Weekly Comment

The Federal Reserve has not reached a clear agreement on its next steps. 

A few weeks ago, the Fed cut its rate by 25 bps, but the real surprise came from the vote: one member called for a deeper cut, while another preferred none at all. 
Two opposing positions that reveal an important fact: the economy is sending mixed signals. 

In this scenario, Jerome Powell was clear: a December cut is not guaranteed. 
Rather than dysfunction, this division shows that the path ahead remains uncertain. 
Why is the Fed divided? Because economic data continue to send conflicting and inconsistent signals. 

Key points: 
☑ Stock market at record highs 
☑ Accelerating investment in AI 
☑ Resilient consumer spending 
☑ Labor market losing momentum 
☑ Housing sector stagnating 
☑ Rising layoffs and credit card delinquencies 
☑ Government shutdown delaying key data, reducing visibility for both the Fed and the markets 

A divided Fed doesn’t imply chaos, but rather caution in the face of an ambiguous economy and incomplete data. 

The message for investors is clear: it’s not about predicting the next move, but about staying disciplined and focused on long-term horizons. 

Source: Morningstar 

The Federal Reserve delivered its second rate cut of the year, lowering the policy rate by 25 bps to a range of 3.75%–4%. It announced that it will halt its balance sheet reduction in December. 

The Fed acknowledged moderate growth but warned of rising labor market risks.  The vote was 10–2, reflecting divided positions. 

Powell: another cut in December is not guaranteed. 

Key Data: 

• Second rate cut of 2025 
• Rate range: 3.75%–4% 
• Vote: 10–2 
• Balance sheet runoff to end in December 
• Labor market risks on the rise 

The market continues to expect a possible third rate cut in December, though signals remain mixed. 
The Fed remains cautious and data-dependent, with employment as a key variable guiding the rate path. 

The U.S. government shutdown is once again testing market patience amid stalled negotiations and disagreements over public spending. Unlike previous shutdowns, this time there is talk of permanent layoffs instead of temporary furloughs, which could have a stronger impact on employment and domestic consumption. However, historical evidence suggests that such events tend to have a limited effect on financial asset performance over the medium and long term. The main market drivers remain fundamentals: inflation, interest rates, earnings, and employment. 

Key Data: 

• Average government shutdown duration: 9 days 
• Longest shutdown: 34 days (2018–2019) 
• Potential permanent layoffs could have longer-lasting effects 

The key is to stay focused, avoid hasty decisions, and rely on diversification as protection against political noise. 

Source: Capital Group  

The S&P 500 shows resilience heading into 3Q 2025, with reasonable earnings growth expectations despite a challenging macroeconomic backdrop. Below are the main takeaways for the upcoming earnings season: 

Earnings Growth 

• Earnings (EPS) are projected to grow 7.9% YoY in 3Q 2025. If confirmed, this would mark the ninth consecutive quarter of growth for the S&P 500. As of June 30, the growth estimate stood at 7.3%. 
• Six sectors have seen upward revisions to estimates, contributing to stronger earnings expectations. 

Sector Growth 

• Eight of the eleven sectors are projected to post annual growth, led by Information Technology, Utilities, Materials, and Financials. 
• Three sectors are expected to report annual declines, mainly Energy and Consumer Staples. 

Revenues 

• Revenues are expected to grow 6.3% YoY, compared to the 4.8% projection as of June 30. 
• If confirmed: 
  o This would be the second-largest revenue growth since 3Q 2022 (11.0%), only behind the previous quarter. 
  o It would mark the 20th consecutive quarter of revenue growth for the index. 

Valuation 

• The S&P 500 forward 12-month P/E multiple stands at ~22.5x, above the 5-year average (19.9x) and the 10-year average (18.6x). 
• This suggests that while earnings growth continues, valuations remain tight with much optimism already priced in. 

Key data points for the quarter: 
☑ EPS growth estimate +7.9% YoY in 3Q 2025 (vs. 7.3% as of June 30) 
☑ Six sectors with upward revisions 
☑ 8 of 11 sectors projected to grow 
☑ Revenues +6.3% YoY (vs. 4.8% as of June 30) 
☑ 20th consecutive quarter of revenue growth 
☑ Forward 12-month P/E ~22.5x (vs. 19.9x 5-year avg. and 18.6x 10-year avg.) 

Corporate performance remains resilient, with earnings growth expectations of 10.8% in 2025 and 13.8% in 2026 — outlooks that investors will closely monitor in a context of valuations above historical averages. 

Source: FactSet 

The Federal Reserve lowered its benchmark rate to a 4.00%–4.25% range, in line with expectations. The decision was nearly unanimous, with only one dissent. Projections point to two additional cuts before year-end, which would bring the average rate to 3.6%.  

For 2026, the Fed anticipates just one more adjustment. While inflation and unemployment forecasts remained unchanged, Jerome Powell acknowledged a substantial slowdown in labor demand and job creation. 

The Fed confirms a policy shift but with caution. The bias remains restrictive: only three cuts are projected through 2026. Markets will closely monitor upcoming inflation and employment data. 

FED Indicators Update (September vs. June)

Source: Federal Reserve.

The second-quarter earnings season closed with results better than expected. 81% of S&P 500 companies beat estimates, with aggregate annual earnings growth of 12%. Nvidia stood out with a +45% increase in earnings, while Technology, Financials, and Industrials led the way, driven by artificial intelligence and energy demand. 

Key data from the quarter:

• 81% of companies beat expectations
• +12% annual earnings growth
• Nvidia: +45% earnings growth 
• Consumer Staples, Energy, and Materials faced headwinds from tariffs and FX

Consumers remain resilient, though spending is becoming more selective. With elevated valuations, the market is now watching whether corporate earnings can sustain current prices in an increasingly uncertain global environment. 

Source: Raymond James –  FacSet.

The U.S. inflation report for July showed mixed signals. Headline CPI held steady at 2.7% year-over-year, while core inflation rose to 3.1%, up from 2.9% the previous month. This shift reinforces market focus on the upcoming Jackson Hole symposium and the Fed’s September decision. 

Other relevant highlights: 

• Food: unchanged in July after a 0.3% increase in June. 

• Energy: mixed performance – gasoline (-2.2%) and natural gas (-0.9%) fell, while heating fuel rose (+1.8%). 

• Shelter: rose 0.2% MoM, unchanged from June. 

The Fed continues to monitor the impact of tariffs and their potential inflationary effects. Although two committee members supported immediate rate cuts, the overall tone remains cautious, with emphasis on balancing inflation and employment mandates. 

Source: Morningstar

Investors often focus on corporate earnings reports, inflation, or central bank decisions, but there is another factor that also influences markets: seasonality. 

Historically, August has been one of the weakest months for financial performance. Since 1950, the S&P 500 has averaged near-zero or negative returns. In pre-election years or after a strong summer, the pattern often repeats. For the Nasdaq, August has been the second-worst month since 1971. 

• Lower liquidity: With institutional traders away, market depth decreases. 
• Few macro catalysts: August falls between key data and inflation periods. 
• Psychological reset: Portfolios are reassessed after summer optimism. 

Market implications:

Volatility is not always negative, but it is rarely the result of chance. Therefore, in August as in any other period, patience and a long-term positioning matter more than very short-term performance. 

July Fed Monetary Policy Statement 

As markets anticipated, the Federal Reserve left its benchmark interest rate unchanged, maintaining the target range at 4.25%–4.50%. Unlike the more optimistic tone in June, this time the Fed acknowledged a slowdown in economic activity during the first half of the year. 

While the labor market remains strong and unemployment stays low, inflation is still somewhat elevated. As a result, the Committee reaffirmed its commitment to its dual mandate: maximum employment and price stability. 

A key highlight was the lack of unanimous support. Two members—Bowman and Waller—voted in favor of a 25-basis-point rate cut. This marks the first time since 1993 that multiple Fed governors have dissented on a rate decision. 

Market Implications: 

Focus now shifts to the annual Jackson Hole symposium in August, where the Fed Chair traditionally provides guidance on the direction of monetary policy. Markets are still pricing in a potential rate cut in September, which would lower the target range to 4.00%–4.25%. 

Federal Funds Rate Expectations

Source: JP Morgan

Despite recent criticisms from former President Donald Trump toward the Federal Reserve (Fed), the possibility of an early removal of Fed Chair Jerome Powell seems limited. The Federal Reserve Act of 1913 does not grant the Executive Branch the authority to dismiss its officials due to disagreements over monetary policy. In addition, a recent Supreme Court decision further reinforced the central bank’s independence, making intervention even more difficult. Although the law allows for removal “for cause,” this clause has never been tested, leaving the legal grounds for dismissal uncertain.

Against this backdrop, three scenarios emerge regarding the Fed’s future under new leadership:

The Fed would maintain a technical approach, free from political pressure.

• More predictable policy
• Lower inflation
• Greater long-term stability
• In the short term: a flatter yield curve and wider credit spreads

A more flexible stance could lead to more expansive policies.

• Boost to short-term growth and inflation
• Result: steeper yield curve and higher inflation expectations

The Fed could succumb to pressure to keep rates low despite high inflation.

• Loss of credibility
• High volatility and potential abrupt adjustments, as in the Volcker era (1979)

However, early dismissal could trigger:

• Temporary volatility spikes
• Weaker U.S. dollar
• Stock market declines
• Distortion of the yield curve

Since the 1970s, the Fed has remained committed to controlling inflation as a core institutional priority.

Source: Capital Group