Weekly Investment Update (08/22/2025)

The next Weekly Investment Update will be published on September 5 due to the Labor Day holiday.

U.S. equity markets had been down for the week but bounced back sharply after Fed Chair Jerome Powell’s Jackson Hole speech was interpreted as more dovish than expected. The S&P 500 index ended the week slightly up, while the tech-heavy NASDAQ was down slightly. This week witnessed some slowdown in technology-driven momentum, partly due to some cautionary commentary from OpenAI CEO Sam Altman and an MIT study questioning artificial intelligence (AI) monetization. Altman stated that investors may be overexcited about AI and the industry could be in a bubble. Concurrently, MIT’s Media Lab (Project NANDA, or Networked Agents and Decentralized AI) released a report that showed 95% of corporate generative AI pilot programs had no meaningful positive impact on profits. While the long-term outlook for AI still looks promising, this week’s developments remind us that the path is unlikely to be a straight line. 

On Wednesday, the Federal Reserve released the minutes from its July 30-31 meeting, where many policymakers expressed concerns about tariffs and inflation. Importantly, this Federal Open Market Committee (FOMC) meeting occurred before the August 1 employment report, which showed significant downward revisions to monthly job gain numbers. As a result, Powell’s Jackson Hole speech is likely more indicative of future monetary policy than these minutes.

On the geopolitical front, President Trump met with Ukrainian President Zelenskyy and several European leaders at the White House in a coordinated push toward peace in Ukraine. President Trump signaled willingness to offer U.S.-backed security guarantees but stopped short of insisting on an immediate ceasefire, which contrasts with European demands for more urgent de‑escalation. Trump is now reportedly working to arrange a trilateral summit involving himself, Zelenskyy, and Putin, but a quick end to the war still appears unlikely.

Powell Takes a Modestly Dovish Tone in Jackson Hole With the Labor Market Still in Focus

What is happening: In his final keynote address at the Federal Reserve’s annual symposium in Jackson Hole, Chair Powell kept the door open for an interest-rate cut in September due to the potential labor market weakening, noting that downside risks to employment are rising and the shifting balance of risks may warrant adjusting policy. Powell noted that the labor market is broadly in balance but attributed this to slowing of both supply and demand for workers, with concerns that accelerating weakness could cause more economic harm. Additionally, he acknowledged existing tariff-driven price pressure but suggested a “reasonable base case” is that tariffs will result in a one-time upward shift in price level. That said, Powell emphasized that the Fed will not allow a one-time price increase to lead to persistent inflation.

In addition to discussing the economic policy outlook, Powell outlined changes to the Fed’s framework, which is reviewed every five years and specifies how the Fed intends to conduct monetary policy. Notably, the Fed abandoned its Flexible Average Inflation Targeting (FAIT) framework, which was adopted in 2020 with the intention of achieving an average inflation rate of 2% over time by allowing it to run somewhat above 2% following a period of lower inflation. The Fed formally adopted a 2% inflation target in 2012, but then saw inflation running persistently below target in the decade following the Global Financial Crisis. Adopting the FAIT was thought to allow the Fed more flexibility in pushing up inflation following this period. However, the framework broke down after the Covid-19 pandemic, when inflation surged to a 40-year high in 2022, driving the Fed to revise the language in its latest review.

Why it matters: Despite underlying risks to inflation, Chair Powell’s emphasis on labor market weakness and overall dovish tone suggest a September rate cut is likely, in our view. At the same time, Powell referred to current policy levels as “modestly restrictive,” suggesting a September cut would move rates closer to neutral rather than being overly stimulative. Ahead of Powell’s speech, markets had tempered expectations for a September rate cut to about a 70% chance but have since sharply repriced the probability back to around 90%. Additionally, Treasury yields fell across the curve, and the S&P 500 rose about 1.5% following the speech.

Although the Fed formally revised its framework, this does not indicate a shift in how it will make policy decisions in the current environment. Since inflation has been extremely elevated in recent years, there has been no need for the Fed to make up for persistently lower inflation. In essence, the Fed has already been operating under a flexible inflation targeting framework that aims to achieve 2% annual inflation. Removing the word “average” from the statement simply better reflects its current policy goals.

We expect the Fed to stay focused on the labor market even as tariff-driven price increases prolong uncertainty around the inflation outlook. Importantly, the August jobs and inflation reports will be released ahead of the next Fed meeting on September 17, providing more insight into the state of the labor market and inflation. If August data show continued labor market softening, the Fed will likely have further reassurance that a September rate cut is warranted. 

We continue to emphasize portfolio resilience through high-quality companies with durable earnings power, which we believe are best positioned to navigate both policy shifts and lingering macroeconomic uncertainty.

Housing Activity Slow Given Higher Rates, but Tight Supply and Strong Demand Support Prices

What is happening: The July housing data highlight ongoing strains in the sector. Elevated mortgage rates have pushed affordability to record lows, slowing sales to their weakest summer pace in a decade and driving permits to new cycle lows. Builder sentiment has deteriorated, with two-thirds now offering sales incentives, while listings linger on the market longer and price cuts rise to record levels.

Yet home prices reached new highs in June, sustained by the interest-rate “lock-in effect” as existing homeowners with low-rate mortgages resist selling, keeping supply tight. Regionally, prices are holding up better in the Midwest and Northeast but continue to decline in the South and West, which together account for most of the new construction. Multifamily construction gave a temporary lift to July housing starts, but underlying single-family activity remains subdued, and rent growth is cooling — pointing to softer demand.

Why it matters: The housing market remains a drag on the broader economy as affordability challenges — from high prices and elevated mortgage rates — weigh on both buyers and sellers. While the July rebound provides a short-term lift, the sustained weakness in permits and builder sentiment suggests construction activity could soften further. For the Fed, cooling rents and slowing price momentum ease inflation pressures, giving policymakers greater scope to cut rates sooner. As the Fed resumes its rate-cutting cycle, lower interest rates should bring some relief, though the impact will take time to flow through given the lock-in effect and cautious builder sentiment. 

For the economy, slower home price appreciation and weaker sales turnover restrain household wealth effects and consumer activity. Despite the near-term headwinds, we believe the structural backdrop remains supportive for housing longer term. Pent-up demand from sidelined buyers, a persistent gap between housing supply and population growth, and favorable demographics all point to a resilient demand base. This suggests that while prices are unlikely to continue their rapid ascent of recent years, they will likely trend higher over time, providing continued support to household wealth and acting as a stabilizing force for the broader economy.