By Pete Biebel, Senior Vice President, Senior Investment Strategist
Since the lows five months ago, the stock market has delivered solid returns. The S&P 500 Index (SPX) tacked on another one-third of 1% last week and now has a net year-to-date gain of just over 10%. The NASDAQ Composite Index (COMP), thanks to big gains in a couple of its big tech companies, rose 1.14% for the week and is now up a little over 12% for the year. Among the major indices, the Dow Jones Industrial Average (DJIA) was the only one that failed to deliver last week. DJIA slipped 0.32% during the holiday-shortened week, dropping its year-to-date gain to 6.71%. All three indices hit new highs on both an intraday and a closing basis at some point during the week.
Following the holiday on Monday, the first day of trading in the new month began with a steep decline. That was the market’s response to news that a federal appeals court had ruled that the administration’s “emergency” tariffs exceeded the President’s authority. The major averages all hit what would be their lows for the week in the early hours of trading on Tuesday. They were able to recoup some of the damage through the afternoon but still ended the sessions with losses of between 0.5% and 1%.
Wednesday was a big day for COMP, which rang up a 1% gain for the day. News that the court decision in U.S. v. Google, which imposed much less severe penalties on parent company Alphabet Inc. than had been feared, had been released the prior evening. GOOGL stock gapped higher Wednesday morning and ended the day with about a 9% gain. Shares of Apple Inc. also spiked higher on the news, gaining nearly 4% for the session. SPX, where GOOGL and AAPL are among the most heavily weighted components, ended the session with about a 0.5% net gain. DJIA, which received much less help from the performance of those two stocks, lost 0.1% on Wednesday.
The first of the week’s disappointing employment news was released on Thursday morning. Initial jobless claims came in a little higher than expected, and private sector payroll growth was much lower than expected. Those two disappointments combined to greatly increase optimism for a Federal Reserve Board (Fed) rate cut next week. Stocks celebrated the news with an all-day march higher. The major indices gained between 0.8% and 1% for the day and ended the day at or very near record highs.
As you may have surmised, the rest of the week’s disappointing employment news came the following morning. Just 22,000 nonfarm payrolls (NFP) were added in August; that was the fourth consecutive discouraging monthly report. Revisions to prior months’ NFP numbers were also net negative. While the July number was increased by 6,000, June’s NFP was revised lower by 27,000. That made June the first negative month for NFP since December 2020. Oh yeah, and the unemployment rate ticked up a notch to 4.3%. That data pretty much assured the market that a Fed rate cut was imminent. In fact, a 50-basis-point cut next week is now more likely, and the probability of 75-basis-points or more in cuts by year-end has climbed to 79%. Stock index futures spiked higher on the news, and the major averages all hit new highs in the early minutes of trading.
Unfortunately, the reality of the dangers of a potentially slowing economy quickly overwhelmed the rate-cut euphoria. The major averages all peaked just three to five minutes into the session. The opening gains were all given back in the next half hour, and by the end of the first hour of trading, the averages were all solidly in the red. The averages continued lower over the next half hour, hitting their lows of the day in the area of Thursday’s lows. Some of the losses were recovered that afternoon with COMP almost getting back to even and SPX and DJIA losing between 0.25% and 0.5% for the day.
The disappointing economic data and the increased odds of multiple Fed rate cuts before year-end did wonders for the bond market. Through the month of August, the yield on 10-year Treasury notes had settled into a steady trading range between 4.20% and 4.30%. Thursday’s news triggered a rally across the bond market, and the 10-year yield dropped below 4.20%. Following Friday’s data, the 10-year yield plunged to 4.07%, its lowest level since April. The yield on the longer 30-year Treasury bonds, which spiked to near 5.0% Tuesday morning in the wake of the tariff news, slumped to 4.85% after the Thursday jobs data and ended the week near 4.76%. That’s its lowest level in four months.
The lower interest rates have also been a gift for the stock prices of smaller companies. The Russell 2000 Index of small-cap stocks (RUT) gained a little over 1% last week. That lifted its net gain for the past five weeks to more than 10.5%, more than double COMP’s gain over that time. RUT is now up a little more than 7% year-to-date.
Friday’s jobs news and the subsequent market action provided a hint of how fragile the market’s current condition is. Through the summer, the market’s confidence in better earnings, lower inflation and a decent economy propelled stocks higher. Now, that confidence has been shaken. Now, inflation may be creeping higher, and the economy may be slowing; both may hurt companies’ ability to grow earnings. So, despite the averages touching new highs last week, some special handling may be required going forward.
There’s no denying that the overall market is at a very expensive valuation. True, that has been the case for most of this year. That alone doesn’t mean the market has to move lower from here, but it does mean two things: First, forward returns are likely to be substandard. For the major averages to advance another 5% from here would require a perfect mix of economic growth, lower inflation and increasing earnings. Second, the odds of the market going down 10% or more from here are significantly higher than the odds of a 10% advance. Those probabilities are reflected in the market’s historically low current equity risk premium, which is shouting that fixed income likely will provide a better return than equities over the coming months.
A new wrench in the works is the possibility of tariff refunds. If a significant amount of the tariffs collected to date are ultimately deemed to have been illegal, then the process of refunding those billions of dollars would not only create a bottleneck of paperwork but would also significantly worsen the fiscal deficit.
The market’s technical condition is looking toppy. All the major averages are showing momentum divergences at their recent highs. Several also have divergences in their advance/decline lines. There has also been a spate of failures to follow through at new highs. Maybe it’s just because the market is already so richly valued, but there have been several days in the last few weeks that have hit new highs early in the session only to close much lower or with losses. Friday was the most recent example.
There’s no need to rush for the exits, just be aware of current conditions and be prepared to react if things take a turn for the worse. Talk to your advisor. Have a plan. Given the current shaky technical condition of the market, a little fundamental disappointment could go a long way.
On last week’s research call with our advisors, I explained that the 6450 level on SPX seemed to be a key level to watch short-term. SPX shot above that level on the opening the very next day and continued higher. The sell-off following Friday’s gap-up opening fell all the way back to the 6450 area. If SPX holds above that level this week, then there would be no cause for alarm. But falling below that level this week would be the first bad omen. The more significant level below 6450 is 6350 and the 50-day moving average of SPX. Falling below that level would indicate that a more defensive approach would be necessary.
One other factor to watch is the yield on 10-year Treasuries. I described above how that yield has slumped to multi-month lows. Recall that a year ago, as the Fed made its initial 50-basis-point rate cut, the 10-year yield was at a 15-month low, near 3.6%. In less than four months following the Fed’s September 2024 rate cut (and with another quarter-point cut a couple months later), the 10-year yield had increased by nearly 120-basis-points. If, for whatever reason, that yield climbs above 4.3% in the months ahead, especially if that occurs in an environment with increasing unemployment, that would be very bad news for the stock market.
The updates on inflation statistics on Wednesday and Thursday will be the key data for the market this week. However, the jobless claims numbers on Thursday could also be significant catalysts, especially following the disappointing news last week and the big revisions of a month ago.
| Economic Calendar (9/8/25 – 9/12/25) | Previous | Consensus | |
| Monday 9/8/2025 | Consumer Credit, July, M/M | $7.4B | $15.0B |
| Tuesday 9/9/2025 | NFIB Optimism Index, August | 100.3 | 100.6 |
| Wednesday 9/10/2025 | Producer Price Index, August, M/M | +0.9% | +0.3% |
| PPI ex-Food & Energy, August, M/M | +0.6% | +0.3% | |
| Producer Price Index, August, Y/Y | +3.3% | ||
| PPI ex-Food & Energy, August, Y/Y | +2.8% | ||
| Wholesale Inventories, July, M/M | +0.2% | +0.2% | |
| Thursday 9/11/2025 | Initial Jobless Claims | 237K | 234K |
| Continuing Claims | 1,9K | 1,9K | |
| Consumer Price Index, August, M/M | +0.2% | +0.3% | |
| CPI ex-Food &Energy, August, M/M | +0.3% | +0.3% | |
| Consumer Price Index, August, Y/Y | +2.7% | +2.9% | |
| CPI ex-Food &Energy, August, Y/Y | +3.1% | +3.1% | |
| Friday 9/12/2025 | Consumer Sentiment, September | 58.2 | 58.0 |
Links to previously published commentaries can be found at benjaminfedwards.com/Latest Investment Insights/Market Commentary/Market