Weekly Investment Update (09/12/2025)

Markets entered the week focused on the September inflation report, which showed core inflation in line with expectations. While some inflation-sensitive goods categories saw hotter price increases, others cooled, leaving the Fed with little reason to hold off on a rate cut next week. Labor market data also factored into the outlook, with initial jobless claims rising — largely due to temporary factors in Texas tied to post-flood insurance application deadlines. Broadly, the labor market continues to show signs of softening, consistent with slower hiring rather than widespread layoffs. In fact, commentary from corporate leaders suggests the economy remains on stable footing. Capital One CEO Rich Fairbank noted that consumer behavior remains strong, while American Express described the environment as "much better than what the headline or the newspaper would suggest.”

Meanwhile, momentum in AI continues to serve as a powerful market catalyst. Oracle’s earnings report revealed a massive surprise in bookings, with Remaining Performance Obligations (RPO) surging 359% year-over-year to $455 billion — triple the forecast — driven by several multibillion-dollar cloud infrastructure contracts. Although revenue and free cash flow came in below estimates, the surge in capital expenditure reinforces the view that AI investment remains a durable and growing tailwind for markets.

Inflation Data Keep the Fed on Track for a September Cut

What is happening: Headline CPI rose 0.4% month-over-month in August (2.9% year-over-year), while core CPI increased 0.3%, leaving the annual pace unchanged at 3.1%. Core goods inflation accelerated modestly to 1.5% year-over-year, particularly in tariff-sensitive categories such as vehicles, apparel, and appliances. Services inflation held steady at 3.6%. Shelter costs increased, with owners’ equivalent rent rising, though private sector housing data suggest CPI shelter measures may be overstating actual rental pressures.

The Producer Price Index (PPI) surprised to the downside, falling 0.1% month-over-month versus expectations for a 0.3% gain. On a year-over-year basis, core PPI held steady at 2.8%, its highest in nearly two years, reflecting gradual tariff pass-through but limited broader cost acceleration.

Why it matters: The inflation picture remains one of modest tariff effects, rather than broad-based pressures. Some goods categories continue to reflect tariff-related price increases, but services and housing remain relatively stable, reducing concerns of a large reacceleration in inflationary pressures.

With inflation data largely in line with expectations and labor market indicators softening, the Fed’s focus is shifting toward risks to growth. This reinforces the case for the Fed to resume rate cuts at the September FOMC meeting, with markets currently pricing in three consecutive 25-basis-point cuts across the September, October, and December meetings.

Given this environment, we are maintaining a long-duration stance within fixed income strategies. In equities, we emphasize high-quality companies with durable earnings and pricing power, which are best positioned to weather a slower growth backdrop.

Small Business Optimism Increases as Labor Market Softness Persists

What is happening: The NFIB Small Business Optimism Index rose to 100.8 in August, its best reading since January and above its 50-year average of 98. The uptick was driven by strong sales expectations and greater clarity around tariffs. The net percentage of business owners expecting higher real sales volumes rose to 12%, well above its April low of -1%. Although the uncertainty component remains elevated, the decline in August reflected easing concerns about financing conditions, likely tied to expectations for Federal Reserve rate cuts.

At the same time, the employment survey results depict a mixed picture. Plans to increase employment rose to a net 15%, marking a third consecutive monthly gain, though on par with last year’s levels and meaningfully lower than the average from 2021 to 2023. Small businesses reported filling only one position for every three openings, the lowest reading since 2020, highlighting continued challenges in hiring and a misalignment between labor needs and workforce availability.

Why it matters: The rebound in small business sentiment from April lows, when tariff announcements drove sentiment sharply lower, is another signal that we are likely past peak uncertainty. Additionally, as we expect the Federal Reserve to resume its easing cycle this month, small businesses in particular are likely to benefit as nearly 80% of small business loans have variable interest rates. Due to their higher sensitivity to economic cycles and greater domestic revenue exposure, small businesses are likely to benefit more from lower rates compared to larger firms. The combination of improving sentiment and lower rates creates a stronger economic backdrop for small businesses to make investment decisions. The optimism is also reflected in recent small cap outperformance, with the Russell 2000 posting its strongest monthly gain since November 2024 and outpacing the S&P 500 by about four percentage points over the past three months.

That said, employment expectations continue to show signs of a softening labor market, particularly important as small businesses account for just below half of overall private sector jobs. A sustained slowdown in hiring could weigh on consumer demand, offsetting some of the benefits from improved sentiment and lower rates. Overall, the latest Small Business Optimism survey supports the view that the U.S. economy is likely to grow this year, albeit at a slower pace.