Weekly Investment Perspective

After three consecutive weekly gains, U.S. equities took a breather as stronger-than-expected economic data complicated the interest rate outlook. The S&P 500 slipped 0.3%, the Nasdaq declined 0.7%, and the Dow edged down 0.2%, with all three indices pulling back from record highs set earlier in the week. Meanwhile, U.S. Treasury yields climbed higher across the curve, and the U.S. dollar continued to edge higher from its lows (though the U.S. Dollar index is still down roughly 10% so far this year).

The primary driver of last week’s market action was a sudden shift in the macroeconomic tone. A raft of strong data—including a significant upward revision to second-quarter GDP, a drop-off in jobless claims, and a bounce in new home sales—cast doubt on the view that the economy was weakening and that the Fed would deliver swift and sizable rate cuts. In a reversal of recent market dynamics, good news on growth translated into mild pressure on stocks, as high valuations had been supported by increasingly dovish rate expectations.

The economic story was indeed a striking one. Revised figures showed second-quarter GDP rose at a 3.8% annualized pace, up from the prior 3.3% estimate. More importantly, the underlying details were far stronger than initially reported: consumer spending growth was revised from 1.6% to 2.5%, while private final domestic sales jumped from 1.9% to 2.9%. Business investment also saw an upgrade, and core durable goods orders rose in August—suggesting Q3 is shaping up stronger than Q2, with the Atlanta Fed now estimating 3.9% real GDP growth. Taken together, the data suggest the Q1 slowdown was a temporary shock and not a sign of sustained weakness.

This firmer economic footing complicates the Fed’s near-term policy calculus. Until recently, policymakers appeared increasingly willing to ease based on signs of cooling inflation and flagging labor market momentum. But this past week’s developments may tip the balance back toward caution. Fedspeak reflected that divide: new Governor Miran advocated for aggressive cuts, while Chicago Fed President Goolsbee and others urged patience. Chair Powell stayed largely in line with his post-FOMC remarks, emphasizing a data-dependent approach. With no clear consensus emerging among Fed officials, the September data cycle, especially this week’s jobs report, will be critical in shaping the path forward.

Trade headlines also resurfaced after a relatively quiet stretch. President Trump announced a new round of sector-specific tariffs under national security provisions, targeting patented drugs, heavy trucks, and select furniture products. Additional measures, including new H-1B visa fees and pressure on semiconductor firms to increase domestic production, contributed to renewed volatility in foreign trade dynamics. While these stories did not move markets materially last week, they reinforce the uncertain backdrop as investors weigh the long-term economic impact of deglobalization and rising protectionism.

Looking ahead, the September jobs report—due Friday morning—will be the marquee event on the calendar. Forecasts are calling for a modest 51k increase in nonfarm payrolls, in line with the July-August trend, but some economists see upside risk given the improving backdrop in consumer and investment data. Also on deck this week: JOLTS job openings, ISM manufacturing and services reports, construction spending, and several Fed speeches. The potential for a government shutdown beginning October 1 may also add noise to the release schedule and investor sentiment.

While the economic news is undeniably stronger, the investment implications remain nuanced. Markets may need to adjust to a slower pace of rate cuts, especially if inflation remains sticky or employment rebounds more quickly than expected. Still, firmer growth and corporate profitability are not bad outcomes—particularly if productivity gains from AI begin to show up more tangibly in the data. For now, investors may need to accept that the path to lower rates may take longer, even as the economy itself looks sturdier.

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