September 2025 KWP Newsletter

Economic Resilience Amidst Challenges

Despite facing various challenges, the U.S. economy continues to demonstrate remarkable resilience. Consumer spending remains robust, businesses are investing in growth, and markets are showing steady progress. This enduring strength underscores the adaptability and stability of our economic system, providing a solid foundation for investors navigating these times.

Market Overview: August and September

In August and early September, markets exhibited cautious optimism. The S&P 500 experienced modest gains, supported by strong corporate earnings and consumer activity. Technology and AI sectors led the charge, with major companies surpassing expectations and driving market momentum. Consumer discretionary stocks also outperformed, benefiting from sustained spending patterns among households.

In the fixed income space, bond yields softened slightly as markets anticipated potential Federal Reserve rate cuts. Treasuries and high-quality bonds continued to serve as stabilizers in diversified portfolios, offering a buffer against equity market volatility. Energy and materials sectors showed mixed results, with energy prices stabilizing and materials benefiting from global infrastructure demand.

The Federal Reserve's Approach

Market analysts are pricing in a 0.25% rate cut from the Federal Reserve this month. However, the Fed remains cautious. Retail sales in August surpassed expectations, indicating strong consumer demand, while import prices rose, signaling ongoing inflationary pressures. These factors suggest that the Fed may proceed carefully, balancing economic resilience with inflation risks. We will prepare for measured moves, as any surprises could lead to short-term market volatility.

Risks to Monitor

While the economic backdrop is encouraging, certain risks persist:

• Earnings Disappointments: Unexpected earnings shortfalls could pressure valuations, particularly in high-growth sectors.
• Inflation Surprises: Unexpected increases in inflation may prompt the Fed to adopt a more cautious stance, impacting market sentiment.
• Political and Geopolitical Events: Developments in domestic and international politics can influence investor confidence and market stability.

Bottom Line

The U.S. economy's resilience remains a positive indicator for investors. While markets have been favorable, they are priced for near perfection, and short-term volatility is always possible. The best approach is to stay diversified, disciplined, and prepared to act on opportunities or pullbacks. An active investment process can help ensure it balances growth potential with risk management as we move into the fall season.

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