Stocks pause, but rate cuts, economic growth may provide support

From a potential US government shutdown, to the return of tariff talks, to political and fiscal challenges in Europe — there's a lot for markets to process at the moment. And we see no reason why things will get any easier over the coming weeks and months. But difficult doesn’t mean bad. While stocks took a small step down the proverbial “wall of worry” last week, we expect markets to resume their climb. But as always, investors should carefully pick their handholds to help navigate the best route.

Stocks take a small step down the wall of worry

Stock markets struggled a little last week, with the S&P 500 Index posting its worst weekly return in nearly two months.¹ In that time, investors have had to contend with continued geopolitical uncertainty, domestic growth worries, and slowing labor market data. But markets have been supported by resilient earnings,² stable inflation expectations,³ and the prospect of easier monetary policy.⁴

So why step back now? Some point to slowing growth, citing softer US payroll numbers.⁵ Others argue growth is too strong, which would mean fewer rate cuts. Last week saw an upward revision to the second-quarter US gross domestic product (GDP) from continued consumer resilience.⁶ Seasonal factors and concerns over a potential US government shutdown have also been mentioned. While a shutdown could introduce volatility, history suggests it has had a limited market impact. There have been 21 US government shutdowns since 1976, lasting just eight days on average, and the S&P 500 Index averaged a modest 0.1% return during those periods.⁷ Overall, we’d say the reason for the pullback is a combination of all of the above

The recent declines, in our view, are a potential near-term consolidation following a robust advance. Nothing more ominous than that. The US economy likely remains in the middle stage of the cycle, with few signs of recession still. We continue to believe that rate cuts and a possible reacceleration in economic activity will support stock market gains as we move toward year-end and into 2026. Pullbacks are healthy and normal.

US government shutdowns aren’t unusual

If Congress doesn’t pass a spending bill or a continuing resolution by midnight on September 30, parts of the government will start to shut down. This appears likely due to partisan gridlock over federal spending. Should a shutdown happen, essential services such as air traffic control, Social Security, Medicare, and military operations will continue. Non-essential workers may be furloughed, and agencies like NASA and the National Park Service will close.

The economic impact is likely to be modest. Only around 3% of government spending is non-essential,⁸ and federal employment is at a record low relative to the total workforce.⁹ Still, nearly 3 million federal workers may be affected, with essential workers receiving IOUs until funding resumes.¹⁰ Some limited market volatility is to be expected, but history suggests that government shutdowns tend to pass without significant incidents to markets.¹¹

Tariff talk returns

Tariffs returned to the headlines as President Trump announced a new round of sectoral tariffs. These include a 100% tariff on branded pharmaceutical products, 50% on kitchen cabinets (oddly specific in our view), and 30% on upholstered furniture.

Mixed economic picture

Global economic data released last week painted a mixed picture. In the US, second-quarter GDP was revised significantly higher,¹² driven in part by continued strength from the consumer. While the labor market is showing signs of cooling, jobless claims remained low,¹³ suggesting that businesses are still reluctant to let go of workers. Additionally, the US Services Purchasing Managers’ Index (PMI) stayed in expansionary territory, reinforcing the resilience of the domestic economy.¹⁴

Outside the US, the data was less encouraging. Eurozone and UK Purchasing Managers Indexes pointed to contraction in manufacturing activity,¹⁵ while China’s factory output fell to a 12-month low, underscoring the economic strain in the region.¹⁶

Mixed comments from Fed speakers

Many Fed members spoke last week. The message was mixed across the group, but consistent relative to each individual’s previous comments. Steven Miran argued his very dovish case, saying he would rather be “proactive” than wait for a “giant catastrophe.”¹⁷ The language from others was less hyperbolic, with Austan Goolsbee saying he was “a little uneasy with too much front-loading”¹⁸ and Jeffery Schmid saying data “still remains largely in balance.”¹⁹

Political and fiscal challenges in Europe

Bond yields in the UK and France rose last week as both face increasing political and fiscal challenges. The UK government is increasingly mired in infighting as well as external challenges to Prime Minister Keir Starmer. That’s limiting its ability to pass the policy needed to regain the bond market’s confidence in the UK fiscal picture. Talks of a UK crisis are overblown, in our view, but challenges to the bond market will likely remain until at least the end of November, when the budget is due. In France, Prime Minister Sébastien Lecornu is still struggling to pass a budget that cuts the deficit, as various political groups wrestle in the National Assembly.