October 2025 Market Commentary

October 13, 2025

• Federal Reserve cuts rates by 0.25%.
• Second quarter GDP revised up to 3.8%.
• US Government shuts down for first time since 2018.
• September Returns: S&P 500 3.5%. Bloomberg US Aggregate Bond index 1.1%.

Historically, September has been the worst calendar month for the S&P 500 over the past century, with an average return of -1.1%. However, despite the historical precedent, lofty valuations, and continuing levels of elevated uncertainty, the S&P defied history by returning 3.5% in September, it’s best September return since 2010. The gains were driven in part by growing expectations of Federal Reserve rate cuts in response to deteriorating labor market conditions.

With labor markets showing significant signs of slowing over the summer- nonfarm payrolls added an average of just 27K new jobs/month between May and August- all eyes were on the Federal Reserve in the run up to its September meeting. Given the slowdown in employment data, and comments by Fed Chair Jay Powell in August that current inflation and labor market conditions might warrant a change in monetary policy, markets were pricing in a 100% chance of a 0.25% rate cut. Thus, it came as no surprise when the Fed announced its first cut since December 2024, reducing the Fed Funds rate by 0.25% to 4.00-4.25%. As the rate cut was widely expected, markets were arguably more interested in hearing from Powell at his post-meeting press conference as well as reviewing the Fed’s updated Summary of Economic Projections (SEP).

At his post-meeting press conference, Powell addressed a number of topics including a) inflation, which he described as “somewhat elevated” vs. the Fed’s 2% target; b) employment, where downside risks have risen and it has become increasingly difficult for job seekers to find work; and c) tariffs, which he said have begun to push up prices for some categories of goods but whose overall effects on the economy and inflation remain to be seen.

The updated Summary of Economic Projections (SEP) suggested two additional rate cuts in 2025 followed by one more in 2026. However, the wide range of projections amongst the various Fed members, particularly for 2026, illustrated the current elevated levels of broader economic uncertainty. Some uncertainty surrounding the Fed was resolved, or at least temporarily postponed, when the Supreme Court decided at the end of the month that Fed Governor Lisa Cook can remain in her position for the time being, despite President Trump’s efforts to fire her. The court said it will hear arguments regarding the case in January 2026.

Tariffs, another key source of uncertainty for much of the year, continued to take a back seat in September, until the end of the month when Trump announced new tariffs of 25%, 30-50%, and 100%, on imported trucks, furniture, and pharmaceuticals, respectively. However, goods from countries that recently signed trade deals with the US are exempt, making the potential impact on prices less severe than headlines might suggest. In addition, days later, Trump suspended the 100% tariff on pharmaceuticals to allow individual drug companies the opportunity to negotiate deals with the administration to lower drug prices. Should the tariffs on pharmaceuticals take effect, they will not be levied on generic drugs.

Thus far there has been little to no market reaction to the government shutdown. In fact, the S&P 500 ended at a new record high on Friday October 3rd. In the near term, the lack of reaction is likely due to markets typically being more focused on longer-term macroeconomic trends than short-term government funding issues. In addition, with a short-lived shutdown, most government spending slated to occur during the shutdown is simply delayed not canceled. That does not mean, however, there is no economic cost to a shutdown. According to JP Morgan, each week the government remains closed lowers annualized GDP growth by 0.1%. Thus, an extended shutdown could lead to a more measurable impact on broader economic activity. Currently about 750,000 employees are furloughed while hundreds of thousands of others deemed “essential” continue to work without pay.

One major casualty of the shutdown is the timely release of key economic data, making it more difficult to accurately gauge the health of the economy. The temporary loss of data comes at a particularly sensitive time as the Fed tries to balance a slowdown in labor markets with renewed upward pressure on inflation stemming from tariffs. In the absence of official government data, Fed officials, economists, investors, and others will have to rely on private data. For example, in lieu of the monthly employment report, investors are left with data from payroll processing company ADP. Unfortunately, the monthly ADP report often deviates significantly from official government data, reducing its overall efficacy for assessing the health of labor markets. Over the past two years, average monthly job additions according to ADP have been 114K compared to the government’s figure of 140K, with an average difference between the two reports of 66K.

Prior to the government shutdown, the third estimate of second quarter GDP growth was released showing the economy grew at a 3.8% annualized rate, far better than the initial and second estimates of 3.0% and 3.3%, respectively. The upward revisions in the third estimate were due primarily to revised consumer spending. Though the stronger-than-expected economic growth helped assuage overall concerns about the economy, investors greeted the news as “good news is bad” regarding the probability of future Fed rate cuts.

Despite growing concerns about elevated valuations, which by some measures rival or even exceed those of the dot-com era, equity markets enjoyed positive returns in September, aided by growing expectations of a Fed rate cut. During the month, the S&P 500, Dow Jones Industrial Average, and NASDAQ, all set new record highs. So too did more interest rate sensitive small caps, which set their first new record high since November 2021. For the month, large caps (S&P 500) gained 3.5%, while small caps (Russell 2000) added 3.0%. International developed markets (MSCI EAFE) were up a more modest 1.6%, while emerging markets (MSCI EM) surged 7.0%.

Similar to equity markets, fixed income markets also experienced positive returns in September, with the Bloomberg US Aggregate Bond index, the broadest measure of the US bond market, gaining 1.1%. September saw an uptick in volume, with the treasury market trading an average of $1.1 trillion a day, up 6% from the month prior. September’s most dramatic move was at the long end of the curve, where 30 year yields fell 25bps (0.25%) from a 4.96% to a 4.71%. The short end also saw a rather meaningful 20bps decrease. Traders were positioning for September’s rate cut as well future expectations – with any evidence of weakness in the labor markets seeming to override the inflationary risks at hand. Still, Atlanta Fed President Raphael Bostic warned on continued inflationary pressures: “Not having been at target for over four-and-a-half years, we definitely need to be concerned about it.” Even with the government shut down and the as-of- yet missing economic data, markets are pricing in one to two additional cuts by December.

On a global scale, US 10-year yields have dropped about 46bps year to date and are currently hovering near a five-month low. In comparison, similar-maturity yields have climbed about 26bps in Germany, 27bps in France, and 57bps in Japan. In aggregate, the US treasury market has had the biggest return year to date of the 15 largest debt markets globally.

Continuing the momentum, the muni market had its biggest month since December of 2023. While the short end cheapened slightly, the long end was 40 bps tighter by month end. The 30-year Bloomberg benchmark muni is yielding 4.25%, an attractive absolute rate that has allowed demand to more than accommodate a heavy new issue calendar and significant inflows into funds.

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