Investment Commentary | August 2025

The August heat wasn’t limited to just the dog days of summer; hot returns were seen across all major asset classes. Despite the sell-off to end the month, the S&P 500 index posted a gain of 2.03%. The month started with uncertainty left over from the resignation of Federal Reserve Governor Adrianna Kugler, the firing of Bureau of Labor Statistics Chief Erika McEntarfer, and continued animosity between the Federal Reserve and White House.

Fed Policy and Market Reaction

Markets were keen to hear from the Federal Reserve Chair during the Jackson Hole Economic Symposium, hoping for a change in tone regarding interest rate cuts. Judging by the stock market reaction, investors were pleased with the shift from Chair Powell of potentially reducing rates. The Federal Reserve (Fed) may shift course again based on incoming data, but markets are certainly expecting a rate cut in September. While teasing the possibility of a rate cut was good news for August, failure to follow through will make September a difficult month.

Tariff Uncertainty Remains

Tariff uncertainty continues to cause concerns. The potential for tariffs to be completely overturned, or at least significantly reduced, could be another tailwind for stocks. The U.S. Court of Appeals for the Federal Circuit upheld a lower court’s decision that the tariffs are illegal. The case will now head to the Supreme Court as the eyes of the world watch. The administration has other tools to impose tariffs, but the overall effect is expected to be much weaker, potentially reducing prices.

Sector Performance: Materials, Health Care, and Energy Lead

Gains in the S&P 500 were led by the Materials, Health Care, and Energy sectors, with returns of 5.76%, 5.38%, and 3.64% respectively. Stocks were lifted by strong earnings, marked by 11.9% year-over-year growth in earnings and 81% of companies reporting higher than expected revenue and earnings per share. Valuation in the large cap market is still a major concern with the forward 12-month P/E ratio of the S&P 500 at 22.4, well above the 5- and 10-year averages of 19.9 and 18.5 according to Fact Set. Utilities were the only sector to post a decline for the month, dropping 1.58%. Despite the decline, all eleven sectors are now positive year-to-date.

Small and Mid-Caps Outpace Large Caps

Mid and small cap US stocks were not left out in the cold, as they both outpaced their large cap peers with returns of 3.39% and 7.06% for the S&P Midcap 400 index and S&P SmallCap 600. Smaller companies tend to be more sensitive to interest rates. The change in tone from the Fed helped lift these stocks. Investor confidence was also boosted by broadening of positive returns amongst different sized companies and different sectors.

Global Markets: Continued Strength

Markets outside the US continued the hot streak. The S&P Developed Ex-US Broad Market Index returned 4.47% for the month, and the S&P Emerging Broad Markets Index followed with a 2.65% return. Countries such as South Korea, Vietnam, Poland, Spain, and Italy are all having a strong year. Weakness in the dollar has helped lift returns in foreign markets. Additionally, increases in domestic spending and rate cuts in most countries have helped returns. While valuations are not the concern in foreign markets that they are in the US, there are still a host of concerns.

In developed markets, Germany’s economy has again slowed significantly, shrinking by 0.3% in the second quarter. France is headed to a confidence vote that could collapse the government and potentially trigger a selloff in assets. The UK continues to grapple with capital flight, tax increases, budget deficits, and political uncertainty.

Emerging markets are still heavily weighted towards China, which has had positive market returns recently. However, there are still debt issues, problems in the real estate sector, and the ongoing tariff discussions with the US that could reverse the positive returns.

Bond Market: Watching the Supreme Court

The US bond market ended the month up 1.20% based on the S&P US Aggregate Bond index. The question for the bond market is if this year will end like last, with short term rates getting cut while longer term rates rise. The previously noted tariff decision by the Supreme Court could roil bond markets if the government must pay back the tariff revenue. This revenue was a key consideration in the massive tax bill earlier this year.

There are levers that can be pulled to keep the bond market humming, but the large supply of debt relative to the demand is not easily solved. The growing deficit, the current $37 trillion debt combined with the $5 trillion increase in the debt ceiling, might be the reason bond auctions did not go well in August. Political pressure on the Fed may also serve to raise rates if investors flee the market.

Precious Metals Continue to Shine

Precious metals continue to shine as bright as the sun. The S&P GSCI Precious Metals index returned 5.72% for the month, bringing the year-to-date return to a blistering 31.52%, leading all major asset classes and indexes. The case for metals continues to be strong. Global debt level concerns, political uncertainty, geopolitical tensions, potential interest rate cuts, and weakness in the dollar all continue to lift prices of the metals.

Looking Ahead

August continued the market’s hot streak, but as we enter a seasonally volatile time of the year, will Fall start to cool things down?

At Central Trust Company, we continue to reassess the rapidly changing investment landscape for both risks and opportunities. If you would like to access our full monthly outlook and additional investment commentary, visit our Investments Learning Center. As always, if you have questions or concerns, please contact your Central Trust Company team. We are always ready to help.