Market Update
U.S. equity markets ended the week up last week, shrugging off the government shutdown and instead focusing on the anticipated rate cuts which should be tailwind to the economy and equities. Markets increased the probability of a second rate cut to 85%, up from 65% a week ago. Government shutdowns tend to have a minor and short-lived effect on the economy with the median shutdown lasting 4 days since 1976 with a median return of 0.1%. The S&P 500 was higher 12 months post shutdown 86% of the time with a median return of 12.3%. Given the shutdown, certain major economic data releases have been postponed, most notably the BLS’s nonfarm-payrolls report for September. We did get the ADP payrolls report which showed payrolls fell 32k in September (the weakest since March 2023), however the ADP numbers have been a poor predictor of the BLS’s jobs data. This week is a relatively quiet week in terms of economic data, with the upcoming Q3 earnings season most likely being top of mind for investors.
Q3 Market Wrap Up
US equities rallied in Q3 with the S&P 500 up 8.12% (total return), continuing the strong rally we saw in Q2. The Technology sector continued to outperform the overall market as the AI theme dominated, followed by Communication Services with other AI-related names such as Google experiencing strong returns. On the other hand, defensive sectors continued to underperform, with Consumer Staples leading the drag coming in as the worst performing sector for the quarter. Early in the quarter, we had the passage of the One Big Beautiful Bill Act (OBBA), which confirmed the predicted tax-cut extensions and provided companies with additional tax incentives and benefits. We also had multiple trade deal announcements with major trading partners such as the EU, Japan, and South Korea. Q2 earnings were another major tailwind, with earnings coming in well ahead of expectations. While the labor market data during the quarter continued to show signs of weakening, the inflation data was mostly in-line with estimates, allowing the Fed to prioritize the labor market and resume their monetary policy easing. The Fed delivered their first rate cut of the year in September, and two additional cuts this year are currently forecasted by the market. Overall, the story for Q3 was a healthy economy, strong earnings growth, a resilient consumer, and Fed monetary policy back in easing mode.
ADP Private Payroll Data
Employment lost momentum in September, with the ADP estimating that private employers shed 32,000 jobs for the month, versus expectations of 45,000 new jobs. A majority of the job losses came from the service sector, with leisure/hospitality leading the way, at a figure of -19,000, followed by professional/business services, with 13,000 jobs lost. Changing the lens to establishment size, job reduction was felt acutely in small establishments, with a loss of 40,000, and meanwhile, large establishments partially offset those losses by adding 33,000 jobs. The overall trend for the labor market remains negative, with job openings continuing to decline, down 17% since last year, and hiring plans at their lowest levels since 2009. Job cut announcements have climbed to 946,000 so far this year, and are expected to surpass one million by year-end, which would be the highest level since 2020.
September 2025 ISM Services PMI
The Services PMI slipped from an expansion territory of 52 to a neutral reading of 50, signaling neither a contraction nor an expansion in the service sector. Key points in the report indicated that business activity shifted from growth to contraction, driven by cost pressures stemming from tariffs, weakness in the construction sector, and labor market headwinds. Second, the employment index improved from the previous month, with six out of fourteen industries reporting gains in employment, and AI appeared to be positively impacting resource productivity. Nonetheless, September marked the fourth consecutive month of employment contraction. Lastly, the prices index continued to rise, reaching its second-highest reading since October 2022, with 15 out of 18 services industries reporting an increase in prices paid.
Sources:
https://markets.jpmorgan.com/jpmm/research.article_page?action=open&doc=GPS-5095530-0
https://adpemploymentreport.com/
