A Rally Stalled

August 18, 2025

Financial Markets

U.S. equity markets delivered mixed results last week, reflecting a shift in market leadership and renewed concerns about inflation. While much of 2025 has been defined by the dominance of large-cap technology stocks—particularly the so-called “Magnificent Seven”—a new and previously underappreciated group of stocks briefly took the lead. The Dow Jones Industrial Average outperformed its peers, suggesting a rotation away from the narrow leadership that has characterized recent rallies.

However, momentum stalled with the release of the Producer Price Index (PPI), which showed an unexpected uptick in inflation. This development tempered investor enthusiasm and reminded markets that the Federal Reserve’s path toward easing monetary policy remains uncertain.

Economics

The PPI surprise underscored investor sensitivity to inflation data. Coming just ahead of the Federal Reserve’s annual Jackson Hole conference, where interest rate strategy will be a focal point, the report shifted market sentiment. Many analysts had anticipated a 25 basis point rate cut in the near term. Instead, the hotter-than-expected inflation data injected doubt, raising the possibility that the Fed may wait for clearer evidence before easing.

Complicating matters, labor market data offered a more ambiguous picture. While job creation remains positive, signs of softening growth are emerging. The combination of persistent inflation pressures and moderating economic momentum has fueled discussion of stagflation—a problematic scenario in which inflation remains elevated while growth weakens. The Fed is unlikely to act without strong conviction that inflation is sustainably under control, even if growth continues to slow.

Internationally, China’s economic struggles continue to serve as a cautionary tale. Years of excessive borrowing and overinvestment—particularly in housing and heavy industry—have left lasting imbalances. Despite repeated attempts at stimulus, structural challenges persist, with consumer debt burdens and industrial overcapacity weighing on growth. These headwinds suggest that China’s economic malaise is unlikely to resolve quickly.

Conclusion

The balance of risks facing investors has shifted once again. While equity markets have demonstrated resilience, recent inflation data highlights the fragile nature of the rally. For now, it is neither the time to overweight risk nor to retreat entirely from markets. Instead, discipline and diversification remain essential.

We continue to believe that the most significant risks are political rather than economic in nature. Unlike economic cycles, which tend to follow rational patterns, political developments are far less predictable. Against this backdrop, caution is warranted as we enter a critical period for monetary policy and global stability.

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