Making Sense: September Market Update

Making Sense

Monthly Market Update

Recorded on September 24, 2025

Amy: Hi, I'm Amy Thomas. I'm a strategist here at First Citizens Bank. Today is Wednesday, September 24, 2025, and I'm joined by our Chief Investment Officer, Brent Ciliano, and Director of Market and Economic Research, Phil Neuhart, to take a deep dive into what's happening in the markets and the economy. This is part of our Making Sense monthly market update series.

As always, the information you're about to hear are the views and opinions of only the authors at the time of recording and should be considered for educational purposes only. This should not be considered as tax, legal or investment advice.

Brent: Well, thank you, Amy, and good afternoon, everyone. Hope all of you are well. Phil, it's hard to believe that it's fall already. Can you believe that we only have 3 months to the end of the year? Where has 2025 gone?

Phil: It's flown by. It really has.

Brent: Flown by. Well, we've got a wonderful, I think, economic narrative to talk about today. Huge shout-out to Blake Taylor for helping us put this together. But we're going to talk a little bit about, you know, the Fed just cut rates. We're going to talk about Fed policy. And we're going to talk about the impact of the dual mandate.

We've had a lot of things going on recently, and I think we want to unpack that pretty significantly. And as we always do, we're going to dive into markets. We'll talk about where equity markets are. We'll talk about valuations. We've got some great slides there on what's fundamentally driving markets, and then certainly we will get into fixed income. So, Phil, why don't you kick us off on the economic section?

Phil: Absolutely. So spent a lot of time on the road in recent weeks, and the word on the tip of clients' tongue is rates. What is the Fed going to do? Well, we finally had a Fed cut this year on September 17, as you can see here. This is the federal funds rate. Reminder, this is the overnight rate, right? And we'll talk more about longer-term rates later in the presentation.

And you can see the FOMC projections leading forward. So when you look at the rest of 2025—the median FOMC projection—this is a forecast. This is not a guarantee. It's two further cuts, but only one cut next year and one cut in 2027. Now if you look at fed funds futures, they're pricing a little bit more aggressive.

Brent: Much more aggressive, yeah.

Phil: More aggressive cuts. The truth is whether you look at the summary of economic projections or fed funds futures, the one thing we know is they'll both be wrong. It's just in what direction.

Brent: Invariably, right?

Phil: But looking at the near term, bias is lower in terms of short-term rates. But moving outside of 2025, it becomes more interesting. And one of the reasons for that is on this next chart, which is inflation. Really, no matter what measure you look at—headline inflation or core, which excludes food and energy—inflation is running above the Fed's target.

Now, nowhere near the highs we saw in 2022, but this has compounded. And we hear this on the road from clients all of the time is that prices are too high. Well, the issue is if core inflation's running, let's say, 3%—that's on top of what was 4% and what was 6 and what was 9. So we are seeing prices that are quite elevated, and that has had implications for the consumer as well.

When we look at Fed or inflation expectations, we're looking at two measures here. So let's start on the left side. This is household inflation expectations. You saw one year, the next-year inflation expectation, and next-5 both spike. The 1-year spiked much higher with the fears around tariffs. They have come down from their highs, but still quite elevated versus where they were in 2004.

So to say that households are not paying attention to headlines—

Brent: Every time they go to the store, every time they pull up to the gas pump, they're keenly aware.

Phil: That's right. So it is certainly on consumers' minds. So now let's look at market pricing. This is what we call a swap rate. Basically, it’s the market pricing of inflation based on fixed-income markets. One year has moved up really rapidly. This is on the right side, the blue line, which you would expect, right, because of trade conflict. What's interesting is the 5-year 5-year inflation swap rate. This is the—

Brent: Sounds complicated.

Phil: Yeah. The forecasted—according to markets, the implied inflation rate 5 years from now for 5 years beyond that. So think of it as years 6 to 10. It's a fancy way of saying long-term inflation rates. You will hear Chair Powell of the Fed mention the 5-year 5-year. It is still above the Fed's target, but remains somewhat contained. It has not moved up like that 1-year.

This is the sort of thing that the Fed has pointed to as they're cutting rates is that longer-term inflation expectations are somewhat contained compared to fierce.

Brent: Yeah. And I think, you know, the important takeaway is that, you know, we're not predicting that it's going to be back at 2%. Whether I look at implied market pricing or household surveys, we're looking at something that's materially above 2%, which will drive the path of where does the Fed ultimately settle that’s, you know, sort of our star that everyone talks about figuring out where we actually end up is likely to be different than what we've seen over the last decade.

Phil: Yeah. And there's a lot of focus on the Fed's 2% target, 2.0. But the truth is that target is only a little over a decade old. The Fed did not have a target prior to that. And long-term inflation before the last cycle averaged over 2. So the question is, what's the directionality? Do we see inflation move from 3 higher? The truth is if inflation's 2.5 to 3, the Fed may be willing to deal with that for this cycle.

Brent: Yeah. So let's shift, Phil, to the other side of the Fed's mandate. So we have price stability and we have full employment here. So we're talking about the US labor market. As the title says, the narrative on the labor market in the last handful of months has changed materially.

What we're looking at here is a 3-month moving average of job creation. You can see for August—29,000 jobs, Phil, right? So that's been falling since April. So we're seeing that come down quite a bit. The BLS, the Bureau of Labor Statistics, announced not too long ago that they're also going to revise the data from April of 2024 through March of 2025 down by 900,000 jobs. So the labor market has been a little bit on weaker footing than what was originally thought for quite some time.

And the underlying trajectory of what's going on is certainly in question. Now in a little bit less than 2 weeks, we get the September report. But, again, the broad set of economists are only expecting about 42,000 jobs created for September. So the underlying trajectory of the labor market has fundamentally been slow.

Phil: Yeah, when we're asked, "Well, what has changed over the last couple months? All of a sudden, it was just consensus the Fed was going to cut in September." This is the story—is that we saw material downward revisions and weakening in net job gains. Gains still, but at a far lower rate than we thought previously.

Brent: Yeah, and the Fed, to your point, faced with a difficult decision between wondering whether we actually have transitory inflation—or we had this jump up in price level—versus a deteriorating labor market, more often than not, they're going to default towards making sure that the labor market is in better shape than what it could be otherwise without their—

Phil: They're favoring that side of their dual mandate.

Brent: Absolutely. So another interesting labor market metric that you and I have reported on for quite a while is, you know, job openings per unemployed person. Do you remember, Phil, back in, you know, mid-2021 through 2022 when we had two open jobs for every unemployed person, right? And we had really, really tight labor market. We are now at below one to one. Ever so slightly, but the labor market has loosened materially.

Phil: In a way, supply and demand of workers has come back in line.

Brent: Exactly. Exactly. So, again, at the margin, this is something that we're certainly watching, but the amount of job openings relative to the unemployed has materially weakened.

And when you take another interesting labor market, which is comparing people that switch jobs versus job stayers, so job switchers here were looking at the gold line, and blue line is the job stayers. For quite a while, if you look—basically 2019 all the way through recently—there was a premium for people that were switching jobs, right? You got paid a little bit more to make that move, and you can see we hit the height of that in, you know, 2022, 2023, where we saw a pretty significant migration of people changing jobs. Well, you can see right now, you're actually getting compensated a little bit more to stay in that job versus job switching. So just another data point at the margin to say that the labor market and what maybe employers are willing to pay from a market pricing perspective for people has started to go down.

Phil: It’s interesting. We're seeing this anecdotally. For a year and a half, maybe more, the number one complaint we heard from clients is they could not find workers.

Brent: That's right.

Phil: It's not that that's still not the case, particularly in a lot of skilled labor, but we don't hear that nearly as much. Now it's much more about input costs, concerns around trade, for example, fiscal situation in the US, more than "we cannot find workers." And so the data is showing it and anecdotally that matches up with what we're hearing from clients.

Brent: Yes.

Phil: So what about employment just in mass, right? And then there's really two sides to the coin. Obviously, we've seen some normalization or weakening in the labor market from the data you just showed. But if you look to the employment-to-population ratio—and this is prime age workers, age 25 to 54—so we're using that because Baby Boom retiring is distorting a lot of participation data. What you'll notice is that core age adults are employed at the highest rate since 2001 relative to population.

Brent: That's a pretty incredible statistic.

Phil: So people are working—and notice that line is just kind of moving sideways.

Brent: Yeah, right.

Phil: So, yes, we are seeing softening in the demand for workers, but people are generally working. Now, is there a lot of debate in America around the quality of jobs, et cetera? 100%. But when you look at "Are folks working?" The answer, in short, is yes. And that is finding its way into the unemployment data.

Generally, when you look at lows in the unemployment rate and it starts to rise, it continues to rise and rises pretty rapidly. And, generally, we have an inflation—or a recession, rather. What we are noticing here is something a little bit different, right?

We bottomed in 2023 and rose in the unemployment rate and have kind of moved sideways for some time. And we don't believe we're in a recession right now. So this this cycle is very different in a lot of ways. I think that this is something unique that we—it's a reminder. You can't just assume that history is always going to play out.

And what showing is, in my view, sort of a muddle-through economy. It's not that the economy is in great shape. It obviously is not. But we're muddling along.

Brent: Yes.

Phil: And I think one of the boosts to that "muddle along" is what we're showing here, which is that the government has run persistent deficits even with a relatively strong economy.

So when you look at the unemployment rate before the Great Financial Crisis—so look kind of before that 2010 label—you'll notice that the unemployment rate and federal budget deficits tend to move in tandem. In other words, the unemployment rate goes up, the deficit increases.

Brent: From that stimulus and everything that we put into the economy to support coming out of that recession.

Phil: You get stimulus—and we focus a lot of monetary stimulus, right, being that we're market folks—but this is really the fiscal side of it. The two recent examples are the most extreme.

Look at the unemployment rate skyrocketing, that 2008, 2009, and fiscal deficits skyrocketing. And then, of course, the pandemic of 2020, same thing. What you'll notice—and this really started with the Great Financial Crisis—is that the deficit did not fall as precipitously relative to employment as it has in the past. And then an even more extreme example is the period since the pandemic.

So the truth is we're running deficits. That is fiscal stimulus in various ways, whether that is money finding its way to the economy or just less revenue for the government, and that supports the economy. And I think that's helping to support consumer spending and you certainly could argue the stock market as well. This is one of the things that's helping keep this a muddle-through economy and not something worse.

Brent: Well, and one of the positive byproducts of this on the next slide, Phil, is what that stimulus has done to broad financial assets. Whether you're looking at people's homes, whether you're looking at the equity markets, et cetera. We've seen significant wealth creation over the last number of years.

What we're looking at here—it's a great new chart where we're looking at total household equity value worth in the numerator, divided by spending, right? So nominal equity values divided by nominal PCE spending, right? So in essence, it's almost kind of inflation-adjusted to a degree, right, because you're looking at nominal nominal, so you're adjusting for that.

But what's incredible is that outside of that one point post-pandemic, which wasn't driven by higher equity values, it was driven by the denominator falling. When the denominator falls, that number goes up because we had less spending, right? We have—households have—the highest aggregate equity values in history, right? So from a wealth-effect perspective, equity values relative to spending are at the highest levels ever.

And now households have on average about 4.3 years of equity value relative to spending, which is the highest level ever. And if you think about we've been talking for quite a while that high income households—those making more than $100,000—have been the primary drivers of both nominal and real spending.

This is one of the things that makes them feel better about spending. When you have a higher value of your house, when you look at your online statements and you see that you have your equity values going up, you feel better about making those discretionary purchases, taking that trip.

Phil: And very clearly a benefit to higher-net-worth folks than lower-net-worth folks, and we're seeing that in the spending. Something we showed last month and showed previously is for the lowest income quintile, spending has not increased in real terms—inflation adjusted—in 3 years. But high income has. Well, and this is why. Stocks are at an all-time high. Home value's gone up, et cetera.

Brent: Well, let's take what you just said a little bit deeper, and let's talk about some of the frictions for all spenders, but let's focus on middle- and low-income spending.

What we're looking at here is the underlying rising cost of everyday living expenses just to get by. So the dashed line here is core CPI, right? Sort of that baseline. And we base this at January of 2020. And we're kind of looking at some of those things that everyday Americans spend, whether that's, you know, gasoline, food, you know, vehicle repairs and maintenance, insurance, which has skyrocketed, you know, things like gas and utilities, electricity. And you can see all of those in percentage-change terms significantly above core CPI.

So those everyday necessities for folks, while wages have risen, the underlying cost of everyday necessities have gone up significantly more, right, which is putting a strain on spending, which is putting a strain on folks in that middle- and lower-income households.

Phil: And what have we seen? We've seen those folks access their credit card. Revolving credit has skyrocketed. And now, unfortunately, we're seeing credit card delinquencies rise. So you access your credit card to pay your bills, and now delinquencies are rising.

Brent: A stretched consumer.

Phil: But then you say, "Well, but Brent, spending is still hanging in. Why is that?" Well, it's because of folks that have excess capital and wealth that this does not hurt as much.

Brent: That's right. So let's take that spending narrative, and let's look at the chart on the left here. The dark blue line is nominal spending. The gold line is inflation-adjusted spending.

And you can see from an inflation-adjusted perspective, spending has been pretty solid. And if you said, "Hey, let's translate real spending to growth," right?Because we talked about 68% of US Real GDP is consumption. So if you said, "Hey, Brent, we're going to print 2.1% Real GDP quarter-on-quarter," I would be cheering, right?

So real spending is hanging in there, but you can see the chart on the right. When I look at the trajectory—and the gold and blue bars there are consumption related to goods, the gray bar is consumption related to services—and you can see that in aggregate nominal spending is coming down, but you can see spending on services at the margin is starting to fall.

Phil: Yeah, that contribution is coming down.

Brent: Exactly. That contribution is coming down in addition to the aggregate nominal level is starting to moderate lower, which, again—so spending is OK. But as it relates to what that translates to growth going forward, we're going to have to see some type of stimulus as it relates to what's going to drive growth further to make sure that we stay out of recession.

Phil: The only takeaway I'd add is the right chart shows how important services spending is to not only to personal consumption growth, but to personal consumption. So when you look at things like tariff impacts, sure, we see an impact in goods spending. It's in the data. But if most of spending—which it is—is services, it may not find its way versus goods. So it is interesting as we see that play out in the inflation data. So let's turn to markets for a moment.

First, this is a chart we've shown much of this year. Reminder, of course, we had a drawdown earlier this year. That seems like distant history, though.

Brent: Yeah, it's hard to remember.

Phil: US stocks drew down 19%, up now 14% year to date.

Brent: What a change.

Phil: And what a year for diversification. Developed equities up nearly 25%. Emerging markets up over 27%. Aggregate fixed income has had an incredible year for a risk-off asset, up 6%. And muni bonds, which lagged for a while, now up 3%.

So we certainly have seen a great year. There's a lot of good news in the price, which we'll talk about in a moment, but certainly have seen a great year for assets really across the globe. So how great has this return been in the US specifically?

Brent: I like that line.

Phil: Yeah. S&P 500 returns here, all the way back to 2022. As a reminder, since the low in October of 2022, we have rallied 95%.

Brent: It's incredible.

Phil: Now remember, we had a 25% drawdown in 2022, also something that's easy to forget. We've had drawdowns. We had 19% this year. We've had some 10% drawdowns. But in the end the market has been incredibly resilient. There's some fundamental reasons why, which we'll talk about in a moment. But just a reminder that we have come quite a long ways.

Brent: So, you know, one of the—and we've talked about this before—one of the byproducts of that 95% run-up from October 12 of 2022 is that valuations on the S&P 500 have gotten a little bit stretched.

And, what we're looking at here is the next 12-months PE ratio, in essence, what are investors willing to pay for a dollar of next 12-months earnings, which they're willing to pay 22.6 times, right, which is—relative to history—approaching almost two standard deviations expensive. But as you and I talk about all the time, you know, the multiple rarely trades at the average. You have high highs and low lows, and it's really the trajectory.

And we've talked about—and we'll get into in a moment when we talk about corporate earnings and profitability—that multiples tend to move in line with operating margins, and operating margins are looking pretty robust.

But one of the things that we might, you and I might push back at, as it relates to higher valuations, is what's fundamentally driven equity markets since 2022. And on this next slide, which is a newer one, we decided to just to break it down.

So let's look at what we're talking about here. The dark blue bar on the right is the cumulative return for the S&P 500 from January 1 of 2022 all the way through August of this year. And you can see cumulative 48% returns. What we've done is disaggregate—well, what's contributed to those returns?

And what I want you to really focus on is that gold bar. Twenty-nine percent of the 48%—or roughly 60% of the S&P 500's returns from 2022 to now is driven by earnings. And when you add in dividends, which is 6% contribution, a full almost three quarters of S&P 500 returns are fundamentally driven, right?

You have only about a quarter, which is what we call multiple expansion or paying more for that same dollar of earnings. So, again, as you and I have been talking for quite a while, this equity market has been robust, but it's driven by the underlying fundamentals of companies in the S&P 500.

Phil: Yeah, we hear this a lot on the road—the market's expensive. And by the way, we've heard that for a couple years now. And the truth is that was these were still good entry points. And then the reason is what you just said is the fundamentals are actually driving the lion's share of return. It's not just that the price-to-earnings multiple has expanded.

Brent: Yeah, so let let's get under the hood. Let's talk about corporate earnings and profitability and where we are. So let's look at that first bullet on the left.

What is expected by analysts for the full year? We are now up to 10.7%. This used to be 10.3%—jeez, just about a month or so ago. So at the margin for this year, it's great.

We saw 12% in Q2. We're looking at 7.7% for Q3. So, again, continued robust earnings growth. But what I find really fascinating is expectations for 2026 are now up to 13.7% from 13.4%.

And, again, think about the base effect that you and I were talking about. That's off of a higher base. So corporations are looking to grow almost 14% next year after what they've already put up. And, again, relative to the long-term average since 1950, next year's earnings growth is almost double the long-term average, which is just remarkable.

On the right-hand side is bottom-up S&P 500 companies' estimated next 12-months operating margins. So, again, we're looking at the next 12 months, and again, bottom-up from companies, sitting at 18.2%, Phil. That is the highest level ever recorded.

So when you think about what corporate earnings and profitability has been able to deliver and operating margins for S&P 500 companies, it's truly astounding given the operating environment that we're in today, right? Because as you and I talk about all the time, it’s less than clear.

Phil: Right.

Brent: But with everything that's going on, both geopolitically and fiscally, for companies to be able to do this and to expect to see margins like that is truly staggering.

Phil: And to your point, we have seen upward revisions, right? So here we're showing revisions, a smooth 3-month moving average for the S&P 500. This is analysts revisions, so think company-level analysts. Numbers were revised down pretty sharply after Liberation Day and tariff concern. Why is that? If you have a trade embargo in China, an analyst has to cut their numbers.

Brent: That's right.

Phil: Well, the truth is we've seen a lot of resolution on the tariff side, a lot more certainty there, and now revisions have moved higher. As you mentioned, that's finding its way into the growth data. Excellent to see, and I think one of the reasons the market has performed well since its lows in April.

Something that's really on folks' mind is the dollar, right? We've seen quite a bit of dollar weakness this year. It has diverged from the 10-year Treasury yield, which tend to often move at least in tandem. I wouldn't say directly in tandem, but, kind of, they rhyme.

We have seen divergence there. Why is that? Well, there's some concern around trade. Also, we had had pretty extreme dollar strength. What's interesting—if you look at the dollar index here, yes, it is far weaker than it has been the last couple years, but stronger than it was in 2021, in which the US was still the best house on a bad block.

What does a weaker dollar mean? Well, one, it does boost S&P 500 earnings. Why is that? S&P 500 is filled with multinationals. When they sell internationally and they bring whatever that currency back, it is now worth more in dollars because the dollar is weaker. It also helps on an export perspective. Import—different story, right? So there are implications for this, but something that's very much on our clients' minds and has been a bit of a tailwind to US corporate earnings.

Brent: Well and what I would also say is think about building your portfolios and having international diversification. You kind of covered what international stocks have done year to date, right? As the dollar has fallen, right, when I translate those foreign earnings and those foreign prices back to US dollars, that is a boon for owning foreign assets.

So when we think about portfolio diversification, not only do we believe that the fundamentals within international markets look good—not only in absolute terms, but relative to their own history—it's being buoyed by a falling dollar as we translate those earnings and those prices back.

Phil: That's right. So what do we think about stocks moving forward? Our S&P 500 price target, next 12 months, is still 6,800. We have been there now for a month or two.

The market has skyrocketed toward our price target. It's about 2% below it. Our bull case is 7,450. Maybe the bull case is playing out. That said, markets don't just move up in a straight line. And we have stuck with our price target. We, as a reminder, did not cut our price targets in the events of April.

So we have remained constructive, but at the same time, we want to have a reasonable view and not just think we're moving up in a straight line, and we don't. We think that there are certainly things that could slow the move higher in the market. So we remain constructive, but I would not describe us as max bullish.

Brent: But we and we're doing this from a fundamental basis. So we're not going to chase our tail as other analysts on the street start to raise their prices and just chase the momentum, the S&P 500 higher. We're going to do it from a fundamental perspective. And while 2% might seem meager for the next 12 months, to your point, we've certainly been angling towards that bull case. And we do expect volatility, over the next 12 months as we start to sort things out both economically and in market prices.

Phil: That's right.

Brent: So, Phil, let's shift to fixed income, and let's take a look at what's been going on. We decided this time around to show a different picture of the US Treasury yield curve. So what we're looking at here, dark blue line is the 2-year Treasury. The gold line is the 10-year Treasury. And that dotted gray line is the 30-year Treasury.

And what you can see is when you look at the left, as the Fed started hiking rates, you saw a huge move up in the 2-year note to where we got to a point where in 2023, we were north of 5%—which is pretty incredible, right? So, again, the relationship between the overnight rate and fed funds and the shorter end of the curve was pretty much moving in tandem, right?

So as we were thinking about—what you and I had talked about—compensation and yield within fixed income was quite prevalent and it still is today, but we sort of hit that max level in 2023. And what you can see is that gray or so that vertical line when the Fed started cutting rates in September of 2024, we saw the yield curve steepen. And what does that mean in English?

That basically means that longer rates—relative to shorter term rates—so long-term rates rise, short-term rates fall, and you have a steeper yield curve between shorter rates and longer-term rates, which is a more natural, upward-sloping view of that term premium.

And it just makes sense. If you're going to loan somebody money for 30 years, you should demand more in yield than loaning your friend money for 2 years, right? So that's the natural, upward-sloping curve.

But what I will say from an investment perspective, if you kind of draw a line down or a vertical line toward the tops of that 2-year yield—yields have been falling since 2023. And for the folks that should have reserved cash, whether you have an emergency need or a specific liability that you're matching, it makes sense in the context of financial planning to make sure that you have that balance.

But for people that have been sort of, you know, "T-billing and chilling" or sitting within cash to earn that higher yield, you might start thinking about term premium and thinking about locking in some of those yields before yields fall even further if you're thinking about what that means in your financial planning, and we continue to see a steepening yield curve.

On the other side of it, let's take a look at the credit side of the equation here. Dark blue line are high yield bond spreads, and the gold line are investment grade bond spreads. And what is a bond spread? So in essence, we're talking about the yield over and above the commensurate default risk-free asset, which is the corresponding US Treasury, right?

So how much yield compensation you get for the risk in investing in high yield or investment grade bonds. And you can see that spreads—whether it's high yield or investment grade bonds—have fallen pretty significantly. I mean, look, they've fallen pretty significantly from 2022 to now.

And when yields fall, bond prices go up. So we've seen a pretty significant move up in the returns for US high-yield bonds as well as investment grade credit. Now and you look at those dotted blue and dotted gold lines across, we are sort of below that longer-term average of yields.

So we're not saying that spreads can't fall further. We think that they actually will. But the amount of, you know, juice for the squeeze within these asset classes is starting to get to a point where you need to balance the risk there.

Phil: And what does this mean for markets? Well, this is a great measure of risks in the marketplace. When spreads rise, it means that the market's demanding a premium to lend to a corporation compared to the US government. Well, that is tighter, which means there's less risk according to fixed-income markets.

Usually, and fixed-income people will certainly say this, usually fixed-income markets see trouble before equity markets. So it is something we watch. There's a reason we show spreads so often because if these start to rise, it might indicate some problems in the system.

From an investment perspective, excuse me there, you are still seeing yield even with some falling rates across the curve. The aggregate bond is yielding 4.3%. Just to put in that perspective as a reminder, in August of 2020, it was yielding 1%. So you're over four times the yield if you invest in just aggregate bonds compared to where you were.

And, of course, muni bonds at 3.6% tax equivalent yield—that makes it pretty attractive.

Brent: And nominally above the rate of inflation.

Phil: That's right. So there is still yield. It's not that fixed income's not a viable asset class. It actually is much more viable asset class than it was 5 years ago.

So we often get the question, and something that we'd like to wrap up with is—is now a good time to invest? During April, should I exit? Right? I'm worried. I'm scared. Well, first, the answer is always have a financial plan and have the correct buckets, right? If all of your assets are just in the stock market, that might be a problem.

Have your safety valve, have fixed income. But for those long-term risk-on assets, it really is time in the market that pays over the long term. So here is an example for you. If you had $10,000 in 1995 and you just stayed invested through last year, through 2024—remember this includes the end of the original tech bubble. This includes a Great Financial Crisis, the worst financial crisis since the Great Depression. This includes the pandemic. You still grew to a $131,000. Ten thousand to $131—just staying invested, not doing anything.

Brent: That's more than 13 times your invested capital.

Phil: That's right—without doing anything. Now if you miss just the five best days, this is thousands of trading days, right, from 1995 through 2024. If you miss just the five best trading days, your return fell 37% to $83,000.

Brent: Incredible.

Phil: Now, and 10 best, it falls 54% and so on. Every once in a while, the market gives us a gift. That gift this year was in April, in which this was the day that the administration delayed the original tariffs by 90 days. On that day, the stock market rallied 9.5% in 1 day. So you say, well, you only missed five days. How could your return fall 37%? Well, the answer is that one of those days could be 9.5%. And 9.5%, that's a good year of return. It's an excellent year of return.

Brent: Exactly.

Phil: In one day. So trying to time markets is very difficult. As we show on the right side, nearly half of the S&P 500 strongest days occurred during a bear market. Another 28% took place in the first 2 months of a bull market when you don't know, right? Which, by the way, April is an example of that. So three quarters of the days roughly occur when you would not necessarily want to invest.

Brent: Yeah, well, Amy, I see that we've got a lot of questions in the queue. So why don't we open it up to Q&A?

Amy: Well, thank you both for taking a deep dive into markets in the economy. It’s always interesting to hear your perspective each month.

Before we go, I do just want to—before we jump into questions—I want to remind everybody that we do have several publications throughout the month, weekly videos, commentaries that come out.

We also just launched another part of our podcast that you did with Thomas O'Keefe walking through our Capital Management Group's investment philosophy and going through those tenets. So if you'd like to check those out, those are on Spotify, Apple Music and YouTube Music.

So let's jump into questions. We got several this month. No surprise where the first one is around Fed cutting rates. How is it going to affect businesses and household incomes and concerns?

Phil: Yeah, so we get the question a lot of, you know, for households, "Are my mortgage rates going down?" or for businesses, same thing. And the truth is the Fed controls the overnight rate, right? When you look at something like longer-term mortgage rates, that's much more correlated with the 10-year, 30-year Treasury, which has come down, but may not just continue to fall.

I think there's a lot in the price there. Now for businesses that are borrowing at SOFR Plus, for example, sure. You do see rates come down. But Alan Greenspan called this the great conundrum. The Fed controls the overnight rate, do not control long-term rates. Just because the Fed is cutting or hiking does not mean longer-term rates move in tandem.

As a reminder, last year when the Fed cut a whole percentage point—beginning last September—cut a percentage point in the year 2024, we saw Treasury yields, longer-term Treasury yields rise, not fall. So, the answer is yes, mortgage rates have come down, but I would not expect that just because the Fed cuts a quarter point in October, let's say, that mortgage rates fall exactly a quarter point. They may just flatline.

Brent: Yeah. Exactly, and to the point you mentioned, small- to medium-sized businesses, right? So borrowing—if I look at the NFIB survey and I look at borrowing from small- to medium-sized businesses—while that's come down a little as far as the cost of that borrowing, they're still significantly high, which is putting strain on that small- to medium-sized business and ultimately their operating margins because the cost of that borrowing is still high.

Tariffs are having an impact to a degree on some of the prices. So for that smaller- to medium-sized business client, we still haven't seen the relief that we ultimately need to see.

Amy: And Brent, I know you love tech stocks.

Brent: I do.

Amy: There's been a lot about them in the news lately. That's not a new story. It's been ongoing. But where do you see, tech stocks going from here?

Brent: Yeah. Well, I mean, across the board let's take a big picture, Amy, right? The S&P 500 in aggregate has been doing quite well. And if I start first with the fundamental side, when we look at, sort of, second quarter earnings, we talked about 81% of companies beating estimates, but also 81% of S&P 500 companies beat on revenues, right? So earnings, operating margins, there's things that corporate executives can do to work their selves away around that as it relates to, you know, making numbers look good.

Revenue is really hard to monkey with. So when I think about the breadth across stocks in the S&P 500, it's not just the top 10 stocks within the S&P 500 that are driving performance. While they certainly are contributing significantly, we are starting to see that contribution from the residual 490, not only from a performance perspective, but also from an earnings and revenue perspective. So we're starting to see that breadth widen out.

As it relates to any one sector, it vacillates back and forth. Certainly, some of the bigger names within technology are either monopolies themselves or quasi-oligopolies where you think about their ability to be resilient to pricing pressures, to tariffs. And when I think about that from a service perspective versus a goods perspective, they've been able to continue quarter after quarter to put up great return—sorry, great earnings.

But what I will always say to clients, good companies don't necessarily mean that they're good stocks, right? I'm not saying that they're not. There certainly are good stocks and good companies. But at the end of the day, the returns that you get in the equity market is a byproduct of the discounted present value of future cash flows.

So it's really the price that you pay for a company that really drives forward returns, not whether or not it's a great company or not. And when you start to see some of the valuations—when we think about some of the maybe bigger chip company in the S&P top 10 or things along those lines—valuations are starting to get stretched a little bit.

Phil: And we have been in the broadening camp, right? The largest companies—think the top 10 stocks—they've rallied hard for a reason. They have very high margins as Brent mentioned.

But there's good companies outside of that. If you look at the other 490 companies in the S&P 500, 25%—actually, 25% of the largest 3,000, even beyond that—25% of the largest 3,000 have gross margins over 60%, which is extremely high. So there's a lot of good companies.

So we continue to think that, yes, those big companies, that the very largest companies, should trade at a premium. They have incredible pricing power and margins and good business models, but that doesn't mean there's not other good companies. We think there are, so we remain in the broadening camp.

Amy: So there was a lot of concern coming into this year around government policy, tariffs and things of that nature. It seems a little bit like some of that concern has died down a little bit. What are your thoughts there?

Phil: Well, this week that there continues to be concern around a government shutdown. I think risk markets are pretty conditioned that if there is a shutdown it's short term and look through it compared to a few years ago, which, or even a decade ago, the market would react, excuse me, very strongly.

And then on the tariff side, yes, there are still pending tariff deals, but we do know more today than we knew, say, on April 2. I continue to think that policy—whether that's monetary or fiscal policy—remains a bit of an overhang, but look, tax legislation passed, right?

The truth is we just know more now than we did 6 months ago. And I think that helps to explain why the market has moved up. We market folks, we like the market looking at things like corporate earnings.

It's fundamentals for corporations, not looking to DC, right? When it's looking to DC, no matter your stripe, that can be problematic. So we like that we're seeing a return to, "Hey, what is Company X's margins? What's their revenue growth? What's their earnings growth?"

But that said, I don't think DC is going to stay out of the picture persistently. I think that's going to remain something we're talking about and having to focus on.

Brent: Yeah, but I think it's pretty incredible. I mean, we just covered from a corporate earnings and profitability perspective. Next 12 months, Amy, 18.2% against the backdrop of a weighted average effective tariff rate north of 16% with a lot of the fiscal and geopolitical noise.

Despite all of that, who would have thought that with all of that overhang, that companies would still be able to do what they're doing and provide earnings growth and revenue growth and operating margins that look like that? So, again, we constantly underestimate the ability and power of corporate America—and I'd say corporations around the world—to be able to take in this data and navigate their businesses successfully.

Phil: And something we hear on the road, but also observe among the biggest companies and, you know, midsized businesses that we talk to is—particularly in corporate America—these businesses are fairly dynamic. They can adjust. So when you think about something like tariffs, right? The effective tariff rate, what companies are actually paying right now, is below that. If you just do the simple division as Blake Taylor has done. Well, why is that? Companies adjust, right? So I think we are seeing adjustments happening, and companies have been adjusting around policy coming out of Washington for centuries. I don't think that that's changing anytime soon.

Amy: Well, it sounds like we're going to have a busy fourth quarter. I hope you both have plenty of coffee stocked and ready to go. Thank you both again as always for answering questions, and thank you all for trusting us to bring you this information. It's something we never take for granted, and we look forward to seeing you next month.

Making Sense

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Authors

Brent Ciliano CFA | SVP, Chief Investment Officer

Capital Management Group | First Citizens Bank

8510 Colonnade Center Drive | Raleigh, NC 27615

Brent.Ciliano@FirstCitizens.com | 919-716-2650

Phillip Neuhart | SVP, Director of Market & Economic Research

Capital Management Group | First Citizens Bank

8510 Colonnade Center Drive | Raleigh, NC 27615

Phillip.Neuhart@FirstCitizens.com | 919-716-2403

Blake Taylor | VP, Market & Economic Research Analyst

Capital Management Group | First Citizens Bank

8510 Colonnade Center Drive | Raleigh, NC 27615

Blake.Taylor@FirstCitizens.com | 919-716-7964

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