Weekly Recap:

by Michael Reinking, CFA and Eric Criscuolo

Published on 09/12/25

Last week was a short one with Labor Day unofficially ending Summer and kickstarting Fall. The S&P 500 rose modestly on the strength of Communication Services in particular (up ~5%), as well as Consumer Discretionary. However, the Comm Services outperformance was basically driven by Alphabet’s 10% gain (anti-trust court ruling) while Homebuilders pushed Discretionary higher as they benefited from sliding long-term yields (30y yield fell ~25bp from the high). Employment data was a big story, specifically the nonfarm payroll report, which came in well below estimates and drove the drop in yields, which was a tailwind for smaller cap stocks. It was also a nice use of foreshadowing. The Russell 2000 outperformed the S&P 500 by 80bp, while the equal-weight was about in line.

Labor Day usually brings the closure of pools and abandonment of lifeguard stands but technically we still have until September 22 to enjoy Summer. 2:19pm ET on the 22nd to be super-technical. This week the S&P 500 kept the pool party going, replacing one all-time high with another on Thursday. The AI narrative continued to be the story. In this week’s chapter Oracle was the main character, with a blowout bookings number. That sent the stock up over 30%. Like a Tarantino movie, the AI plot contains a lot of other characters. Broadcom continued to follow-through on last week’s strength, memory stocks rose and Microsoft announced a multi-billion dollar deal for compute infrastructure. Perplexity was reported to have raised a new round at a $20 billion valuation. The benefits are not just accruing to Tech. Electrical, energy and construction continued to capture tailwinds.

The S&P 500 gained ~2% this week as AI strength drove outperformance in large caps and Tech. Small caps benefited from the fall in rates last week but didn’t get that help this time. The Russell 2000 underperformed but still finished higher. There was significant outperformance in some of the riskier parts of the equity market. Numerous crypto-related companies- brokerages, treasury companies, miners- were up over 20%. While some of this were bounces after recent declines, the magnitude of some of the moves are noteworthy. Quantum computing stocks were also sharply higher, with most of the strength coming on Friday, when the rest of the market closed the week out uninspiringly- the S&P was flat but the Russell and equal weight fell as Tech and Discretionary sectors propped things up.  

While the record-setting summer party rolls on in the S&P, the labor market may be getting the sweaters out of the closet. The employment story has been one where companies are not laying-off workers but also are not hiring. That storyline could be changing like an approaching George RR Martin wedding scene (hopefully not that dramatically).

This week’s payroll revision and jobless claims (discussed below) doubled down on last week’s NFP report, clearly showing a labor market that was not as strong as once thought. The shaky data also makes last week’s decline in yields more interesting. The Fed now has a final outline to use to write its novella next week, and in all likelihood lower the policy rate 25bp and begin a rate cutting regime in time for the real transition from summer to fall. Lower rates should benefit equities overall and areas like housing and more speculative areas, but this has already been priced in to varying degrees (e.g. D.R. Horton, PulteGroup, Lennar up 20-40% over past 3 months). Over the past month the Russell 2000 has outperformed the S&P 500 by ~250bp. Questions about the durability of the AI story, resiliency of the consumer and inability to get inflation meaningfully lower before cutting rates  continue to reside underneath the surface.    

For the week every sector was higher aside from Consumer Staples which saw broad weakness. Constellation continued to fall after the company lowered its outlook last week on decelerating sales, keeping pressure on the broader beverage group. Tech was the leading sector, and in particular AI and semi-related stocks as we mentioned. Utilities were also a leading sector and continue to attract a lot of attention as an AI infrastructure story. However questions above capex and grid investments as well as consumers' ability to bear rate hikes are making the narrative less clear. Financials were another leader. Commentary at several sell-side conferences was rather positive on the broad economic outlook, in particular the health of the consumer. Healthcare was a laggard and continues to get hit with political headwinds.

There were a couple of big pieces of economic data that drove volatility in markets this week. Most of the data reinforced the growing stagflation narrative. We’ll break down the data in alignment with the Fed’s dual mandate as opposed to chronological order. 

On the heels of last Friday’s weak employment report the BLS released its benchmark revisions for the previous 12 months ending in March. Street estimates were looking for a negative revision of between 500k to 1ml jobs, with administration officials suggesting something in the middle of that range in recent days. With that backdrop the revision of -911k jobs was largely in line with expectations but also keep in mind that this revision will be revised again in February. Last year, the first revision was -818k but it moved down to -598k. Over the covered period ~1.76ml jobs had been reported, so this cuts job growth in half with average monthly job growth falling to 71k from ~146k. After the release, Goldman said its models suggest the revision should be closed to 550k,” cautioning against extrapolating too much from the benchmark revision.".  Sticking with their takeaway, also keep in mind, the revision impacts the establishment survey not the household survey, where unemployment is calculated, with that revision coming in January. Last year’s revisions led to a 0.1% decrease in the unemployment rate with immigration likely driving that decline. With the change in border policy, which will likely move in the opposite direction this year. All else equal, if we assume a 0.1% - 0.2% increase that would suggest an unemployment rate of 4.5% (at the upper end), which is in line with the Fed’s last SEP estimate.

 

However, with the recent signs of weakening in the labor market, that “all else equal” is clearly in question. This week there was a large jump in initial claims to 263k from 236k last week driven by a large increase in Texas. The state, which has been diversifying from its energy roots over the last few years, has been a bright spot in economic growth, so this is something to watch. However, keep in mind some of the increases could be related to the end of summer transition. Continuing claims held steady around 1.94ml. As we’ve highlighted over the last couple of weeks, initial claims have been trending higher since troughing in mid-July and are now up 20% from that level. Up until this point the argument has been that the labor market has remained resilient and while job creation has slowed there hasn’t been a pickup in layoffs/separations. This could mark a turn in that argument and will catch the attention of the Federal Reserve, which has already acknowledged at least a temporary shift in focus to the labor side of the equation.

Given the shift in focus by the Federal Reserve and Chair Powell’s comments that he expected inflation to move higher in the coming months there seemed to be some asymmetric risk to this week’s inflation data where markets would largely discount a hot print and might reward a cooler number. On Wednesday headline PPI was up 0.1% m.m in August, below expectations of +0.3%, a moderation from the hot downwardly revised 0.7% increase last month.  Core was down -0.1% and below expectations while ex-Food, Energy and Trade rose 0.3%, below last month’s 0.6% increase.  As has been the case for the last few months Final Demand Trade Services was responsible for a lot of the movement. Last month it was up 1.0% (revised down from 2.0%), but this month it fell 1.7%. This is essentially a measurement of wholesaler/retailer margins and has been scrutinized to see whether businesses are eating tariff costs or passing them on to consumers.  Final Demand Goods less food and Energy rose 0.3% m.m, down from 0.4% last month. Given the volatility in this data, it is painting a hazy picture.

The CPI report wasn’t nearly as positive but squarely fell in the better than feared bucket. Headline CPI accelerated in August up 0.4% m/m, up from 0.2% in the previous month, and ahead of expectations of 0.3%. The annual reading was in line with expectations 0.2% higher than the prior month’s 2.9% reading, driven by an increase in both food and energy costs. Core was in line with consensus estimates and held steady from last month up 0.3% m/m and 3.1% y/y. Within core goods inflation picked up to 0.3% from 0.2%. There were increases in many of the tariff related areas including autos and apparel. However, you could see signs of the underlying weakness in housing related products. After a large jump last month household furnishings and supplies moderated while appliances fell 1.8% after increasing by the same amount last month. However, within services we still do not see the offsetting housing disinflation everyone has been looking for with shelter ticking back up to 0.4% from 0.2%. Medical care goods and services both fell, helping to counterbalance some of the other increases.

Fed & Treasuries  

This week’s data increased the volume of the debate as to whether the Fed should cut by 50bps next week however, that view didn’t show up in futures markets.  Instead, traders increased the probability of cuts at all three of the remaining Fed meetings this year, a view which is being blessed by multiple investment banks this morning.

As we start to think about next week, if this week’s data shifted some of the views on the Board, you’d expect that to get leaked in some way as the Board typically does not want to surprise the market. Since we haven’t seen an influential investment bank go out with that call yet and there hasn’t been a story floated in the WSJ/FT it seems pretty unlikely but there is still some time.

That being said, we still don’t know for sure what the makeup of the voters will be next week. For the moment Lisa Cook will be participating but the administration has filed an appeal after the ruling earlier this week. The Senate Banking Committee advanced Stephen Miran’s nomination this week and his Senate confirmation could take place on Monday which would give him access to the two-day meeting.  If in fact the Fed cuts by 25bps, it would not be surprising to see a couple of 50bps dissenters.

This week there was a flattening of the yield curve. The 2yr yield was up ~5bps to 3.56%, essentially reversing last week’s post jobs move lower. The 10yr yield was about flat while the 30yr fell 7bps to 4.69%. This week’s 3/10 yr Treasury auctions were very well received pricing below the when-issued market with very strong underlying metrics. The 30yr was also solid but wouldn’t make honor roll. 

Before we get to next week, this week marked the 24th anniversary of 9.11, a day that changed everything for so many. Our thoughts are with those who lost loved ones, and we’re eternally grateful for the first responders and service members who run straight into danger so we can be brought to safety. #NeverForget.

The main event will be the Federal Reserve’s interest rate decision and Chair Powell’s follow-up press conference. A 25bp cut is essentially fully priced in with only slight odds for a 50bp cut. The updated economic projections from the committee will be heavily dissected, as will Powell’s commentary during his press conference. Staying with the Fed, Stephen Miran’s confirmation as new Fed governor could happen by Monday, so there’s a possibility he gets to join the meeting. The rest of the economic calendar will be pretty light, with Retail sales a headliner as well as the weekly jobless claims, especially after this week's jump. FedEx will report earnings, which always provides a broad look at business conditions. The Banks of Japan and England will also have a policy rate decision, and the week ends with a triple witch expiration and S&P quarterly rebalance.    

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