U.S. Equities Hit Record Heights

Major U.S. equity benchmarks—the S&P 500, Dow Jones Industrial Average, and NASDAQ Composite—posted successive record highs last week, driven by a resilient tech sector and renewed investor optimism regarding Federal Reserve monetary policy. By Friday’s market close, the S&P 500 had risen nearly 4% since the start of August and marked its fifth positive week in the past six, closing at 6,584.3, up 1.6% week-over-week and 13.0% year-to-date.

This momentum was underpinned by large-cap growth and information technology stocks, with the Information Technology sector adding 3.1% for the week. Meanwhile, small-cap stocks—represented by the Russell 2000 Index—gained just 0.3%, continuing a recent trend of large-cap outperformance.

Macroeconomic Forces: Inflation Resurges, Labor Market Shows Cracks

Economic data presented a mixed picture. The Consumer Price Index (CPI) rose at a 2.9% annual rate in August, up from 2.7% the prior month, slightly topping consensus forecasts. Core inflation—excluding volatile food and energy segments—climbed to 3.1% year-over-year, indicating that price pressures remain persistent.

Labor market signals turned more cautionary. The U.S. Bureau of Labor Statistics revised prior job creation estimates down by 911,000 jobs for the March 2024–March 2025 period. Furthermore, weekly unemployment benefit claims surged to 263,000—the highest since late 2021—raising concerns about the durability of the economic expansion. Consumer sentiment echoed these concerns, as the University of Michigan’s index slid for a second consecutive month to 55.4, its lowest in four months.

Economists and market strategists remain divided over recession risk, but the confluence of gently rising inflation and modest job market deterioration has kept Federal Reserve policy in close focus.

Federal Reserve: Rate Cut Expectations Firm

Futures and market activity throughout the week overwhelmingly projected a Federal Reserve interest rate reduction at the September 17 policy meeting. As of Friday, CME FedWatch data indicated a 96.4% probability of a quarter-point cut, with a small 3.6% probability of a larger, half-point move. This expectation comes in the midst of persistent—but not runaway—inflation, uncertain global growth, and indications the Fed may pivot to stimulate flagging areas of the U.S. economy.

The yield on the 10-year U.S. Treasury note fell for the fourth consecutive week, dropping to 4.06%—its lowest point in over five months—after briefly dipping below the psychological 4% mark. The yield curve remains relatively flat, though the spread between 2-year and 10-year maturities widened to 50 basis points, reflecting shifting investor sentiment about short- versus long-term risk.

Sector and Market Performance

Across U.S. equity segments, growth stocks and technology continued to lead gains. The S&P 500 Growth index is up 15.0% year-to-date. Defensive sectors like Utilities also performed strongly with a 2.4% weekly gain and 14.6% YTD. Communication Services and Industrials remained robust in a risk-on environment. Conversely, Consumer Staples dipped slightly (-0.2% for the week), highlighting shifts in sectoral rotation.

International and Emerging Markets

International developed markets returned 1.2% for the week and 25% YTD on the MSCI EAFE Index, driven by strong performance in Europe (notably Spain, up 3.0% for the week and over 59% YTD, and Italy, up an impressive 47.1% YTD). In emerging markets, the MSCI EM Index jumped 4.0% weekly and is up 26.1% YTD, with broad-based gains led by Korea (54.3% YTD), China (37.5% YTD), and Mexico (44.1% YTD). These numbers reflect increased investor appetite for non-U.S. growth opportunities amid a weakening U.S. dollar and diversification motives.

Fixed Income, Commodities, and Currencies

U.S. fixed-income markets benefited from the decreasing yields and the prospect for lower rates: the Bloomberg U.S. Aggregate Bond Index rose 0.4% last week (6.4% YTD). Convertible bonds and municipals rose most sharply, blending risk appetite with inflation hedging. Municipal bonds are up 2.7% YTD, with the high-yield corporate bond segment advancing 6.9% year-to-date.

Commodity markets painted a bullish picture for gold, which set an all-time record by briefly topping $3,706 per ounce before closing Friday at $3,681. On a four-week basis, gold has rallied more than 10%—a reflection of global uncertainty, ongoing geopolitical volatility, and speculation about global central bank actions. Oil (WTI) rebounded 1.6% on the week but remains slightly negative for the year. The dollar’s softness was reflected in currency moves, with the Australian dollar up 1.3% on the week and the euro resting at a 13.2% gain year-to-date.

Economic Data Snapshots

• GDP Growth: Real GDP grew moderately in Q2 and Q3 2024, while forecasts suggest a modest 1–2% pace in the coming quarters as both investment and consumption slow slightly due to higher borrowing costs.
• Employment: Labor force participation remains below pre-pandemic levels, and the recent revision of jobs data signals labor market slack could be increasing.
• Inflation: The Consumer Price Index continues to fluctuate between 2.7% and 3.1% annualized, keeping real wage gains modest and consumer confidence subdued.
• Consumer Confidence: The University of Michigan index dropped to 55.4, reflecting anxiety over inflation and jobs, and potentially foreshadowing a cooling in consumer spending.

Fund Flows and Industry Overview

U.S. long-term mutual funds and ETFs saw net inflows of $68.3 billion in August, with taxable bond funds drawing the majority ($64.7B), while U.S. equity funds reported net outflows. The strong inflows into bond funds indicate a risk shift as investors reassess equity valuations and brace for Fed policy moves. Leading Morningstar categories by net flows included Intermediate Core Bond and Ultrashort Bond, while large growth and mid-cap stock funds lagged.

Outlook and The Week Ahead

Looking to the week of September 15–19, markets will digest the Federal Reserve decision, U.S. retail sales, business inventories, and leading economic indicators. Volatility is likely around the Fed’s press conference, with investors searching for signals of a longer-term easing trend or signs of a more cautious central bank.

• Key data releases: Retail sales, business inventories, industrial production, housing starts, and the Conference Board Leading Economic Index.
• Market focus: All eyes on the Fed’s next move and its assessment of evolving inflation and labor market conditions.