Financial Market Roundup
Produced by Fifth Third's Investment Management Group
In the following piece, Fifth Third's Investment Management Group recaps the market and how it reacted to various events in the month of August 2025.
GLOBAL
On April 2, President Donald Trump announced reciprocal tariffs on imported goods on a country-by-country basis which were more severe than market participants expected.
On April 9, the administration lowered tariff rates with most trading partners to 10% to allow for trade negotiations to commence, with further reductions announced on May 12. On Aug. 29, the U.S. Court of Appeals for the Federal Circuit ruled that most of the tariffs enacted earlier this year were unlawful. However, with the appeals process and other avenues for enacting tariffs still open, the reshaping of global trade is likely to continue. In response to tariff-related uncertainty, investors have noticed a considerable drop in business sentiment, lower consumer sentiment and elevated market volatility. Market and economic fundamentals that Fifth Third’s Investment Management Group favor -- labor market strength, moderating inflation, easing monetary policy, strong corporate earnings -- remain resilient. However, we suspect these fundamentals will deteriorate until a clear path forward for global trade is agreed upon by policymakers and businesses alike.
After restrictive monetary policies helped to curtail persistent inflation, most global economies have begun to lower interest rates to help foster growth and support global labor markets. Short-term interest rates from most of the world’s largest central banks are still elevated relative to the last decade, which adds pressure to global financial systems. Offsetting these easier global financial conditions is a sharp increase in global trade policy uncertainty.
Geopolitical tensions remain elevated due to recent conflicts in the Middle East, along with the ongoing war in Ukraine. Aside from the human tragedy that is always associated with war, these conflicts have also contributed to increased risks and volatility in financial markets.
Taken together, recent global and economic actions have kept investors on edge. Despite these concerns, global economic growth remains resilient, driven by consumer spending in most developed nations. We expect this to continue in 2025, although likely at a slower rate than historical norms.
CENTRAL BANK
POLICY
The Federal Open Market Committee did not meet in August; however, Federal Reserve Chair Jerome Powell delivered his annual address at the Jackson Hole Economic Symposium on Aug. 22.
In his remarks, Powell noted that “downside risks to employment are rising. And if those risks materialize, they can do so quickly.” Following this speech, market expectations for a rate cut at the upcoming Sept. 16-17 FOMC meeting modestly increased.
The FOMC last met on July 30 and held interest rates steady, keeping their target range for the federal funds rate at 4.25%-4.50%. Importantly, the decision to hold interest rates steady was not unanimous, with two Federal Reserve governors voting for a 25-basis-point cut. In addressing recent trade uncertainty within the context of its dual mandate -- stable inflation and full employment -- the formal press release stated: “Uncertainty about the economic outlook has diminished but remains elevated. The committee is attentive to the risks to both sides of its dual mandate.” The committee meets next on Sept. 17 and federal funds futures imply around an 88% chance of a 25-basis-point cut being announced at that meeting, with another 25-basis-point cut expected by the end of 2025.
The European Central Bank last met on July 24 and held their target interest rates steady. In a prepared statement, the ECB noted that future decisions “will be based on its assessment of the inflation outlook and the risks surrounding it, in light of the incoming economic and financial data, as well as the dynamics of underlying inflation and the strength of monetary policy transmission.” As of the end of August, market participants expect about a 30% chance of one further 25-basis-point cut from the ECB in 2025.
EQUITY
PERFORMANCE
Domestic stocks increased in August, with the S&P 500 gaining 2.0%.
The blue-chip Dow Jones Industrial Average increased 3.4%, while the tech-heavy Nasdaq composite advanced 1.7%. International stocks were higher, with the MSCI Emerging Markets Index posting a 1.3% gain and the MSCI EAFE Index of developed international equities advancing 4.3%. The MSCI All Country World Index of developing and developed market stocks gained 2.5% during the month.
Second-quarter earnings season is nearly over, with over 95% of S&P 500 companies having reported their financial results. Earnings have been strong, with actual growth exceeding 12%. Eight sectors have posted earnings growth, while three sectors are showing contractions. Looking ahead, 26 companies in the S&P 500 are expected to report financial updates in September.
INTEREST RATES
& GROWTH
On Aug. 28, second-quarter U.S. GDP was revised higher to an annualized growth rate of 3.3%, reflecting a strong rebound in economic activity and outpacing expectations.
The report highlighted a resilient U.S. consumer, as private consumption -- which accounts for about 68% of GDP – increased compared to the first quarter. The report also noted a strong reversal in net exports, which contributed to some of the economic growth.
At the June FOMC meeting, the Fed released their latest summary of economic projections, which details the central bank’s outlook on a variety of prospective economic measures. Specifically, investors digested lower expected GDP growth, higher unemployment and higher core inflation forecasts for 2025.
In August, the U.S. Treasury yield curve moved lower across all term points, with maturities of one to seven years seeing yields drop by at least 20 basis points. Specifically, the two-year Treasury yield fell 34 basis points, ending the month at 3.62%, while the 10-year Treasury yield fell 15 basis points to 4.23%. In addition to higher Treasury yields, credit spreads, or the premium investors require for credit exposures, were mixed in August. Investment-grade spreads expanded by three basis points, while high-yield spreads compressed by six basis points.
Mortgage rates moved lower in August, with Freddie Mac’s Primary Mortgage Market Survey showing the average 30-year fixed rate falling to 6.56% on Aug. 28 -- down 18 basis points from July 24.
POLITICAL
Earlier this year, Trump announced reciprocal tariffs on imported goods on a country-by-country basis which were more severe than we or market participants expected.
These tariffs seek to decrease the trade deficit, promote domestic manufacturing and protect American workers. The net effect of these policy changes resulted in the largest increase in the effective tariff rate on imported goods since the 1920s, which has put downward pressure on business sentiment and upward pressure on inflation expectations from U.S. consumers.
Following trade agreements announced earlier this summer, the U.S. Court of Appeals for the Federal Circuit ruled on Aug. 29 that most of the tariffs enacted under the International Emergency Economic Powers Act were unlawful. The administration is expected to appeal the decision to the Supreme Court, and many political analysts note that other legal avenues remain available to maintain tariffs on imported goods.
This past month, Trump made further efforts to end the war in Ukraine through diplomatic meetings with Russia, Ukraine and other European allies. Trump described the meetings as a “very good, early step” toward bringing the war to an end.
INVESTMENT
THEMES
Domestic equities began seeing upward changes to future earnings expectations in June, and that trend continued over the last month with positive revisions for the S&P 500.
The current earnings season also points to another strong quarter of actual earnings growth for large-cap equities.
Headline inflation was unchanged in July, with the Consumer Price Index holding at 2.7%. Core CPI, which excludes food and energy, rose to 3.1%. The second-quarter U.S. GDP report showed economic growth of 3.3%, supported by a still-resilient U.S. consumer. While the Fed made no policy changes in July, it began signaling potential interest rate cuts in the second half of 2025.
It is our belief that peak trade uncertainty is now behind us; however, geopolitical tensions continue to weigh on investor sentiment. Despite this, key domestic economic fundamentals -- including labor market strength, moderating inflation and strong corporate earnings -- remain resilient. On balance, the headwinds and tailwinds currently at play suggest there is a potential path for global economic growth, albeit at a slower pace than initially expected.
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