Executive Summary
The economy appears to remain resilient, and the Fed is cutting rates in the middle of an economy that is slowing but still expanding. Historically, such conditions have been bullish for risk assets. According to Franklin Templeton, in the last 50 years, there have been eight instances where the Fed resumed cutting interest rates after a pause. This is currently the ninth instance. They found that forward returns for the S&P 500 averaged 17% in similar periods of the past. When the Fed resumes cutting rates after a pause, the Nasdaq Composite Index has led with an average return of 25%. The Russell 2000 has averaged 20%. However, history shows that performance is not a straight line, but in the three to four months following a resumption of rate cuts, volatility has emerged. When the Fed has resumed cutting interest rates after a pause, U.S. Treasuries have averaged a 6% return in the following year. We believe clients, especially in high-tax states, should consider municipal bonds on a fundamental basis. In our view, the heavy issuance of new supply has been the main challenge (not credit deterioration) impacting returns this year. We believe that supply pressure should start to decline, where municipals may represent a suitable asset class at current valuations/yields with a declining rate environment for cash equivalents.
Historically, the performance of the two-year Treasury note yields typically foreshadows the Fed decisions. The two-year note yields ~3.65% (with the effective federal funds rate in the range of 4.0%‒4.25%), suggesting approximately two additional interest-rate cuts are likely at upcoming Fed meetings. Rate cuts aren’t all created equal. If the Fed is easing because it can (preemptive cuts to avoid recession), history indicates that it is good news for stocks. If the Fed is cutting because it must (in other words, tangible evidence of recession risk), the outlook for risk assets gets murkier. The U.S. dollar index (DXY) has been in a range for the last 5 months despite fears of sustained dollar weakness. If the Fed does not provide more easing, the U.S. dollar downside could be limited.
This past quarter, the biggest winners have been Chinese equities, U.S. small-caps, and the AI related technology/communication services sectors. Non-U.S. equities continue to be the dominant leader year to date. The first half of the year, it was Europe with European financials in particular driving returns, but in the third quarter, Asia picked up the slack. The rotation around the world has helped propel non-U.S. equities to near year-to-date highs.
Equities
The S&P 500 returned -0.3% for the week as markets took a breather after posting multiple all-time highs during the month. Despite data that showed the economy remains strong, traders seem to be awaiting fresh catalysts amid risks of a slowing labor market and stubborn inflation. Chair Powell indicated that balancing these two risks means that the Fed faces a difficult task ahead in deciding on future interest rate cuts. Energy (+4.7%) and utilities (+2.8%) were the best performing sectors in the S&P 500; communication services (-2.7%) and materials (-2.0%) were the laggards. EAFE markets returned -0.4% dragged lower by Europe (-0.4%), while EM markets returned -1.1%, led lower by India (-3.9%) and Korea (-2.0%).
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 +2.1, the NASDAQ at +1.3 and EM at +1.5. For the next 12 months, EPS growth for S&P 500 is expected to be 8.6% (vs. 6.9% annualized over the last 20 years). For the next 12 months, EPS growth for NASDAQ is expected to be 13.6% (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 negative returns as rates rose across the curve. Municipals returned -0.4%, U.S. AGG returned -0.3% and US IG returned -0.4%. HY bonds returned -0.2% while bank loans were flat. EM debt returned 1.0% as the U.S. dollar rose 0.5% due to spreads compressed 32bps.
Rates
Rates rose across the curve as traders worried about stubborn inflation amid a strong economy. The recession-watch 3M-10Y spread widened 7bps to +21. The 2Y-10Y spread compressed 2bps to +53. Rates rose in other developed markets. The BTP-Bund spread is at 0.84%. 5-year breakeven inflation expectations were flat at 2.47% (vs. low of 1.88% on Sept 10); 10-year breakeven inflation expectations fell 1bp to 2.38% (vs. recent low of 2.03% on Sept 10); the 10Y real yield rose 6bps to 1.79%. The market now expects between one and two further cuts in 2025 vs the Fed’s guidance of two cuts. At year-end 2025, the market expects the Fed Funds rate to be 3.68% vs. the Fed’s guidance of 3.5%-3.75%.
Currencies/Commodities
The dollar index rose 0.5%. The commodities complex rose 2.9% as energy prices rose 4.9% for the week. Brent prices rose 5.0% to $70/bbl. U.S. natural gas prices fell 1.8% while European gas rose 0.6%.
Market monitors
Volatility was flat for equities and bonds (VIX = 15, MOVE = 74); the 10-year average for each is VIX=19, MOVE = 80. Market sentiment (at midweek) rose from -1 to 3 as investors remain cautious.
Weekly Commentary
Investment Commentary – September 29, 2025
Stuart Katz
Executive Summary
The economy appears to remain resilient, and the Fed is cutting rates in the middle of an economy that is slowing but still expanding. Historically, such conditions have been bullish for risk assets. According to Franklin Templeton, in the last 50 years, there have been eight instances where the Fed resumed cutting interest rates after a pause. This is currently the ninth instance. They found that forward returns for the S&P 500 averaged 17% in similar periods of the past. When the Fed resumes cutting rates after a pause, the Nasdaq Composite Index has led with an average return of 25%. The Russell 2000 has averaged 20%. However, history shows that performance is not a straight line, but in the three to four months following a resumption of rate cuts, volatility has emerged. When the Fed has resumed cutting interest rates after a pause, U.S. Treasuries have averaged a 6% return in the following year. We believe clients, especially in high-tax states, should consider municipal bonds on a fundamental basis. In our view, the heavy issuance of new supply has been the main challenge (not credit deterioration) impacting returns this year. We believe that supply pressure should start to decline, where municipals may represent a suitable asset class at current valuations/yields with a declining rate environment for cash equivalents.
Historically, the performance of the two-year Treasury note yields typically foreshadows the Fed decisions. The two-year note yields ~3.65% (with the effective federal funds rate in the range of 4.0%‒4.25%), suggesting approximately two additional interest-rate cuts are likely at upcoming Fed meetings. Rate cuts aren’t all created equal. If the Fed is easing because it can (preemptive cuts to avoid recession), history indicates that it is good news for stocks. If the Fed is cutting because it must (in other words, tangible evidence of recession risk), the outlook for risk assets gets murkier. The U.S. dollar index (DXY) has been in a range for the last 5 months despite fears of sustained dollar weakness. If the Fed does not provide more easing, the U.S. dollar downside could be limited.
This past quarter, the biggest winners have been Chinese equities, U.S. small-caps, and the AI related technology/communication services sectors. Non-U.S. equities continue to be the dominant leader year to date. The first half of the year, it was Europe with European financials in particular driving returns, but in the third quarter, Asia picked up the slack. The rotation around the world has helped propel non-U.S. equities to near year-to-date highs.
Equities
The S&P 500 returned -0.3% for the week as markets took a breather after posting multiple all-time highs during the month. Despite data that showed the economy remains strong, traders seem to be awaiting fresh catalysts amid risks of a slowing labor market and stubborn inflation. Chair Powell indicated that balancing these two risks means that the Fed faces a difficult task ahead in deciding on future interest rate cuts. Energy (+4.7%) and utilities (+2.8%) were the best performing sectors in the S&P 500; communication services (-2.7%) and materials (-2.0%) were the laggards. EAFE markets returned -0.4% dragged lower by Europe (-0.4%), while EM markets returned -1.1%, led lower by India (-3.9%) and Korea (-2.0%).
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 +2.1, the NASDAQ at +1.3 and EM at +1.5. For the next 12 months, EPS growth for S&P 500 is expected to be 8.6% (vs. 6.9% annualized over the last 20 years). For the next 12 months, EPS growth for NASDAQ is expected to be 13.6% (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 negative returns as rates rose across the curve. Municipals returned -0.4%, U.S. AGG returned -0.3% and US IG returned -0.4%. HY bonds returned -0.2% while bank loans were flat. EM debt returned 1.0% as the U.S. dollar rose 0.5% due to spreads compressed 32bps.
Rates
Rates rose across the curve as traders worried about stubborn inflation amid a strong economy. The recession-watch 3M-10Y spread widened 7bps to +21. The 2Y-10Y spread compressed 2bps to +53. Rates rose in other developed markets. The BTP-Bund spread is at 0.84%. 5-year breakeven inflation expectations were flat at 2.47% (vs. low of 1.88% on Sept 10); 10-year breakeven inflation expectations fell 1bp to 2.38% (vs. recent low of 2.03% on Sept 10); the 10Y real yield rose 6bps to 1.79%. The market now expects between one and two further cuts in 2025 vs the Fed’s guidance of two cuts. At year-end 2025, the market expects the Fed Funds rate to be 3.68% vs. the Fed’s guidance of 3.5%-3.75%.
Currencies/Commodities
The dollar index rose 0.5%. The commodities complex rose 2.9% as energy prices rose 4.9% for the week. Brent prices rose 5.0% to $70/bbl. U.S. natural gas prices fell 1.8% while European gas rose 0.6%.
Market monitors
Volatility was flat for equities and bonds (VIX = 15, MOVE = 74); the 10-year average for each is VIX=19, MOVE = 80. Market sentiment (at midweek) rose from -1 to 3 as investors remain cautious.
Disclosure and Source
Investment Commentary Sources: Bloomberg. Investment advisory services offered through Robertson Stephens Wealth Management, LLC (“Robertson Stephens”), an SEC-registered investment advisor. Registration does not imply any specific level of skill or training and does not constitute an endorsement of the firm by the Commission. This material is for general informational purposes only and should not be construed as investment, tax or legal advice. It does not constitute a recommendation or offer to buy or sell any security, has not been tailored to the needs of any specific investor, and should not provide the basis for any investment decision. Please consult with your Advisor prior to making any Investment decisions. The information contained herein was carefully compiled from sources believed to be reliable, but Robertson Stephens cannot guarantee its accuracy or completeness. Information, views and opinions are current as of the date of this presentation, are based on the information available at the time, and are subject to change based on market and other conditions. Robertson Stephens assumes no duty to update this information. Unless otherwise noted, any individual opinions presented are those of the author and not necessarily those of Robertson Stephens. Indices are unmanaged and reflect the reinvestment of all income or dividends but do not reflect the deduction of any fees or expenses which would reduce returns. Past performance does not guarantee future results. Forward-looking performance targets or estimates are not guaranteed and may not be achieved. Investing entails risks, including possible loss of principal. Alternative investments are only available to qualified investors and are not suitable for all investors. Alternative investments include risks such as illiquidity, long time horizons, reduced transparency, and significant loss of principal. This material is an investment advisory publication intended for investment advisory clients and prospective clients only. Robertson Stephens only transacts business in states in which it is properly registered or is excluded or exempted from registration. A copy of Robertson Stephens’ current written disclosure brochure filed with the SEC which discusses, among other things, Robertson Stephens’ business practices, services and fees, is available through the SEC’s website at: www.adviserinfo.sec.gov. © 2025 Robertson Stephens Wealth Management, LLC. All rights reserved. Robertson Stephens is a registered trademark of Robertson Stephens Wealth Management, LLC in the United States and elsewhere. A2609
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