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Market Update: August 2025 In Review
Key Observations
- The S&P 500 and Dow hit record highs in late August, driven by strong earnings momentum. Still, all major indexes ended the month with a modest pullback, leaving the S&P up 2.03% for August.
- Big tech and AI stocks powered much of the rally, but an MIT study showing weak AI return on investment (ROI) and tariff worries cooled sentiment.
- The economy rebounded strongly in Q2 with 3.3% growth and inflation holding at 2.6%, raising hopes for Fed rate cuts. However, consumer confidence slipped, signaling households remain cautious about spending.
Market Recap
As summer winds down, August brought another eventful chapter in both the markets and the economy. The month was characterized by record-setting highs across major U.S. equity indexes, continued enthusiasm around artificial intelligence and technology earnings, and a generally resilient economic backdrop that contrasts with softer consumer sentiment. Below, we review the highlights of August 2025 and provide perspective on the forces shaping the investment landscape.
Markets Reach Historic Highs, Then Pause
U.S. equity markets entered August with momentum carried over from July’s gains, and that strength persisted through much of the month. On Aug. 28, the S&P 500 notched both intraday and closing record highs, reaching 6,445 and 6,502 respectively. The Dow Jones Industrial Average also reached a new peak late in the month, climbing above 45,600. These milestones were underpinned by robust earnings results from several large-cap companies, particularly in the technology and artificial intelligence (AI) space, where strong demand for infrastructure and cloud services continued to drive growth.
Despite these achievements, markets eased slightly as August came to a close. On the final trading day of the month, the S&P 500 slipped 0.6%, the Nasdaq fell 1.2% and the Dow lost 0.2%. Even with this modest pullback, the S&P 500 ended August higher by 2%, marking its fourth consecutive month of gains. The Russell 2000, a proxy for smaller companies, also advanced in August, up over 7%.
This pattern—record-setting highs followed by a cooling-off period—reflects a broader trend we have seen throughout 2025. Investors continue to reward companies delivering strong results but are increasingly sensitive to any signs of overvaluation or slowing growth.
Technology Leads, But AI Hype Faces Scrutiny
Technology stocks remained at the center of market leadership in August. Earnings reports from several mega-cap companies highlighted the ongoing demand for AI-enabled services, data centers, and software tools. These results reinforced the narrative that artificial intelligence remains a transformational driver for corporate growth and productivity, at least in the near term.
However, the optimism around AI was tempered by new concerns about its longer-term ROI. An MIT study released in mid-August found that approximately 95% of generative AI pilot projects to date have produced little or no measurable returns. This report triggered a wave of caution across markets, erasing nearly $1 trillion in market value in a matter of days as investors recalibrated their expectations. The selloff was most pronounced in companies viewed as heavily reliant on AI adoption to justify premium valuations.
In addition to the AI debate, trade policy and tariff headlines weighed on sentiment. Uncertainty surrounding international trade flows has been an undercurrent throughout 2025, and markets are beginning to price in the possibility of more lasting disruptions.
In short, the technology sector continued to deliver results that excited investors, but the month also underscored that expectations are high, and vulnerabilities remain if growth does not materialize as quickly as hoped.
Economic Growth Rebounds, While Confidence Softens
On the economic front, the U.S. delivered another positive surprise. After a tariff-related contraction in the first quarter, gross domestic product (GDP) rebounded sharply in the second quarter, growing at an annualized rate of 3.3%. This pace of expansion exceeded many forecasts and highlighted the resilience of both business investment and consumer spending in certain categories.
Inflation, as measured by the Personal Consumption Expenditures (PCE) index, remained stable at 2.6% year-over-year in July, the latest data available during August. This reading was in line with expectations and suggested that inflationary pressures are gradually moderating without derailing growth. Market participants increasingly interpreted this as an opening for the Federal Reserve to begin reducing interest rates as soon as September. Futures markets reflected nearly a 90% probability of a rate cut, up significantly from a month earlier.
However, despite the positive GDP and inflation data, consumer confidence weakened in August. Surveys from both the University of Michigan and the Conference Board showed that households are growing more cautious, particularly around large purchases such as automobiles and vacations. This suggests that while aggregate economic numbers remain healthy, many individuals still feel pressure from higher costs of living and are hesitant to commit to discretionary spending.
This divergence—between strong top-line growth and softer consumer sentiment—illustrates one of the defining dynamics of the current economic cycle. Businesses, particularly in technology and services, are finding ways to expand, but households remain more conservative in their outlook.
Global Context
Beyond the U.S., international markets presented a mixed picture in August. European equities were generally steady, supported by easing inflation and hints of policy flexibility from the European Central Bank. In Asia, performance varied, with Japan continuing to benefit from a weaker yen that boosts exporters, while China’s markets remained pressured by lingering concerns over real estate weakness and slower consumer demand.
Trade remains an overarching theme globally. Tariff tensions, particularly between the U.S. and key trading partners, continue to affect sentiment across supply chains. For multinational companies and globally exposed sectors, this uncertainty creates both risks and opportunities as firms adjust their strategies.
Conclusion
August underscored both the opportunities and challenges facing markets. On one hand, equities achieved historic highs, supported by robust earnings and a resilient economy. On the other hand, the month highlighted areas of concern, including the sustainability of AI-driven growth, trade-related uncertainty and softening consumer confidence.
For long-term investors, these dynamics illustrate the complexity of the current environment. Markets continue to reward innovation and resilience, yet they remain quick to adjust when expectations get ahead of fundamentals. As always, our role is to monitor these developments carefully and provide you with clear, objective updates on the forces shaping markets and the economy.
We thank you for your continued trust and look forward to keeping you informed in the months ahead.
This market commentary is meant for informational and educational purposes only and does not consider any individual personal considerations. As such, the information contained herein is not intended to be personal investment advice or a recommendation of any kind. The commentary represents an assessment of the market environment through August 2025.
The views and opinions expressed may change based on the market or other conditions. The forward-looking statements are based on certain assumptions, but there can be no assurance that forward-looking statements will materialize.
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Does past performance matter?
Major Market Index Returns
Period Ending 9/1/2025
Multi-year returns are annualized.
Mix Index Returns
Global Equity / US Taxable Bonds
Indexes are unmanaged and cannot be directly invested into. Past performance is no indication of future results. Investing involves risk and the potential to lose principal.
The Russell 3000 Index is a United States market index that tracks the 3000 largest companies. MSCI Emerging Markets Index is a broad market cap-weighted Index showing the performance of equities across 23 emerging market countries defined as emerging markets by MSCI. MSCI ACWI ex-U.S. Index is a free-float adjusted market capitalization-weighted index that is designed to measure the equity market performance of developed and emerging markets excluding companies based in the United States. Bloomberg U.S. Aggregate Bond Index represents the investment-grade, U.S. dollar-denominated, fixed-rate taxable bond market, including Treasuries, government-related and corporate securities, as well as mortgage and asset-backed securities. Bloomberg Municipal Index is the US Municipal Index that covers the US dollar-denominated long-term tax-exempt bond market. The index has four main sectors: state and local general obligation bonds, revenue bonds, insured bonds, and prerefunded bonds.
Market Update: July 2025 In Review