Five for Friday

Rate Cuts, A Historic Rally, Consumer Confidence, Breadth, Bubbles

1. Cuts

The Federal Reserve cut interest rates this week for the first time in 2025, and honestly, there’s not much of a take: it was widely expected by markets, and the Fed did a pretty decent job of treading lightly between concerns over weakening labor markets and the potential for tariff-driven inflation (while also avoiding most political landmines). Perhaps the biggest takeaway was that the Fed is now “forecasting” an additional rate cut in 2025 vs. their June projection, and signaling an overall more aggressive pace of easing through 2027. For investors, this will show up most directly in the yield on money market funds, which tend to track the fed funds rate. Assets in these products (which are not the same as cash but are widely treated as a place to store money) are nearly $8 trillion, up from just over $3 trillion in 2019. In a world of stickier inflation and lower rates (if that’s where we’re headed), these funds won't be the best place for long-term dollars.  

2. Momentum

Over the five months ending Sept. 8, 2025, the S&P 500 returned 30.4%. Since 1950, I estimate that the S&P 500 has only clocked a five month return north of 30% on 90 other dates across five unique periods—fewer than 0.5% of total trading days. In all 90 of those instances, the S&P 500 was positive over the next year, with an average return of +15%. Said another way, since 1950, the S&P 500 never rallied 30%+ over five months without being higher a year later. We can’t know what will happen for incident #91, but the historical trend is not bad at all.

3. Confidence

Last week, the University of Michigan’s widely followed survey reported a monthly reading of 55.4, the sixth-worst reading in the last 45 years. This generated a raft of spooky headlines, but consumer confidence data has historically had little-to-no correlation with stock market performance (see the mostly random-looking dot placement in the chart). But many of the worst months for this reading (at the left end of the chart) were great times to invest, including the early 1980s, early 2009, and mid-to-late 2022. Further, data out this week showed retail sales (i.e., consumer spending) accelerated at a pace above estimates. How people feel about the world is important, but it’s even more important to watch what they tend to do—and history suggests that sentiment surveys have been better for a juicy headline than for getting a market call right.

4. Un-magnificent

In recent weeks we’ve called attention to how many different companies, sectors, and countries are rising across the stock market to show that this rally is not “only a few Big Tech / AI stocks.” We’ll keep the trend going here. Did you know that there is not a single Magnificent 7 company in the 50 top-performing S&P 500 stocks this year? But the list does include aerospace & defense stocks, luxury apparel stocks, building products stocks, utilities stocks, banking/brokerage stocks, movies & entertainment stocks, and so on. A broader market is a healthier market, all else being equal, and the range of industries performing well in the current environment shows both that the impact of AI is widening (e.g., data centers need power…utilities outperform) and that the underlying economy may be in better shape than the prevailing narrative suggests. An AI boom with non-recession rate cuts is a powerful mix.  

5. On this day

305 years ago, a run began on the Sword Blade Bank – the South Sea Company’s main banker – marking the beginning of the end of one of the biggest financial bubbles ever. Studying bubbles is instructive because regardless of the underlying asset, the “bubbliness” almost always stems from human folly and herd behavior. The South Sea Bubble also spawned one of the great lines in finance history, from an investor who reportedly lost an inflation-adjusted amount in the millions – Sir Isaac Newton. As he quipped, “I can calculate the movement of stars, but not the madness of men.”  

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