCI All World Index ex-USA.
And while international strength hinged primarily on the dollar’s decline this month, a byproduct of higher long-dated yields around the globe, European and Emerging Market bourses benefitted from single-stock success stories in their concentrated markets as well.
Looking Ahead
Throughout the month of August, dangerous riptides made cautious swimmers uneasy about entering the water, in much the same way that market cross currents may signal caution to investors. As we enter September, we are aware that relatively benign cross currents could turn into more ominous riptides. September has been notoriously negative for markets and, coupled with a confluence of economic data in the coming weeks, including August’s jobs report and two inflation reports, PPI & CPI, may upend the market’s current rate cut narrative.
During volatile times, it is important to remember that your Cape Cod 5 team builds diversified portfolios that will withstand the test of choppy waters. If would like to discuss your unique financial plan, please reach out to your team of advisors.
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These facts and opinions are provided by the Cape Cod 5 Trust and Asset Management Department. The information presented has been compiled from sources believed to be reliable and accurate, but we do not warrant its accuracy or completeness and will not be liable for any loss or damage caused by reliance thereon. Investments are NOT A DEPOSIT, NOT FDIC INSURED, NOT INSURED BY ANY FEDERAL GOVERNMENT AGENCY, NOT GUARANTEED BY THE FINANCIAL INSTITUTION AND MAY GO DOWN IN VALUE.
