September delivered what markets had been anticipating: the Federal Reserve’s first rate cut in nine months. The result was the S&P 500’s strongest September performance in 15 years. But the rally tells only half the story. Beneath the headline gains, we’re seeing extreme concentration risk, persistent inflation, and a labor market that’s weakening faster than expected.
Here are our six biggest highlights of September 2025:
1. The Fed’s Risk Management Cut
On September 17, the FOMC lowered rates by 25 basis points to a target range of 4.00%–4.25%. This wasn’t a declaration of victory over inflation, it was a defensive move driven by deteriorating employment data.
The numbers speak for themselves. August added just 22,000 nonfarm jobs, July managed only 79,000, and the unemployment rate climbed to 4.3%, the highest level since October 2021. Chair Powell framed this as addressing “downside risks to employment,” and J.P. Morgan Global Research expects two more cuts before year-end.
The complication: inflation isn’t cooperating. Consumer prices rose 2.9% year-over-year in August (up from 2.7% in July), with core inflation holding at 3.1%. Consumer confidence dropped to 94.2 in September, the lowest since April, with inflation now the top concern alongside job market worries. The Fed is essentially trying to thread a needle between supporting employment and not reigniting inflation.
Meanwhile, the ECB held rates steady at 2.00%, and the BOJ continues its glacial normalization. This policy divergence is putting structural pressure on the dollar, which matters significantly for international assets and emerging market debt.
2. Market Strength Built on Narrow Foundations
The S&P 500 gained 3.53% in September, and both the S&P 500 and Nasdaq Composite pushed past 6,500 points in Q3. International markets participated as well, with the Nikkei 225 showing solid momentum.
But here’s what should concern investors: nearly all of these gains came from the Magnificent 7 tech megacaps. The S&P 493, the index minus these giants, barely moved. We’re essentially watching a handful of companies prop up the entire market, which creates significant concentration risk for portfolios heavily weighted toward passive strategies.
Emerging markets posted more modest but consistent gains, with the MSCI Emerging Markets IMI Index up 0.49% for the month and 26.60% year-to-date.
3. The Reality Behind AI Growth
Technology remains the dominant force, but the AI narrative is shifting from software potential to hardware constraints. Specifically, power. U.S. data center electricity demand is projected to grow at 15% annually through 2030, potentially accounting for 8% of total U.S. power consumption.
This creates opportunity in an unexpected place: utilities. Companies are rapidly expanding capacity through renewables, natural gas, and nuclear power. Microsoft’s 20-year power purchase agreement with Constellation is an early example of what will likely become a broader trend.
Beyond tech, we’re seeing tentative signs of rotation. Small-cap and value stocks are showing relative strength and remain fundamentally undervalued. Communications, Real Estate, Energy, and Healthcare sectors are offering better valuations. In financials, the rate cut environment will lower base rates for commercial borrowers but may compress net interest margins for banks, though life insurers continue benefiting from still-elevated yields.
4. Deal Activity and Private Market Discipline
M&A activity is up 27% year-over-year, concentrated heavily in mega-deals over $1 billion, which increased 57% and now represent 72% of total volume. Notable transactions include the Anglo American/Teck Resources merger at $53 billion and Thoma Bravo’s $12.3 billion take-private of Dayforce.
Private equity and venture capital tell a more cautious story. Total PE-VC investment dropped roughly 14% to $21 billion over nine months. Deployment strategy has shifted markedly toward late-stage companies (Series G or later), which captured 35% of investments. Investors are favoring minority stakes in mature “local champions” companies with predominantly domestic revenues, to mitigate supply chain and geopolitical risks.
5. Fixed Income and the Emerging Markets Opportunity
U.S. Treasuries recorded their third consecutive positive quarter, with the long end outperforming on expectations of a sustained easing cycle. This environment supports extending duration for fixed income investors.
Emerging market debt is particularly compelling. Local currency debt (GBI-EM GD) returned 13.8% year-to-date through August, substantially outpacing hard currency debt at 8.7%. This performance is driven by dollar weakness, Fed easing expectations, and successful country-specific recoveries, including debt restructurings in Sri Lanka and IMF programs in Egypt.
6. Geopolitical Pressure Increases
On September 5, the SEC established a Cross-Border Task Force to combat fraud and increase scrutiny of foreign issuers, with explicit focus on China. The SEC cited concerns that governmental control in certain jurisdictions obscures transparency. This is framed as part of the Administration’s “America First Investment Policy” and represents another step in U.S.-China financial decoupling.
Positioning for Q4 2025
September confirmed we’re in a two-speed market, strong headline performance masking narrow leadership and conflicting macro signals between weak employment and persistent inflation.
Key investment considerations going forward:
- Address concentration risk. Active diversification beyond large-cap tech is essential given current market structure.
- Follow the infrastructure build-out. The physical infrastructure supporting AI, utilities, energy providers, data center operators, represents a durable growth opportunity.
- Capture value dislocations. Small-cap and value segments remain undervalued and could deliver outperformance if the economy achieves a soft landing.
- Leverage emerging market opportunities. EMD, particularly local currency issuances, offers diversification and yield in a weakening dollar environment with regional recovery tailwinds.
- Maintain quality discipline in private markets. Continue prioritizing late-stage, proven companies with resilient domestic revenue streams to navigate geopolitical uncertainty.
The rate cut provided relief, but the underlying tension between growth concentration, inflation persistence, and labor market weakness means Q4 will require careful navigation. The opportunity exists for those who look beyond the headline index performance.
