Executive Summary
Last week, U.S. stocks were down and bonds up (price up / yield down). The S&P 500 outperformed the MSCI Emerging Markets and MSCI EAFE indices. As for fixed income, the 10 yr. Treasury yield fell 17 bp on the week to 4.21%. The best performing parts of the bond market were treasuries, MBS, and investment grade corporates. High yield bond spreads were up on the week to 301 bps, but still well off recent highs of 453 bps.
The markets continue to minimize fundamentals as an input and turned quickly to the macro picture. The weaker U.S. dollar has been the biggest tailwind. The U.S. dollar, macro tariffs and job developments have been the more powerful forces in 2025.
Equities
The S&P 500 returned -2.3% amid weak economic data, stubborn inflation readings, and expectations that the Fed remained in “wait and see” mode. A weak employment number, with a large downward revision of previous readings, spooked traders about the state of the labor market. The Fed’s preferred inflation gauge, the Personal Consumption Expenditures (PCE) index, accelerated, indicating limited progress on taming inflation, while retail sales were disappointing. Chairman Powell’s comments at the conference post the Fed meeting indicated that the committee was in no rush to cut rates. Equities were further troubled by healthcare stocks, which sank as President Trump asked drug makers to cut prices. Even strong earnings results from tech bellwethers Microsoft, Meta, and Apple could not buoy the market. All sectors in the S&P 500 saw negative returns except for communication services which were flat; materials (-5.4%0, consumer discretionary (-4.5%), and healthcare (-3.9%) were the key laggards. EAFE markets returned -3.1% with Europe down -4.1% as the impact of the EU trade deal sank in, while EM markets returned -2.5% with impact across geographies.
From a valuation perspective, the S&P 500, the NASDAQ, and EM trade at or above +1 standard deviation based on historical forward P/E ratios, with the S&P 500 at +1.9, the NASDAQ at +1.2 and EM at +1.0. For the next 12 months, EPS growth for S&P 500 is expected to be 6.3% (vs. 6.9% annualized over the last 20 years). For the next 12 months, EPS growth for NASDAQ is expected to be 7.9% (vs. 10.7% annualized over the last 20 years). Equities across markets caps in the U.S., and in non-U.S. developed and emerging markets, trade at or above their 20-year averages based on forward P/E ratios.
Fixed Income
Investment grade fixed income sectors had positive returns as yields fell across the curve, offsetting widening spreads. Municipals returned +0.7%, U.S. AGG returned 1.0% and US IG returned +0.8%. HY bonds returned -0.2% as spreads widened 27bps while bank loans returned -0.1%. EM debt returned +0.4% even while the U.S. dollar rose 1.5% even as spreads widened 13bps.
Rates
Rates fell sharply across the curve as markets were spooked by the jobs number and began to price in more rate cuts. The recession-watch 3M-10Y spread compressed 11bps and has flipped to negative at -8. The 2Y-10Y spread widened 7bps to +53 as two-year rates sank. Rates fell in other developed markets as well; the BTP-Bund spread is at 0.84%. 5-year breakeven inflation expectations fell 3bps to 2.49% (vs. low of 1.88% on Sept 10); 10-year breakeven inflation expectations fell 9bps to 2.33% (vs. recent low of 2.03% on Sept 10); the 10Y real yield fell 8bps to 1.89%. The market now expects between two and three cuts in 2025 vs the Fed’s guidance of two cuts. At year-end 2025, the market expects the Fed Funds rate to be 3.70% vs. the Fed’s guidance of 3.75%-4.00%.
Currencies/Commodities
The dollar index rose 1.5%. The commodities complex rose 0.2% as energy prices rose 1.7% for the week. Brent prices rose 1.8% to $70/bbl. U.S. natural gas prices fell 0.9% while European gas rose 3.1%.
Market monitors
Volatility rose for equities and bonds (VIX = 20, MOVE = 84); the 10-year average for each is VIX=19, MOVE = 80. Market sentiment (at midweek) rose from 3 to 7.
Weekly Commentary
Investment Commentary – August 4, 2025
Stuart Katz
Executive Summary
Last week, U.S. stocks were down and bonds up (price up / yield down). The S&P 500 outperformed the MSCI Emerging Markets and MSCI EAFE indices. As for fixed income, the 10 yr. Treasury yield fell 17 bp on the week to 4.21%. The best performing parts of the bond market were treasuries, MBS, and investment grade corporates. High yield bond spreads were up on the week to 301 bps, but still well off recent highs of 453 bps.
The markets continue to minimize fundamentals as an input and turned quickly to the macro picture. The weaker U.S. dollar has been the biggest tailwind. The U.S. dollar, macro tariffs and job developments have been the more powerful forces in 2025.
Equities
The S&P 500 returned -2.3% amid weak economic data, stubborn inflation readings, and expectations that the Fed remained in “wait and see” mode. A weak employment number, with a large downward revision of previous readings, spooked traders about the state of the labor market. The Fed’s preferred inflation gauge, the Personal Consumption Expenditures (PCE) index, accelerated, indicating limited progress on taming inflation, while retail sales were disappointing. Chairman Powell’s comments at the conference post the Fed meeting indicated that the committee was in no rush to cut rates. Equities were further troubled by healthcare stocks, which sank as President Trump asked drug makers to cut prices. Even strong earnings results from tech bellwethers Microsoft, Meta, and Apple could not buoy the market. All sectors in the S&P 500 saw negative returns except for communication services which were flat; materials (-5.4%0, consumer discretionary (-4.5%), and healthcare (-3.9%) were the key laggards. EAFE markets returned -3.1% with Europe down -4.1% as the impact of the EU trade deal sank in, while EM markets returned -2.5% with impact across geographies.
From a valuation perspective, the S&P 500, the NASDAQ, and EM trade at or above +1 standard deviation based on historical forward P/E ratios, with the S&P 500 at +1.9, the NASDAQ at +1.2 and EM at +1.0. For the next 12 months, EPS growth for S&P 500 is expected to be 6.3% (vs. 6.9% annualized over the last 20 years). For the next 12 months, EPS growth for NASDAQ is expected to be 7.9% (vs. 10.7% annualized over the last 20 years). Equities across markets caps in the U.S., and in non-U.S. developed and emerging markets, trade at or above their 20-year averages based on forward P/E ratios.
Fixed Income
Investment grade fixed income sectors had positive returns as yields fell across the curve, offsetting widening spreads. Municipals returned +0.7%, U.S. AGG returned 1.0% and US IG returned +0.8%. HY bonds returned -0.2% as spreads widened 27bps while bank loans returned -0.1%. EM debt returned +0.4% even while the U.S. dollar rose 1.5% even as spreads widened 13bps.
Rates
Rates fell sharply across the curve as markets were spooked by the jobs number and began to price in more rate cuts. The recession-watch 3M-10Y spread compressed 11bps and has flipped to negative at -8. The 2Y-10Y spread widened 7bps to +53 as two-year rates sank. Rates fell in other developed markets as well; the BTP-Bund spread is at 0.84%. 5-year breakeven inflation expectations fell 3bps to 2.49% (vs. low of 1.88% on Sept 10); 10-year breakeven inflation expectations fell 9bps to 2.33% (vs. recent low of 2.03% on Sept 10); the 10Y real yield fell 8bps to 1.89%. The market now expects between two and three cuts in 2025 vs the Fed’s guidance of two cuts. At year-end 2025, the market expects the Fed Funds rate to be 3.70% vs. the Fed’s guidance of 3.75%-4.00%.
Currencies/Commodities
The dollar index rose 1.5%. The commodities complex rose 0.2% as energy prices rose 1.7% for the week. Brent prices rose 1.8% to $70/bbl. U.S. natural gas prices fell 0.9% while European gas rose 3.1%.
Market monitors
Volatility rose for equities and bonds (VIX = 20, MOVE = 84); the 10-year average for each is VIX=19, MOVE = 80. Market sentiment (at midweek) rose from 3 to 7.
Disclosure and Source
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