Weekly Market Update: August 25, 2025

The July price data painted a mixed picture on inflation. On the positive side, the Consumer Price Index (CPI) was relatively in line with the consensus forecast and overall benign. Conversely, the Producer Price Index (PPI) came in very hot, with the PPI and core PPI, which excludes the food and energy components, jumping 0.9% and 0.6%, respectively, on a month-to-month basis, suggesting that the Trump tariffs may be leading to an uptick in inflation at the wholesale level. However, it should be noted that the PPI tends to be a more-volatile series of data and a good deal of the July PPI increase came from the services side, which is little impacted by tariffs. 

The labor market is holding up well. True, the nation created an estimated 73,000 jobs in July, well below the consensus forecast of 110,000. However, the unemployment rate held steady at 4.2%, a level indicative of near-full employment, and we have not seen a notable uptick in corporate layoffs. In fact, initial weekly jobless claims in early August remained at a pace indicative of a tight labor market. 

According to the Fed futures market, the odds of an interest-rate cut in September remain high. However, the overheated July PPI figure, which factors into the Personal Consumption Expenditures (PCE) Price Index reading, likely takes the possibility of a half-point reduction off the table. It also might make the central bank less dovish on the monetary policy front over the remainder of 2025. Still, the stock market is encouraged that the Federal Reserve appears set to cut the federal funds rate by a quarter-point next month. 

A favorable second-quarter profit performance was cheered by Wall Street. Indeed, earnings growth for the S&P 500 companies was averaging nearly 12% for the period, easily exceeding prognostications. The new tariffs did not have as much of a negative impact on second-quarter results as feared, but still may prove to be a headwind for businesses in the months ahead. 

Conclusion: Given the strong second-quarter profit performance from Corporate America and sentiment that the Fed will resume cutting rates next month, a portfolio led by high-quality stocks is recommended, despite valuations looking a bit frothy.

Source: ValueLine.com