Financial markets experienced a brief pause last week, reflecting investor caution amid a complex mix of global developments. The S&P 500 recorded its weakest weekly performance in nearly two months, influenced by geopolitical tensions, domestic economic concerns, and signs of a cooling labor market. Despite this dip, underlying fundamentals such as solid corporate earnings, steady inflation expectations, and anticipated monetary easing continue to provide a supportive backdrop.
Some analysts attribute the recent pullback to weaker-than-expected payroll data, suggesting a slowdown in economic momentum. Others argue that strong consumer-driven growth, evidenced by an upward revision to second-quarter U.S. GDP, could delay anticipated interest rate cuts. Seasonal factors and the looming possibility of a federal government shutdown have also contributed to market uncertainty. Historically, however, shutdowns have had minimal impact on equities—the average S&P 500 return during past shutdowns has been a modest 0.1%, despite an average duration of eight days.
With Congress facing a September 30 deadline to pass a spending bill, a partial shutdown appears increasingly likely due to political gridlock. Essential services like air traffic control, Social Security, and military operations would continue, but non-essential agencies such as NASA and the National Park Service could close temporarily. Around 3% of federal spending falls into the non-essential category, and while nearly 3 million workers may be affected, the broader economic consequences are expected to be limited.
Trade policy resurfaced as a market theme after former President Trump proposed new sector-specific tariffs, including a 100% duty on branded pharmaceuticals, 50% on kitchen cabinets, and 30% on upholstered furniture. These proposals have reignited debate over protectionist measures and their potential impact on inflation and supply chains.
Global economic indicators presented a mixed picture. While U.S. consumer strength bolstered second-quarter GDP and the services sector remained in expansion, manufacturing activity contracted in the Eurozone and the UK. China’s industrial output dipped to a one-year low, highlighting regional economic pressures.
Federal Reserve officials offered varied perspectives last week. Steven Miran advocated for proactive rate cuts to prevent deeper economic trouble, while Austan Goolsbee expressed caution about moving too quickly. Jeffery Schmid noted that economic data remains balanced. These differing views reflect ongoing debate within the central bank as it weighs inflation against growth risks.
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Stocks pause, but rate cuts, economic growth may provide support
From a potential US government shutdown, to the return of tariff talks, to political and fiscal challenges in Europe — there’s a lot for markets to process at the moment. And we see no reason why things will get any easier over the coming weeks and months. But difficult doesn’t mean bad. While stocks took a small step down the proverbial “wall of worry” last week, we expect markets to resume their climb. But as always, investors should carefully pick their handholds to help navigate the best route. n nStocks take a small step down the wall of worry n nStock markets struggled a little last week, with the S&P 500 Index posting its worst weekly return in nearly two months.1 In that time, investors have had to contend with continued geopolitical uncertainty, domestic growth worries, and slowing labor market data. But markets have been supported by resilient earnings,2 stable inflation expectations,3 and the prospect of easier monetary policy.4 n nSo why step back now? Some point to slowing growth, citing softer US payroll numbers.5 Others argue growth is too strong, which would mean fewer rate cuts. Last week saw an upward revision to the second-quarter US gross domestic product (GDP) from continued consumer resilience.6 Seasonal factors and concerns over a potential US government shutdown have also been mentioned. While a shutdown could introduce volatility, history suggests it has had a limited market impact. There have been 21 US government shutdowns since 1976, lasting just eight days on average, and the S&P 500 Index averaged a modest 0.1% return during those periods.7 Overall, we’d say the reason for the pullback is a combination of all of the above n nThe recent declines, in our view, are a potential near-term consolidation following a robust advance. Nothing more ominous than that. The US economy likely remains in the middle stage of the cycle, with few signs of recession still. We continue to believe that rate cuts and a possible reacceleration in economic activity will support stock market gains as we move toward year-end and into 2026. Pullbacks are healthy and normal. n nUS government shutdowns aren’t unusual n nIf Congress doesn’t pass a spending bill or a continuing resolution by midnight on September 30, parts of the government will start to shut down. This appears likely due to partisan gridlock over federal spending. Should a shutdown happen, essential services such as air traffic control, Social Security, Medicare, and military operations will continue. Non-essential workers may be furloughed, and agencies like NASA and the National Park Service will close. n nThe economic impact is likely to be modest. Only around 3% of government spending is non-essential,8 and federal employment is at a record low relative to the total workforce.9 Still, nearly 3 million federal workers may be affected, with essential workers receiving IOUs until funding resumes.10 Some limited market volatility is to be expected, but history suggests that government shutdowns tend to pass without significant incidents to markets.11 n nTariff talk returns n nTariffs returned to the headlines as President Trump announced a new round of sectoral tariffs. These include a 100% tariff on branded pharmaceutical products, 50% on kitchen cabinets (oddly specific in our view), and 30% on upholstered furniture. n nMixed economic picture n nGlobal economic data released last week painted a mixed picture. In the US, second-quarter GDP was revised significantly higher,12 driven in part by continued strength from the consumer. While the labor market is showing signs of cooling, jobless claims remained low,13 suggesting that businesses are still reluctant to let go of workers. Additionally, the US Services Purchasing Managers’ Index (PMI) stayed in expansionary territory, reinforcing the resilience of the domestic economy.14 n nOutside the US, the data was less encouraging. Eurozone and UK Purchasing Managers Indexes pointed to contraction in manufacturing activity,15 while China’s factory output fell to a 12-month low, underscoring the economic strain in the region.16 n nMixed comments from Fed speakers n nMany Fed members spoke last week. The message was mixed across the group, but consistent relative to each individual’s previous comments. Steven Miran argued his very dovish case, saying he would rather be “proactive” than wait for a “giant catastrophe.”17 The language from others was less hyperbolic, with Austan Goolsbee saying he was “a little uneasy with too much front-loading”18 and Jeffery Schmid saying data “still remains largely in balance.”19 n nPolitical and fiscal challenges in Europe