In the first few days of President Trump’s second term, the newly reinstalled President generated news at a head-spinning rate. This week was another one of those head spinning times. In the last two days President Trump proposed raising new H-1B visa fees to $100,000, is seeking an equity stake of roughly 10% in Lithium Americas Corp. (LAC.N – $3.07), a Canadian-based lithium company, as part of the company’s $2.26 billion Energy Department loan negotiation, announced a willingness to assist Argentina with its weakening peso, warned about the safety of paracetamol during pregnancy, canceled a meeting with Democrats who want to add $1.5 trillion more spending concessions to the seven-week continuing resolution, stated that Russia faces “big” economic problems at home and implied this could help Ukraine retake all its occupied lands, and in an historic speech at the UN (worth watching in full) blasted the assembly for its lack of peace efforts, called climate change the “greatest con job” ever, condemned moves to recognize a Palestinian state, and lectured Europe on buying Russian oil which supports Russian warfare on their borders and for allowing mass migration which is ruining European countries and cultures.

Each of these items is worthy of further discussion since each has economic implications. But the most immediate of these is the battle in Congress regarding the seven-week continuing resolution (CR). The House’s Republican-backed bill was rejected in the Senate by a 44-48 vote. A competing CR introduced by Senate Democrats also failed to pass and now Congress has until September 30 to pass a funding proposal in order to avert a government shutdown.

Keep in mind that aside from keeping the federal government running, the House-passed bill would have extended key health care programs that are currently set to expire at the end of this month. These include programs that provide inpatient payments to small, rural hospitals with a high percentage of Medicare patients, telehealth and hospital-at-home flexibilities, and the Cybersecurity Information Sharing Act. However, instead of negotiating, both political parties are blaming the other for a government shutdown, which is beginning to feel inevitable.

In other news, Nvidia Corp. (NVDA – $178.43) announced a $100 billion investment in OpenAI LLC, with the first $10 billion going toward building a gigawatt of capacity using its next-generation Vera Rubin chips. The build-out is estimated to start in the second half of 2026. Perhaps more interesting is the fact that while this announcement triggered a tech rally, it proved to be short-lived, and stocks gave up their gains by the end of the session.

September has a history of being a volatile month, and though it has produced gains so far this year, we would not be surprised if the market took a short pause as it awaits news on a possible government shutdown. Plus, this Friday the BEA will release data on personal income, personal expenditures, and the Fed’s favorite benchmark, the PCE deflator. At the end of next week, the BLS will release the jobs report for September. These two reports will be the basis for what analysts will expect at the next FOMC meeting on October 28-29. At present, we expect another 25-basis point cut in the fed funds rate, but calm inflation and a weak employment report could shift the consensus toward a larger cut. Either way, a dovish Fed should be good for equities. But in the interim, there may be little to drive stock prices substantially higher.

Recently reported housing data reveals a slow but steady deterioration in this important segment of the economy. In July, the total annualized rate for construction was $2.2 trillion, down 2.8% YOY. The residential construction rate was $899 billion, down 5.1% YOY. These numbers represent the sixth consecutive monthly decline in total and residential construction spending. Housing starts fell 6% YOY in August, and single-family starts fell 11.7% YOY. Permits were similarly down 11.1% YOY in total and down 11.5% for single-family units. These represented the worst declines in starts and permits since the third quarter of 2023 and suggest that the housing industry could remain in a slump for the rest of the year. See page 3.

Data for existing and new home sales in August will be reported later this week; but in July, the annualized rate for existing home sales was 4.0 million, up a mere 0.8% YOY. New home sales were 652,000, down 8.2% YOY. The average existing single-family home price was $559,900 in July, up 0.3% YOY; and the average new single-family home price was $487,300, down 5% YOY. Overall, the trends in both residential sales and prices are negative or decelerating and we will look to see if new data supports or stabilizes this trend. See page 4.  

The inventory of existing single-family homes rose to 1.36 million units in July, which equals 4.5 months of supply. This is up substantially from 990,000 units of inventory reported in December, which was 3.1 months of supply. Inventories are up 15% YOY while sales, at 4.0 million units, are roughly the same as a year ago. See page 5.

The National Association of Home Builders confidence survey showed the headline index was 32 and unchanged in September. Present sales were unchanged at 34, sales over the next six months rose 2 points to 45 and traffic of potential buyers rose 1 point to 21. In short, this survey suggests that the weak numbers seen in residential construction in August are likely to continue in September. See page 6.

Import prices for the month of August showed no change on a year-over-year basis, but June and July data were revised lower and July import prices fell 0.6% YOY. Conversely, exports prices rose 3.4% YOY in August, up from a rise of 2.4% YOY in July. This data is before tariff pricing, but it shows that those selling to the US are keeping prices low, whereas US sellers are able to raise prices. Moody’s Analytics has an interesting chart on global CPI which shows worldwide inflation was less than 3.6% YOY in August, down from July, and decidedly lower than the 4.2% YOY seen in January before tariffs were introduced. Moreover, Moody’s reports that Africa leads in inflation at 10.6% YOY, down from 11.3% YOY in July. Again, hard data does not support the view that tariffs are generating inflation.

Consensus earnings estimates continue to inch higher, and the S&P Dow Jones estimate for calendar 2025 is now $258.30 and the LSEG IBES estimate is at $267.86. For 2026, these consensus forecasts are calling for earnings of $302.91 and $304.88 per share. The IBES estimate for 2027 is $345.27, up $1.11 this week. Although PE multiples are rich, in our view the forward earnings yield of 4.5% and dividend yield of 1.2% compare well to a 10-year Treasury bond yield of 4.15%. Plus, the 12-month sum of operating earnings shows a gain of 10.5% YOY, better than the 75-year average of 8.1% YOY. See page 7. Most technical indicators, with the exception of the 25-day up/down volume oscillator, support the bullish view. The oscillator has not confirmed the August-September highs, which suggests a pullback may be ahead. Nevertheless, we would be a buyer of weakness in coming weeks.

Gail Dudack

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The September Federal Reserve meeting is finally here and, in our view, the long-anticipated 25-basis-point cut in the fed funds rate is fully priced into stock prices. Nevertheless, barring some radical change in the economy, it is easy to build a case for 25-basis-point cuts in each of the next two Federal Reserve meetings this year. And since stocks tend to perform well in the six months following the first in a series of rate cuts, many forecasters, us included, are bullish for the rest of the year.

This bullish historical pattern related to Fed rate cuts may be why this September – a month that is typically the worst performing month in the calendar — has been kinder to equity investors than normal, at least to date. But there are a number of roadblocks ahead this month. The fighting in both the Middle East and Ukraine appear far from over and in some ways is growing more dangerous than ever. The fiscal crisis facing France continues, even with the appointment of a new Prime Minister. Fitch’s downgrade of France’s credit rating may be the first of several downgrades, and it is increasing France’s borrowing costs and deepening the crisis. And as President Trump arrives in Britain for an unprecedented second state visit, both the UK and the US face a similar combination of massive debt, weakening economies, and social unrest.

As we discuss this week, the fiscal year ends in September, and the government will shut down at 12:01 a.m. October 1^st without a new law to keep funds flowing. House Republicans are unveiling legislation to fund the government through November 21^st and it add security resources for government officials. But it is unclear if they have the votes to pass it. Democrats are demanding that any spending extension should tackle expiring health care subsidies that are due to expire at the end of the year.

The US debt crisis is real. In fiscal 2024, gross federal debt represented 122% of GDP and the Biden administration estimated this would soon rise to 130%. Debt held by the public (which includes the Federal Reserve but no other government agencies) was 97.8% of GDP in the same period.

Treasury Secretary Scott Bessent has indicated he has a long-term goal of lowering annual deficits to 3% of GDP. However, the administration’s attempt to balance the budget is proving difficult. Even though tariffs and capital gains taxes are adding to Treasury revenue, outlays for Social Security and Medicare are up 8% and 10%, respectively, in fiscal 2025. At the end of August, the 12-month sum of deficits equaled 6.3% of GDP, down from 7.2% in January, but still historically high. See page 3.

And since federal deficits remain large, public debt issuance jumped to $572.8 billion in July and remained high at $439.3 billion in August. (September auctions are estimated to be roughly $150 billion.) Quarterly data from the St. Louis Federal Reserve shows debt in Treasury bills was $5.78 trillion in June after peaking at $6.19 trillion in December. At mid-year this represented 16.4% of total federal debt, down from 17.5% at the end of 2024. The 3-month Treasury bill rate was 4.3% in June and the current 3-month constant maturity rate is 4.1%. More importantly, in fiscal 2024, interest expense represented 3.1% of GDP, higher than the 3.0% of GDP spent on defense. And though fiscal issues are not in the Federal Reserve’s mandate, this helps explain why interest rates are important to the federal deficit and why President Trump would like to see the fed funds rate lower.

In our opinion, the recent statement from the Bureau of Labor Statistics estimating a revision of 911,000 fewer jobs for the 12 months ending in March 2025, is a disturbing development. This means that job growth averaged 70,000 per month for most of 2024 and not the 147,000 as reported. This is certainly a reason for the Fed to be cutting rates.

And while inflation data for August was mixed it should not derail the Fed from lowering rates. Headline CPI rose 2.9% YOY in August, up from July’s 2.7% and the highest since January’s 3.0%. Core CPI was unchanged at 3.1% YOY. Only three segments of the CPI index showed inflation growing at or below 2% in August. Transportation, food away from home, medical care, and other goods and services all showed prices rising more than 3% YOY. However, while housing, with a weighting of 44.4% in the CPI, rose 4% YOY, it continued to ratchet lower. See page 4.

The problems in the CPI are concentrated in the service sector, areas such as motor vehicle maintenance and repair where prices rose 8.5% YOY in August. It is noteworthy that energy commodity prices fell 6.2% YOY in August, but energy services rose 7.7% YOY. While new vehicle prices rose only 0.7% YOY, used car prices rose 6% YOY. All in all, inflation issues do not appear to be tariff related. See page 5.

CPI, PPI, and import price indices have remained below the 3.5% long-term average for nearly two consecutive years; and with the fed funds rate at 4.33% and the PCE deflator at 2.6%, there is room for the Federal Reserve to have not one, but three consecutive 25 basis point cuts this year. See page 6.

Consumer spending was better than expected in August. Total motor vehicle unit sales were 16.5 million in August, up 5.5% YOY. And the impact of auto tariffs is clear from data that shows domestic light weight truck sales rose 12.5% YOY while foreign light weight truck sales fell 1.5% YOY. August retail sales surprised to the upside with headline sales increasing 5% YOY and sales excluding autos up 4.9% YOY. Retail sales for auto and other motor vehicle dealers rose 5.0% YOY in the first eight months of 2025. Miscellaneous store retailers saw sales increase 8.4% YOY in the same period and nonstore retailers had a 6.9% increase in sales year-to-date. See page 7. The consumer appears resilient.

Corporate earnings have also been resilient. In September, the 12-month sum of S&P 500 operating earnings showed a gain of 10.5% YOY. This was much better than analysts expected and is above the 75-year average of 8.1%. And though PE multiples are rich, the current earnings yield for the S&P 500 of 3.5%, when coupled with a dividend yield of 1.2%, comes to 4.7%. This compares well to a 10-year Treasury bond yield of 4%. Moreover, we expect positive earnings surprises will continue in coming quarters. From a technical perspective, the NYSE cumulative advance/decline line made a record high on September 15, 2025 and is bullish. The 10-day average of daily new highs is currently greater than 500, defining a broad-based advance. The AAII sentiment indices are more positive this week with recent readings showing bullishness at 28% and bearishness at 49.5%. This is nearing the 20/50 split that is rare and very positive. The one indicator that remains neutral is our 25-day up/down volume oscillator; and though this week’s reading of 2.00 is closer to an overbought reading of 3.0 or greater, it is still short of a five-day overbought reading needed to confirm the recent market highs. This suggests the volume on the advance in July and August lacked convincing volume, and it leaves the market vulnerable to a pullback. Nonetheless, we would be a buyer on weakness.

Gail Dudack

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French President Emmanuel Macron named loyalist Sebastien Lecornu, 39, a conservative protege, as prime minister on Tuesday, following the collapse of his fourth government in two years. This appointment shows Macron’s determination to hold on to a minority government and a pro-business reform agenda which cuts taxes on business and the wealthy and raises the retirement age. Lecornu’s appointment is unlikely to appease left-wing “Block Everything” participants who are planning to shut down all of France with protests and blockades on September 10. More importantly, as Macron struggles to hold on to his minority coalition government, the country is slowly slipping toward a fiscal crisis. A combination of weak growth, high borrowing costs, and a massive debt burden has resulted in French bonds yielding 3.4%, a higher cost of capital than Greece or Spain, placing French bond rates second only to Italy.

Meanwhile, the US 10-year Treasury bond yield is currently 4.07%, at the lower end of the 4.0% to 4.7% range that contained yields so far this year. And we wonder if this decline in yields is a response to risks seen in the European debt markets or an indication of weaker US growth. Perhaps it is both.

August payrolls grew by a disappointing 22,000 in August and the unemployment rate rose from 4.2% to 4.3%. Moreover, the U6 unemployment rate rose faster from 7.9% to 8.1%. On a year-on-year basis, the establishment survey showed total employment grew 0.9% YOY, below its long-term average pace of 1.7% YOY. The household survey showed jobs growing 1.2% YOY, below its long-term average rate of 1.5% YOY. However, while both growth rates are currently below average, they are nonetheless positive. A positive growth rate is critical to the economy because a year-over-year decline in jobs is an indication of a recession.

But what dominated news this week was the Bureau of Labor Statistic’s announcement that the annual revision to payrolls in the 12 months ending in March 2025 is estimated to be 911,000, which means payrolls were lower than previously reported. More specifically, this indicates that for every month from March 2024 to March 2025, actual job growth was an average of 76,000 jobs less than reported. This annual adjustment was far larger than economists’ expectations and it appears to be the largest revision ever recorded. And this would be the second unusually large negative annual revision in a row. It also implies that the economy under President Biden was much weaker than reported, it suggests the Federal Reserve should have been lowering interest rates and it supports President Trump’s decision that more rigorous leadership is needed at the Bureau. Last, but far from least, it means that the growth rate in jobs over the last year might already be negative! However, that will not be confirmed until next year.

Revisions to government data are normal as new information is accumulated; but unfortunately, these massive revisions are three times larger than normal and as a result, have destroyed confidence in most government data. This is regrettable. See page 3.

August employment data also revealed a number of underlying trends. Over the last twelve months, foreign employment declined by 822,000 workers while native-born employment increased by 2.8 million workers. This is a massive turnaround from August 2024 when native employment declined by 1.3 million workers and foreign-born workers increased by 1.24 million. See page 4. The unemployment rate rose to 4.3% in August but underlying details show a dichotomy in workforce dynamics. The unemployment rate for those with less than a high school degree is currently 6.7% and rising. The unemployment rate for those with a bachelor’s degree or higher is also rising but remains substantially lower at 2.7%. This suggests that the lower end of the employment market is suffering.

The household survey estimates the number of people who are not in the labor force but currently want a job. This group totaled 6.4 million in August, which was not a big change from July, but it was up 722,000 over the year. This category of “currently want a job” represents 6.3% of those currently not in the labor force, up from 5.7% a year ago. According to the BLS, these individuals are not counted as unemployed because they were not actively looking for work during the four weeks preceding the survey or were unavailable to take a job. However, the 6.4 million people who are not in the labor force and want a job is sizeable when compared to the 7.4 million counted as “actively” unemployed. In short, digging through the data we find a pattern of underemployment. See page 5.

In our view, economists should not be surprised by the pending negative revision in payroll data because there has been a growing disparity between the establishment and household surveys since June 2023. While the payroll survey showed a steady increase in jobs, the household survey – which is much broader – suggested job growth was flat during this period. Note that in the last two years, the only increase in jobs in the household survey took place in January 2025 and this was due to the annual Census adjustment to total population! See page 6.

There are two data points we will be watching in coming months to define the strength or weakness in the job market. First, the 3-month moving average of job growth is currently low at 29,330. Should this moving average turn negative it is a definitive signal of a recession. As we noted, economists should be worried because the revision to jobs data next March is likely to result in this number turning negative. Second, the number of people unemployed for 27 weeks or longer displays how easily the unemployed can find work. This number is currently at 1.93 million people and rising. With the exception of the financial crisis of 2008 and the pandemic, a level of 2.0 million has defined a recession. See page 7.

In the US, GDP is closely linked to personal consumption, which represents 68% of our economy. Moreover, 47% of total GDP is personal consumption of services which means the US economy is dominated by the service sector. In August, the ISM nonmanufacturing index rose 1.9 points to 52, which marked the third straight month above 50 for the index. This is encouraging; however, order backlogs were particularly weak, falling 3.9 points to 40.4, below the 40.9 of May 2023, and at their lowest reading since the 40.0 seen May 2009. Note that the sum of the ISM manufacturing and nonmanufacturing employment indices fell below the standard deviation range of 92 to 113 for the second month in a row. A sharp decline in this series has been linked to recession economies. See page 8. All in all, there are many reasons for the Fed cutting interest rates in September.

From a technical perspective, the market improved this week. The NYSE cumulative advance/decline line hit a new high on September 8, 2025 and new highs should continue if the indices continue to move higher. The 10-day averages of new highs and lows is positive. The 25-day up/down volume oscillator is still neutral but moved higher this week. The lack of an overbought reading of 3.0 or higher since mid-July in this oscillator is a technical warning since volume in advancing stocks should exceed volume in declining issues on new highs in a bull market. We will continue to monitor this. September tends to be a dangerous time for equity investors, and this September includes unrest in France, Israel attacking Hamas in Qatar, Russia seeking alliances with China and North Korea, and the possibility of a US government shutdown. However, a rate cut is likely and that, along with relatively good earnings, is a positive for equities. We would be a buyer on weakness.

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September has a long history of being a volatile month. Plus, it tends to be the worst performing month of the year with losses averaging nearly 1% in both the Dow Jones Industrial Average and S&P 500 over the last 73 years. And this September could prove extremely challenging since it includes several pivotal events such as the FOMC meeting, a potential government shutdown, and emerging budgetary crises in both the UK and France. See page 3.

The crises in Europe are significant. French Prime Minister Francois Bayrou – the third prime minister in 12 months — called for a crucial no-confidence vote for September 8 after protests were announced in response to his proposed budget which included ending two public holidays and other forms of fiscal restraint. As we noted last week, Bayrou has stated that deficits in France are unsustainable. In the UK the country’s deficit was smaller than expected in July; nevertheless, this week the British pound dropped more than a percent against the US dollar and the yield on 30-year government debt — known as gilts — rose to the highest level since 1998. The catalyst for these actions was the failure of the UK government to pass legislation to cut welfare spending coupled with the reversal of a plan to cut winter fuel payments. Both actions translate into more government debt and the currency and debt markets responded accordingly. Keep in mind that the US faces similar problems and President Trump has tried unorthodox methods such as tariffs and the possibility of a sovereign wealth fund as a way to increase US revenue and build US net worth. To date, these attempts have been met with resistance.

Domestically, a federal court ruled that President Trump’s tariffs are illegal, and this simply adds more confusion to the US economic environment. Thus, September begins with a number of domestic and international issues that could upset markets. Therefore, investors should expect volatility in the near term. The good news is that the S&P 500 index is up 9.1% year-to-date and S&P 500 earnings in the first two quarters of the year rose 5% YOY and 12% YOY, respectively. In short, fundamentals are currently supporting equities. As long as earnings continue to grow – and we expect earnings will surprise on the upside in the second half of the year – equities should do well. This is key to our long-term bullish view

Gold has soared more than 34% this year and according to Reuters polls, analysts have raised 2025 price targets from $2,756 an ounce in January, to $3,065 in April, and to $3,220 in July. The financial media, including Reuters, attributed the recent breakout in the gold chart to the expectation of a Fed rate cut this month. However, if this were true, we believe the price of gold would have jumped right after Chairman Powell’s Jackson Hole presentation on August 22, 2025. In our opinion, the timeline for the breakout in gold is a safe haven move that is more closely linked to this week’s selloff in British bonds. And as we noted above, there are serious fiscal problems in France, the UK, and the US and unless serious steps are taken soon debt markets may be forced to be the disciplinarian. Moreover, it is not unusual for the currency and debt markets to force politicians to do the right thing. We hope politicians at home and abroad are paying attention. In our Outlook for 2025 (December 23, 2024) we wrote: “It behooves equity investors to monitor the bond market in 2025, since it is often the precursor to stock market declines.” We continue to believe this is true.

Economic reports continue to support a Fed rate cut in September. The pending home sales index was 71.7 in July, down from 72.0 in June. The National Association of Realtors’ release indicated that pending sales were down in the West, but up in the South. The ongoing weakness in the housing market was also reflected in second quarter GDP data which showed that fixed residential investment increased by a mere 1.3% YOY and represented less than 4% of nominal GDP. Fixed residential investment has averaged 4.6% of GDP over the longer term. A percentage of 4.6% or better has not been seen since the second quarter of 2002. See page 4.

The second estimate for second quarter GDP indicated the economy grew at a 3.3% annualized rate versus the advance estimate of 3.0%. It was favorable to see this positive adjustment to GDP, but most of the increase was due to a sharp decline in imports (which subtract from GDP). The second quarter decline in imports, which followed a first-quarter surge, was a major contributor to GDP in the second quarter growth, adding 5.1% points. Consumer spending, state and local government spending and fixed investment grew modestly. Inventories were a huge drag and federal government spending, and residential investment were drags. See pages 5 and 6.

The GDP price deflator was 2.5% in the second quarter, down from 2.6% in the first quarter. Historically, there has been a strong correlation between this deflator and the 10-year Treasury bond yield, however, this relationship appears to have broken down in recent years. The disparity could be due to the high level of federal debt and the fear that rising supply will drive down prices. The fed funds rate and the PCE deflator also have moved in synch historically, but the disparity here has also grown. High short-term interest rates are a burden to the Treasury when federal debt levels are high, which explains why President Trump would like interest rates to be lower; but ironically, rates are high because debt levels are high. See page 7.

In July, personal income rose 5.0% YOY and real personal consumption expenditures rose 4.7% YOY. The most important statistic in the personal income report is real disposable income, which increased 2.0% YOY. This is below the long-term average growth rate of 2.7% YOY, yet it is up from the 1.7% YOY seen in June. In short, the positive growth in real personal disposable income shows households are seeing real gains in income but the levels are not robust. See page 8.

The ISM manufacturing index edged higher to 48.7 from 48 in July but rests below 50 for a sixth consecutive month. This is a sign of contraction in the manufacturing sector. The details of the report were mixed, with six of the 11 components trending lower. New orders rose 4.3 points to 51.4, but production fell 3.6 to 47.8. Employment was relatively unchanged at a weak 43.8. The ISM nonmanufacturing index will be reported later this week. See page 9.

Earnings estimates inched higher in the last week. The S&P Dow Jones consensus earnings estimate for calendar 2025 was $258.36, up $0.01, this week. The earnings forecast for 2026 was $300.69, up $0.12. The LSEG IBES estimate for 2025 is $267.58, up $0.03, and the 2026 estimate is $303.35, up $0.11. The IBES estimate for 2027 is $343.00, up $0.32. Although estimates have been moving higher throughout the last earnings season they remain below our forecasts of $270 for 2025 and $310.50 for 2026. However, we expect more positive earnings surprises in the quarters ahead and believe our estimates may prove to be too conservative. The technical backdrop of the equity market remains bullish with the new highs averaging well above 100 per day and the NYSE cumulative advance/decline line recording a new high on August 28, 2025 confirming the high in the DJIA on the same day. Nevertheless, our 25-day up/down volume oscillator continues to hover around zero indicating that volume in advancing stocks and declining stocks has been equal over the last 25 trading days. The last confirmation of new highs in this indicator appeared in July when the oscillator remained above 3.0 for more than five consecutive trading days. All in all, this implies the August rally is relatively weak and a pullback may be ahead. We would be a buyer on weakness.

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