After weeks of market momentum, U.S. stocks stepped back last week as investors digested the Federal Reserve’s much-anticipated interest rate cut and a steady stream of new economic data. The result: the first weekly loss for all three major indices in four weeks.
While Friday’s rally provided a partial rebound, it wasn’t enough to offset three consecutive days of declines. The S&P 500, Dow Jones Industrial Average and Nasdaq finished in negative territory.
Inflation: Progress, But Not Yet Mission Accomplished
Adding to market uncertainty, Fed officials struck different tones throughout the week. Some voiced support for aggressive rate cuts to counter a weakening labor market, while others, including Chairman Jerome Powell, argued for a slower, data-driven approach. Powell characterized the Fed’s latest move as a “risk management rate cut,” designed to provide flexibility as conditions evolve.
A Paradox in the U.S. Economy
Thursday brought a surprise on the growth front. The Bureau of Economic Analysis reported that gross domestic product expanded 3.8% annually in the April-June quarter, a sharp rebound from the prior quarter’s 0.6% contraction.
This strength was fueled by robust consumer spending, with recent retail sales and business investment trends pointing to continued momentum. The Federal Reserve Bank of Atlanta’s GDPNow model currently estimates 3.3% growth for the July-September period (Source: Bloomberg).
Yet there’s a puzzle here. Economic growth is accelerating, corporate profits are healthy and future earnings estimates are rising … all while the Fed is actively cutting rates to support a softening labor market. One possible explanation is productivity gains from artificial intelligence. Companies are finding ways to deliver more with fewer employees. They are boosting profit margins but leaving some job seekers — particularly new graduates in humanities fields — facing a more challenging employment landscape.
The Wealth Effect: A Double-Edged Sword
This year’s run-up in stock prices has created a “wealth effect” among higher-income households. According to a recent University of Michigan survey, households with significant stock holdings are optimistic about the economy and are powering much of today’s consumer spending.
- In the second quarter of 2025, the top 10% of U.S. earners accounted for nearly half (49.2%) of all consumer spending, the highest level since tracking began in 1989 (Source: Moody’s Analytics).
- In the 1990s, this figure was just 36%.
While this concentration of spending has helped fuel economic growth, it also represents a vulnerability. A sharp and sustained market downturn could prompt high-income households to pull back suddenly, potentially dragging the broader economy into a recession.
April’s brief sell-off didn’t disrupt spending because stocks rebounded quickly. But a deeper or more prolonged decline could have a very different outcome.
What’s Ahead: A Government Shutdown and Missing Data?
In the week ahead, markets may have to contend with another potential headwind: a U.S. government shutdown. Ironically, a shutdown’s most immediate market impact isn’t direct economic harm; it’s the loss of government data releases.
If a shutdown begins on Wednesday, there will be no official reports, including Friday’s crucial Employment Situation report. This jobs report has become a key focus for Fed policymakers as they gauge the labor market’s health.
Should the shutdown persist, investors will instead turn to the ADP private payroll report, set for release on Oct. 1, as one of the few remaining independent sources of labor market data.
All eyes will be on Washington as we see whether a shutdown materializes and, if so, how markets adapt to a temporary data loss. Preparation remains our best strategy in an environment shaped by opportunity and uncertainty.
The information contained herein represents the views of Elevage Partners at a specific point in time and is based on information believed to be reliable. No representation or warranty is made concerning the accuracy of any data compiled herein In addition, there can be no guarantee that any projection, forecast, or opinion in these materials will be realized. Any statement non-factual in nature constitutes only current opinion which is subject to change. These materials are provided for informational purposes only and do not constitute investment advice. Any reference to a security listed herein does not constitute a recommendation to buy, sell, or hold such security. Past performance is no guarantee of future results. The historical returns of any securities and/or sectors mentioned in this commentary are not necessarily indicative of their future performance.