Diamond Capital Management's Market Commentary
September, 2025
Andrew Khosrofian, CFA, CAIA
Vice President, Portfolio Manager
Executive Summary:
- Q2 GDP was revised up to 3.2%, driven by strong consumer spending and a better trade balance.
- The Federal Reserve is expected to cut rates by 25 basis points in September, as soft labor market data and slowing economic indicators point to reduced momentum.
- The S&P 500 is up 10.8% YTD, fueled by strong Q2 earnings and Fed rate cut expectations.
August delivered a positive surprise as U.S. second-quarter GDP was revised up to 3.2% annualized growth, driven by strong consumer spending and a better trade balance. This momentum has reinforced confidence in the economy’s resilience. Recent U.S. trade agreements have also added stability to global supply chains. While average tariff levels remain elevated at 20.1%, consumer prices have held steady, with July inflation at 2.7%. Though still above the Fed’s 2% target, inflation appears to be stabilizing. Looking forward, new trade deals with the UK, EU, Japan, and South Korea are expected to open markets for key U.S. industries such as agriculture, autos, and aerospace—potentially boosting exports and supporting domestic jobs. However, some lingering effects of tariffs may continue to influence inflation into year-end.
Labor market data, meanwhile, has introduced caution. The early September jobs report showed just 22,000 jobs added in August, with unemployment rising to 4.3%. Revisions to prior months—including a 13,000-job loss in June—point to a softer labor market than previously understood. The Conference Board’s Leading Economic Index also dipped 0.1% in July, reflecting weaker trends in consumer expectations, new orders, and building permits. Together, these signals have prompted a more dovish tone from the Federal Reserve, with markets widely expecting a 25-basis-point rate cut at this month’s meeting.
Despite these headwinds, equity markets have remained strong. The S&P 500 is up 10.8% year-to-date, supported by cyclical sector strength and expectations of monetary easing. Second-quarter earnings rose 11.7% from a year earlier, with nearly 80% of companies beating estimates. While third-quarter earnings growth is expected to slow to 5–7%, anticipated rate cuts may help support valuations in the face of trade and labor uncertainty. International equities have also performed well, supported by lower valuations, a weaker U.S. dollar, and investor rotation away from U.S. markets. With a mix of positive and cautionary signals, this environment reinforces the importance of diversification and staying focused on long-term goals.
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