Week Ending September 12, 2025

Summary

U.S. equities extended their advance into new record territory this week, with the S&P 500 and Nasdaq Composite both closing at all-time highs.

The Dow Jones Industrial Average also crossed the 46,000 mark for the first time. Investor sentiment was shaped by mounting expectations for a Federal Reserve rate cut at next week’s FOMC meeting, reinforced by weakening labor market data and steady—though still elevated—inflation readings. Beneath the headline strength, however, notable fund flow divergences and sector rotations suggest that positioning remains cautious.

Market Performance

S&P 500 and Nasdaq Composite: closed at record highs, driven by growth and technology leadership.
Dow Jones Industrial Average: surpassed 46,000, signaling broad index momentum.
Sector trends: Technology, AI, and semiconductors led the rally, while financials, industrials, and consumer cyclicals lagged, reflecting interest rate sensitivities.

Macro Data & Policy Drivers

Labor Market Weakness: August payrolls added just 22,000 jobs, far below consensus expectations of 150,000. The unemployment rate climbed to 4.3%, and job openings fell below the number of unemployed for the first time since 2021. These developments underscored a softening demand environment and provided the Fed with justification to pivot.
Inflation Trends: CPI data showed headline inflation holding above the Fed’s 2% target, but core readings were broadly in line with forecasts. Price pressures in shelter and wages remain persistent but are no longer accelerating, reducing the urgency for additional tightening.

Fed Policy Outlook

Market pricing: Futures markets now imply a near-certain 25 basis point cut at the September 17 FOMC meeting, with roughly a 30% probability of a larger 50 basis point move.
Street consensus: Several sell-side firms project a series of quarterly cuts extending into 2026, though the ultimate pace will hinge on inflation persistence and labor market deterioration.

Flows & Positioning

Equity funds: Posted their largest outflow in five weeks, totaling approximately $11 billion, suggesting some investors are de-risking at record valuations.
Bond and money market funds: Recorded strong inflows, consistent with a rotation toward duration and perceived safety ahead of the policy pivot.
Implication: Positioning signals that despite headline equity strength, investors are hedging exposure and seeking protection.

Risks to Monitor

“Sell the News” Reaction: Markets could retrace if the Fed delivers only 25 bps without sufficiently dovish forward guidance.
Valuation Fragility: AI and semiconductor equities trade at stretched multiples, leaving them vulnerable to earnings disappointments or shifts in sentiment.
Sticky Inflation: Resilience in shelter costs and wages could limit the scope of easing, challenging the Fed’s ability to cut aggressively.

Outlook

The upcoming FOMC decision represents a pivotal moment for risk assets. A dovish cut combined with clear forward guidance could extend the rally into Q4, while any hesitation risks triggering near-term volatility. Investors should monitor CPI, retail sales, and corporate commentary for signals confirming whether the economy is slowing in line with expectations. For institutional allocators, balancing growth exposure with protective hedges remains critical as markets approach an inflection point.

U.S. Equities Push to Record Highs as Fed Easing Cycle Nears