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After a volatile first four months of 2025, it was a good summer for investors to go on vacation, as markets, for the most part, went up weekly. In fact, the major equity indices closed August near their all-time highs.
But nothing signals the end of summer quite like those first crisp mornings in New England, kids waiting at the bus stop, and the abundance of tomatoes in my garden that all ripen at the same time. Now, with Labor Day in the rearview mirror, investors have returned to their desks with an eye toward how the final third of the year will unfold.
Fundamentals, Fundamentals, Fundamentals
Recently, one of my colleagues asked me why the market keeps going up despite negative news on rising grocery prices, Fed independence, and geopolitical unrest. It’s a reasonable question. The market has been quite resilient since its April selloff, while investors have seemed to navigate a daily wall of worry.
There are instances when short-term headlines move markets, which we saw in March and April. But over a longer time horizon, fundamentals drive markets.
Corporate earnings reports have been quite strong, exceeding analysts’ expectations. With the upcoming possibility of stimulus from the One Big Beautiful Bill Act and the Fed looking likely to begin cutting interest rates after a lengthy pause, investors seem to be factoring in accelerating economic growth and higher earnings going forward.
Earnings Expectations on the Move
Despite the headwinds it has faced this year, corporate America seems to be in good shape. The S&P 500 Q2 earnings season is virtually over, with 98 percent of companies reporting. Earnings growth has come in at 11.9 percent, compared to analyst expectations of 4.9 percent growth before the start of the reporting season. That is impressive performance no matter the backdrop, and it would be the third straight quarter of double-digit growth.
More importantly for investors, after a period of earnings estimates drifting lower, expectations for 2025 and 2026 are finally moving higher.
Source: FactSet (as of 8/28/2025)
Expectations for 2025 have seen growth return to above 10 percent. At this point, analysts expect 2026 will have another 13 percent earnings growth, which would follow 10 percent growth in 2024. Against that backdrop, it is easy to see why equity markets have rallied.
Investors Like What They Hear From the Fed
The biggest news story in the fading days of August was Fed Chairman Powell’s speech at the Jackson Hole Economic Symposium. Investors showed concern leading into the speech, as markets had drifted lower over the previous five days. But investors sure liked what they heard, with equity markets rallying strongly on the day of the speech.
Chairman Powell reiterated that the two Fed mandates of employment and inflation remain out of sync with employment weakening and inflation ticking higher. But he acknowledged that the balance of risks may now warrant an adjustment to the Fed’s interest rate policy—and that adjustment could occur as soon as September. It appears that for the time being, the Fed is putting more weight on the employment picture than inflation.
Between now and the Fed’s next meeting, key economic data will be reported, including the August jobs report on Friday and a couple of inflation prints next week. But the market is fully expecting the Fed to follow through with reducing rates in a couple of weeks.
Source: CME Group (as of 8/30/2025)
Market participants now believe there is a roughly 90 percent chance that the Fed will cut rates 25 basis points on September 17. This belief helped fuel the market strength at the end of the month, which drove markets to all-time highs once again as, historically, lower interest rates have coincided with higher valuations for stocks.
The Long View
My advice to my colleague was the same advice I would share with investors. Revisit long-term goals, whether that’s buying a house, covering college expenses, or preparing for retirement. Can your current portfolio accomplish these goals? If not, the time to make changes is now, with markets near all-time highs.
If cash is needed for expenses in the short to intermediate term, now is a good time to act on that. Investors could consider funding a cash bucket to ensure liquidity to meet any future needs. But now probably isn’t the time to raise cash simply because the market is up or the headlines make you uncomfortable. Timing markets is hard, if not impossible. The markets could certainly turn lower over the next couple of months as investors wait to see how the uncertainty plays out. But the fundamentals that are currently in place are supportive of equity markets in general.
Downturns in markets always feel bad, and there are always reasons to say “this time is different.” But pulling back and looking through a longer-term lens, downturns tend to be shallow and quick. The chart below shows the last seven bear markets and the bull markets that followed.
Historically, being invested in the market has been the best strategy to help achieve long-term goals that don’t require immediate access to capital. While large-cap growth companies are once again getting all the headlines, the bond market has had positive returns this year, and small-cap led market performance in August. Diversification is still working.
Stay vigilant to headlines that might impact the economy, but pay attention to the fundamentals. They drive long-term performance. Always.
