The economic forecast set for in this material may not develop as protected and there can be no guarantee that strategies promoted will be successful
Over the summer, investors watched as U.S. equities pushed higher, supported by strong second-quarter earnings and optimism around artificial intelligence and technology. Headlines highlighted companies beating expectations, and analysts raised forward guidance for parts of the market. On the surface, everything looks stable.
But a closer look at the U.S. economy tells a different story.
A Softer Labor Market Than Believed
In September, the Bureau of Labor Statistics released a major revision: between April 2024 and March 2025, the U.S. added 911,000 fewer jobs than initially reported. Weekly jobless claims have also risen to levels not seen in nearly four years. For investors, this signals a labor market that is weaker than headlines suggested, one that could weigh on consumer demand in the months ahead.
Inflation Is Still Sticky
While inflation has eased from its post-pandemic highs, the August Consumer Price Index (CPI) showed prices rising 2.9% year-over-year, with core inflation at 3.1%. Tariff-driven increases in goods prices are keeping pressure on households. This presents a challenge for the Federal Reserve: inflation isn’t fully under control, but the economy appears to be clearly slowing.
Corporate Earnings Tell Only Part of the Story
So why do earnings look so good? In many cases, companies have managed to beat expectations through cost controls, price increases, or by lowering the bar earlier in the year. Tech and AI leaders continue to drive indexes higher, while more cyclical areas of the economy, energy, industrials, small caps, have underperformed. That leaves the market looking stronger than the broader economy actually is.
What This Means for Investors
- Valuations are elevated. The S&P 500 is trading well above historical averages. Strong earnings help justify those multiples, but they rely on continued resilience in consumer demand.
- Fed policy is pivotal. Markets are widely expecting a rate cut in September, but the path of future cuts will depend on inflation and employment data.
- Sector positioning matters. If consumer spending slows, defensive sectors like healthcare or utilities may hold up better, while cyclicals could face headwinds.
Earnings and reality are telling two different stories about the U.S. economy. Strong corporate results are keeping markets afloat, but investors should remain cautious about the underlying fundamentals, particularly as households feel the pinch of higher prices and a softer labor market.
At Stonewater, we believe the next few months will be critical in determining whether markets can sustain current valuations or if a broader correction looms.
Disclosures:
Content in this material is for general information only and not intended to provide specific advice or recommendations for any individual
All investing involves risk, including loss of principal. No strategy assures success or protects against loss.
Sources:
Here’s a list of the sources I drew from when drafting the blog. You can include these as references on your site:
- Investopedia. (2025, September 11). Grocery prices squeezed budgets as CPI inflation hit its highest since January. Retrieved from
- The Washington Post. (2025, September 9). U.S. employers added 911,000 fewer jobs than first reported, new BLS data shows. Retrieved from
- AP News. (2025, September 5). U.S. jobless claims jump to highest level since 2021. Retrieved from
- The Guardian. (2025, September 11). US inflation rises again as tariffs push up prices. Retrieved from
- Reuters. (2025, September 10). Barclays lifts 2025 S&P 500 target for second time in three months. Retrieved from
