September defied its reputation. U.S. stocks advanced meaningfully while bonds posted gains, as investors focused on the Federal Reserve’s first rate cut of the cycle and looked past Washington’s shutdown drama. The S&P 500 rose about 3.7% for the month—its best September in fifteen years. Market participation broadened, with small caps and international stocks in the green. Emerging markets outpaced developed peers as a softer dollar lent support.
Markets
Large-cap U.S. stocks led, but the story was broader than a handful of mega-cap tech names. Small caps finished higher, and outside the U.S., emerging markets delivered a standout month, rising roughly 7.2%. Developed international markets also gained about 1.9%, helped by dollar weakness. Year to date, non-U.S. stocks have outpaced U.S. large caps—a reversal from recent years that persisted through the third quarter.
The Fed, Rates, and Bonds
The Federal Reserve delivered a 0.25% cut in September, lowering the target range to 4.00%–4.25% and signaling a data-dependent path ahead. Markets interpreted the move as the start of a gradual easing phase following a nine-month pause, with futures pricing in room for additional cuts as the labor market cools. Treasury yields eased into month-end, and the U.S. Bond Index returned approximately 1.1% for the month.
Economy
Macro data pointed to slowing—but not stalling—growth. Inflation hovered in the high-2% range year over year, while labor indicators softened enough to reinforce the Fed’s pivot. With the federal government shutdown that began on October 1 delaying several official reports, investors leaned on private data and corporate commentary to gauge momentum.
What Drove the Tape
Two forces dominated September: policy and resilience. The initial rate cut eased financial conditions and supported rate-sensitive areas of the market. Just as important, investors continued to look through Washington’s policy turbulence. Tariff announcements and the government shutdown sparked brief bouts of worry, but markets repeatedly rebounded. Even with inflation above target and labor cooling, the stock market’s advance persisted as Fed policy shifted toward gradual easing—showcasing the market’s ability to climb a wall of worry.
Looking Ahead
The interplay among labor data, inflation progress, and Fed communication is likely to remain a significant driver into Q4. Additional rate cuts could extend the bull-market tone, though short-term volatility is likely as investors contend with incomplete data from the shutdown and ongoing tariff and geopolitical risks. For now, the combination of the first rate cut in 2025, solid corporate profitability, and broader participation has investors entering the fourth quarter with cautious optimism. Even so, elevated valuations and global uncertainty serve as a timely reminder that risk management matters most when the market seems most willing to ignore it.
