Market Watch: September 2025

Fed Pivot Signals a Turning Point

September brought a major shift for U.S. markets. After holding rates steady for months, the Federal Reserve cut its benchmark rate for the first time in 2025 to 4.0%-4.25%. This move signaled a more supportive stance in the face of slower job growth and sticky inflation. The market was optimistic about this move, with investors hopeful that the Fed now has room to ease further. Still, challenges remain. Inflation has yet to stabilize fully, global growth remains uneven, and trade tensions persist, creating ongoing uncertainty. Against this backdrop, investors are paying close attention to every economic release, from jobs to retail sales to inflation, to assess better how far the Fed might go and whether the U.S. economy can stay on course without tipping into recession.

Global Market Overview

U.S. equities extended their gains, with the S&P 500 climbing 3.65% in September. GDP was revised higher, indicating that the economy grew at a 3.8% annualized rate in the second quarter. Consumer spending provided a lift, supported by back-to-school shopping, but the labour market showed signs of strain. Only 22,000 jobs were created in August, and the unemployment rate rose to 4.3%, the highest level since 2021. Inflation pressures also reappeared: headline CPI rose 0.4% in August, pushing annual inflation to 2.9%, while core inflation stayed firm at 3.1%.

International markets were more mixed. In Europe, the eurozone PMI reached a 16-month high of 51.2, reflecting strength in services, while the UK’s PMI slowed, dropping to 51.0. Confidence in Germany softened, although households felt slightly better about their incomes. Sweden lowered rates to 1.75%, its third cut of the year, while Switzerland held at 0% as inflation eased to 0.2%. In Asia, Tokyo inflation came in lower than expected at 2.5%, cooling near-term expectations for a Bank of Japan hike; however, a rate rise later this year remains possible.

Canadian Market Overview

Canadian equities also moved higher, with the S&P/TSX Composite Index up 5.4% in September. Economic data showed signs of recovery after a soft spring, with GDP growing 0.2% in July, ending three months of contraction and raising hopes of avoiding a technical recession. Inflation has been easing, with CPI at 1.9% in August, within the Bank of Canada’s target range, while core measures continued to soften. The labour market, however, weakened, with over 100,000 jobs lost in two months, pushing unemployment to 7.1%, its highest since 2016 outside of pandemic years.

Balancing these trends, the Bank of Canada cut its policy rate by 25 basis points to 2.50% in September, its first reduction since March. As borrowing costs decline, housing, consumer spending, and business investment are expected to benefit. However, the sustainability of this recovery will depend on how effectively looser conditions feed into real economic activity.

Canadian Sector Performance

September was a strong month for Canadian stocks, lifted by impressive performances in the Materials and Financials sectors.

• The Materials sector (+18.9%) topped the performance table in September, fueled by gold prices hitting record highs late in the month. The rally sent mining stocks sharply higher and boosted profit margins for Canadian producers, making the sector the clear outperformer.
• The Financials sector (+4.5%) also delivered solid results. Bank stocks benefited from strong earnings and growing optimism that lower interest rates will encourage loan growth and consumer spending. While rate cuts can put pressure on lending margins, expectations of healthier credit demand have so far kept the sector moving steadily higher.

Important Dates

• October 10: Canada Unemployment data
• October 15: U.S. CPI Inflation (September)
• October 21: Canada CPI Inflation (September)
• October 23: Canadian Retail Sales
• October 29: Fed Interest Rate Decision

Portfolio Strategy Tip

In the current market, the focus should be on steady and dependable investments. For instance, companies with strong balance sheets and consistent dividend payouts can provide stability, particularly as interest rates decline. Short-term bonds are also worth considering, as they limit risk while offering a reliable income stream. Moreover, keeping some cash on hand gives flexibility to take advantage of opportunities when markets pull back. Above all, staying diversified remains key in navigating both upside opportunities and potential volatility.

Final Thoughts

The Fed’s September rate cut marked a turning point for markets, but uncertainty still hangs over the outlook. The economy has shown resilience, yet risks such as a possible U.S. government shutdown could unsettle sentiment, even if only briefly. Inflation trends and labor market conditions will continue to shape policy decisions in the months ahead. Market swings are likely, but for long-term investors, these movements can create opportunities to enter high-quality positions at more attractive levels.