The continuation of the market rally in August was driven by strong earnings from tech companies, especially those involved with AI, and growing investor optimism about upcoming interest rate cuts by the Federal Reserve.
From its low point on April 8th, the S&P 500 index has advanced 29.7% over the 99 days from April 9th through August 29th. Concentration risk remains a concern within the U.S. equity space as the top 10 companies in the S&P500 account for nearly 40% of the index’s market capitalization. In August, four of these—Apple, Alphabet, Tesla, and Berkshire Hathaway—were responsible for 81% of the S&P 500’s total return. While the rally initially began in a narrow fashion, it slightly broadened in August with small-cap and mid-cap stocks outperforming large-cap stocks. U.S. Large Cap equities finished the month up 2.1%, U.S. Mid-Caps up 2.5%, and U.S. Small Cap equities finished August up 7.1%, outperforming impressively. Large-cap stocks still maintain a big lead over their smaller-cap peers for the trailing 12 months ending August. After trailing their large-cap peers for the last few years, small-cap stocks may finally look more appealing to investors due to more attractive valuations and the anticipation of future interest rate cuts.
International equities (MSCI ACWI Ex-US) also had a strong month, returning over 3.5% for August, bringing the year-to-date returns to over 22% for 2025. Emerging Markets (MSCI Emerging Markets) continued their relative performance and were up over 1.5% for the month of July and up almost 19% for the year. International equities, as a whole, posted positive returns for the month mainly due to a weakening in the U.S. dollar. U.S. Dollar depreciation remains one of the biggest tailwinds for international equities for 2025.
As stocks continued to advance in August, bonds also participated in strength of performance. The 10-year Treasury yield remained rangebound. After rising from 4.23% at the end of Q2 to 4.36% in July, it edged back down to finish August at 4.23%. Meanwhile, the Bloomberg U.S. Aggregate Bond Index gained 1.2% for the month and is up 5.0% year-to-date. Municipal bonds also had a relatively strong performance for the asset classes, although more moderate when compared to their taxable counterparts. That being said, income levels are attractive for both taxable and tax-exempt fixed income. Given the starting yield of 4.44% on the U.S. Aggregate Bond index, the 10 yr. Treasury yield would need to rise over 5.00% over a 12-month basis to see a negative total return (holding bond spreads constant).
From a macro standpoint, the month began with heightened growth concerns following a weaker-than-expected July nonfarm payrolls report and significant downward revisions to May and June’s figures. This triggered a spike in Fed rate-cut expectations, reinforced by increasingly dovish Fed commentary. Trade developments also drew attention: after the August 1 deadline, Trump reinstated reciprocal tariffs on several countries, while a separate 90-day delay on China tariffs was agreed upon. Focus remained on bilateral deals still lacking key details. Tariffs dominated the Q2 earnings season, with many companies citing cost pressures. However, retail firms’ mitigation strategies were well received, as were signs of continued consumer spending despite evidence of consumers trading down to lower-cost options. Overall, Q2 earnings metrics were resilient.
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