August 2025 Financial Focus
Digesting Data From All Angles
Macro Economic Review
Ever since COVID-19, the Federal Reserve and it’s Chairman, Jerome Powell, have been center stage in nearly every financial conversation. For newer investors, here's a quick refresher: the Federal Reserve sets the Federal Funds Rate (FFR), which influences short-term interest rates, and controls the money supply in the economy. Its two primary objectives? Keep inflation low and unemployment low. Sounds easy, right? Not quite.
Picture a see-saw with inflation on one side and unemployment on the other. The Federal Reserve
shifts the balance point by raising or lowering interest rates; trying to keep the see-saw as level as possible. If they lean too far toward inflation by lowering rates, prices heat up while unemployment tends to fall. Tilt too far in the other direction by raising rates, and inflation cools off, but unemployment starts to rise. It’s a constant balancing act between two opposite reacting forces. The Fed makes these adjustments using incomplete data; always trying to keep the economy steady without tipping too far one way or the other.
At the start of the year, the consensus from many financial institutions called for three rate cuts in 2025. We thought that was optimistic. However, Powell recently spoke at the Fed’s annual Jackson Hole meeting, where investors listened closely for any signs of a shift. His comments were measured, but his acknowledgment that the FFR is "in restrictive territory" suggests a rate cut is on the table. That’s about as close as you’ll get to Powell openly saying a change is coming. Behind the scenes, two members of the Federal Open Market Committee (FOMC) dissented at the last meeting in July. They opposed the decision to hold rates steady and rather opted for a 25 basis-point reduction. Historically, when two or more members of the Fed dissent, the next FOMC meeting almost always results in a policy shift.
The decision to cut rates or hold steady hinges on three key considerations. First, the labor market. Forecasts are beginning to show signs of weakness, with rising concerns about unemployment. This supports a case for a rate cut. Second, the tariff landscape. While Trump-era tariffs haven’t yet caused a clear rise in inflation, the Fed is watching closely. We can’t forget about the lag! That’s a mark against cutting rates. Third, companies and earnings remain strong-Q2 was healthy. However, broader GDP projections have been revised downward, which adds some uncertainty. This puts the Fed in a juxtaposition, and could push the case either for or against a cut.
The challenge is that the Fed makes these decisions based on lagging data, while trying to address future problems. It’s like steering a car based on where the road was ten seconds ago. That makes every move a calculated risk.
Right now, a 25 basis point cut is priced in by about 80% of analysts on “the Street” heading into the Fed’s September meeting. If the data continues trending in the right direction, that cut could be the next step in Powell’s soft-landing strategy.
“We Invest In The World We Have,
Not The World We Want"
Q2 Earnings Review
If there’s one word that sums it up, it’s dispersion.
This quarter didn’t reward the middle ground. Companies either beat expectations and got a pat on
the back, or missed and paid dearly. The gap between
winners and losers is as wide as we’ve seen in years.
Let’s look at the scoreboard. More than 80% of S&P
500 companies exceeded estimates. Those who beat
estimates traded in line with historical trends. The
market reaction was harsh for those that missed the
mark. They dropped over 6% on average the following day, nearly three times the typical decline. It’s a clear
reminder that in today’s market, expectations don’t just matter, they drive the narrative.
Still, despite that tougher grading scale, Q2 came in stronger than anticipated. Earnings growth doubled early forecasts, and revenue growth surpassed what we’ve seen over the past four quarters. Consumer spending remained solid, corporate investment stayed strong, and even with tariffs looming, companies demonstrated impressive resilience.
That said, the nuance matters. The Magnificent Seven continue to carry much of the load. Their EPS
grew by 26% this quarter, while the rest were underwhelming . The long-awaited “broadening out” of performance beyond mega-cap names is still the story, just one that keeps getting delayed.
In the end, Q2 didn’t just clear a low bar, it leapt over it.
With the speed of information amplifying both good and bad news, stocks/markets are reacting more sharply than ever. This is seemingly the new normal. We believe a portfolio built not just for growth, but for resilience, is imperative. One that holds up in down markets and does not cap long-term returns will be the key to successful long-term investing.
Closing Remarks
As we look back at August and ahead toward the final stretch of the year, it feels good to be where we are. April’s turbulence seems like a distant memory now, and speaking for myself, it finally feels like we’ve shaken off that uneasy stretch in the markets. It’s a strange feeling being less than 2 percent off all-time highs, but strange in the best way.
Q2 returns came in strong, and most projections followed suit. When it comes down to it, the markets respond to one thing: profits and growth. As long as the economy continues to deliver on both fronts, we believe we’re on the right track.
As for the Fed’s next move, our office saying has been pretty consistent. Rates right now are slightly above long-term averages, and yes, they are restrictive to economic growth. But the good news is that we’re working with a healthy economy. It is normal for the Fed to raise or lower rates by 25 to 50 basis points throughout the year. A reduction at this point seems warranted. What was not normal was a 5 percent hike in less than 18 months and 9 percent inflation. That was the real disruption.
All that to say, we’re in a much better spot now, and the road ahead looks far more manageable. As always, we’re here to guide you through it. Happy Labor Day.
Partnering with you on your financial journey.
Pertinent Information
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