Monthly Market Summary

▪ The S&P 500 Index rose +2.1% in August, bringing its year-to-date return to +10.7%. Large Cap Value stocks led with a +3.2% gain, while Large Cap Growth gained +1.2%.

▪ Health Care was the top-performing sector. Six additional S&P 500 sectors also outperformed the index, while Utilities and Technology both traded lower.

▪ Bonds traded higher as Treasury yields declined, with the U.S. Bond Aggregate returning +1.2%. Corporate bonds modestly underperformed, with investment-grade posting a +1.0% total return and high-yield gaining +1.1%.

▪ International stocks outperformed the S&P 500 as the U.S. dollar weakened. Developed Markets gained +4.5%, while Emerging Markets returned +2.7%.

Federal Reserve Prepares to Cut Interest Rates as the Labor Market Softens

The Federal Reserve has kept interest rates unchanged this year due to concerns that tariffs could reignite inflation. This concern, along with strong job growth and low unemployment, gave the central bank time to wait for more data. However, the Fed’s policy stance was tested in early August when the July jobs report showed U.S. employers added fewer jobs than expected and unemployment rose to 4.2%. The report suggested high borrowing costs are weighing on the economy and shifted the focus from inflation risk to slowing economic growth.

These concerns resurfaced three weeks later at the Fed’s annual Jackson Hole meeting, when Chair Powell acknowledged the balance of risks may warrant a policy adjustment. His comments hinted that a rate cut could come as soon as the Fed’s September 17th meeting. The market quickly connected the dots: a softening labor market made it easier for the Fed to pivot and opened the door to a rate cut. Stocks and bonds traded higher in anticipation that the Fed would resume its interest rate-cutting cycle.

Small-Cap Stocks Post Biggest Month of Outperformance Since November 2024

Small-cap stocks have trailed large caps for most of the past three years. Since the start of 2023, the Russell 2000 index has gained +40%, significantly underperforming the S&P 500’s +75% return. Higher interest rates have weighed more heavily on smaller firms, many of which depend on floating-rate debt to finance their operations and growth. At the same time, a handful of mega-cap tech stocks have delivered strong earnings growth and returns, fueled by the artificial intelligence industry. As investor attention and capital concentrated on these large names, small caps were left behind, resulting in one of the widest valuation discounts to large caps in over 20 years.

The soft July jobs report and Chair Powell’s Jackson Hole remarks shifted the market narrative, with investors expecting a rate cut as soon as September. The Russell 2000 jumped more than +7%, its best month this year, and outperformed the S&P 500 by over +5%. Small caps tend to benefit more from lower interest rates, and rate cut expectations attracted value seekers to small caps’ valuation discount. This isn’t the first time small-cap stocks have rallied, with recent rallies fading as mega-cap tech reclaimed market leadership. Whether this rotation lasts will depend on upcoming inflation and job reports and how the Fed responds, but small caps’ recent strength shows investors are once again testing the waters for a small-cap comeback.

Firm Disclosures

Views expressed are as of the date indicated, based on the information available at that time, and may change based on market or other conditions. Investment decisions should be based on an individual’s own goals, time horizon, and tolerance for risk. Investing involves risk, including risk of loss. Investment advisory services provided by Provident Financial Planning, LLC, a SEC-Registered Investment Advisor.

The information and opinions provided herein are provided as general market commentary only and are subject to change at any time without notice. This commentary may contain forward-looking statements that are subject to various risks and uncertainties. None of the events or outcomes mentioned here may come to pass, and actual results may differ materially from those expressed or implied in these statements. No mention of a particular security, index, or other instrument in this report constitutes a recommendation to buy, sell, or hold that or any other security, nor does it constitute an opinion on the suitability of any security or index. The report is strictly an informational publication and has been prepared without regard to the particular investments and circumstances of the recipient.

Past performance does not guarantee or indicate future results. Any index performance mentioned is for illustrative purposes only and does not reflect any management fees, transaction costs, or expenses. Indexes are unmanaged, and one cannot invest directly in an index. Index performance does not represent the actual performance that would be achieved by investing in a fund.

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