MONTHLY MARKET MUSINGS

September 2025

All Eyes Are On The Fed

After a pause in rate cuts throughout 2025, the expectation is that the U.S. Federal Reserve (Fed) will begin cutting interest rates again this month. This comes at a good time given that we are heading into two of the historically weakest months of the year, September and October. Resuming rate cuts after a pause, in the past, has been a strong indicator of more upside in the equity markets. Approximately 90% of the time, the equity markets have moved higher in the year following the resumption of a cutting cycle after a Fed rate cut pause that lasted between 5 to 12 months.[1] Fed rate cuts have been good for equities when the economy is not on the path towards a recession which seems to currently be the case.[2] We saw evidence of that with the U.S. GDP which grew at an annual rate of 3.3% in the second quarter of 2025.[3] This was better than economists were expecting. The resuming of the rate cuts after the pause also signals to the market that there are likely more rate cuts coming in the next few quarters. It is quite unlikely that the Fed would come off a nine month pause to cut rates once and then re-enter into another extended pause throughout 2026. According to JP Morgan, they expect the Fed to make three more 25-basis point (0.25%) cuts after the currently anticipated September cut.[4] We believe that the combination of the anticipated rate cuts and the fiscal stimulus (tax cuts, deregulation, etc.) via the new tax bill should provide enough fuel to keep the equity market moving forward for the coming quarters. The Fed's independence has recently come into question, once again, with the Trump administration pushing for the removal of a Fed governor following mortgage fraud allegations. This has added more uncertainty and anxiousness to the equity markets as the Fed independence has long been viewed as a critical component to a well-functioning U.S. economy and the integrity of the financial markets. It remains to be seen whether or not President Trump will scale back the pressure on the Fed should the September rate cut happen and the cutting cycle resumes or perhaps, he will double down and push even more aggressively for more cuts.

The Q2 earnings season wrapped up this past week and the results were very good despite some initial concerns. Corporate results proved to be strong and resilient in the current environment. The concerns as to whether technology companies would scale back on their Artificial Intelligence (AI) investments were put to bed, for the most part, as many of the hyperscalers continued to show strong monetary support for AI. Large tech firms likely have a clear view of the extent of the monetization for their AI products/services and despite these large capital expenditures, it is being viewed as an effective use of cash which will provide a solid return on their investments in the coming years. Another important aspect of the Q2 earnings was that the results were well represented across sectors, which generally suggests that we are in a relatively healthy market environment.

On the tariff front, the U.S. Court of Appeals for the Federal Circuit ruled that many of the President Trump's imposed tariffs are illegal. The court has allowed the tariffs to stay in place until mid-October to allow the Trump administration the opportunity to file an appeal with the Supreme Court. Some tariffs, steel and aluminum, fall under different rules and will stay as is. White House officials have stated that they are confident that the Supreme Court will uphold the use of the tariffs. This leaves the tariff situation unresolved for the time being and it remains an overhang on the market. One thing to note is that the resolution of the tariff situation likely skews positively now versus where it once was. The tariffs that most countries are currently facing are unlikely to get worse and those levels are already priced into equity markets. Moreover, depending on how it plays out with the Supreme Court, we could potentially see a large portion of the tariffs removed entirely.

As we have stated, September and October are often tougher months for the financial markets. While there are many uncertainties that persist, the decrease in interest rates that is expected this month should help to alleviate some of this concern and support equities. We believe that the resumption of the monetary easing cycle by the Fed and the expansionary fiscal policies by the U.S. administration will be a large benefit to the U.S. economy and will set the stage for solid growth in the coming quarters.

JAY SMITH, CIM®, FCSI

Senior Portfolio Manager & Senior Wealth Advisor    

jay.smith@cibc.ca

BRAD BROWN, MBA, CFA
Portfolio Manager & Associate Investment Advisor

brad.brown@cibc.com