August continues to be risk on - does the rally have legs?

August was the 5th consecutive month of positive equity market returns as the Morningstar Global Markets Index rose 1.5% for the month on an SGD basis. One main characteristic of the August rally was the broadening of the rally beyond select sectors and regions (such as US large cap tech, which drove July performance). In the US, materials and healthcare were the best performing sectors, while the small and mid cap stocks represented by the Russell 2000 also saw strong outperformance. By region, Japan and China equities drove the rally, continuing the diversified performance outside of the US this year.

Strong corporate earnings were a major tailwind for the market - in the second quarter, the average S&P 500 company grew earnings by approximately 12% year-on-year vs analyst expectations of around 5%. This marks the 3rd consecutive quarter of double digit year-on-year earnings growth. Moreover, many companies have revised their earnings guidance for 2025, noting that tariff uncertainties are being navigated better than expected through supply chain management, increasing prices, and cutting other costs. 

Fixed income markets also performed well in August as treasuries rallied and interest rates fell for the 6th time in eight months. 10 year treasury yields fell 15bps in August to 4.2% (34 bps lower than the 4.6% level at YE2024). While the FED did not hold an FOMC meeting in August, FED chair Jerome Powell did deliver a more dovish speech at the Jackson Hole symposium following a weak July jobs report. This triggered the market to become more positive in both the equity and the bond markets.

On the economic front, labour markets showed clear signs of weakening with weak July nonfarm payrolls and negative revisions to previous months’ job numbers. However, the impact on markets was relatively short-lived as it seemed a deja vu of Aug 2024, where we saw a rapid recovery post market turbulence caused by the yen carry trade unwind and a weak July nonfarm payrolls with negative revisions. Moreover, Chairman Powell’s dovish comments, coupled with a still solid second quarter Gross Domestic Product amid moderate but sticky inflation, seemed to suggest that the “goldilocks” narrative could be sustained for now.

Beyond the cut: Why the Fed’s message matters most

The Federal Reserve is in the spotlight this week as it continues to navigate a complex economic landscape. A fragile truce in the US-China trade war is holding, but recent talks have made little headway on major issues, leaving investors to contend with ongoing uncertainty.

This external risk is compounded by a mixed domestic picture; the US labour market is showing signs of cooling, yet inflation remains somewhat elevated above the Fed's target. This backdrop of moderating growth and persistent inflation has set the stage for a pivotal policy meeting.

It is now widely anticipated that the Fed will deliver a rate cut, but for investors, the immediate action may be less consequential than the accompanying message. A critical focus will be on the central bank's forward guidance to discern whether this is a one-off "insurance cut" to address a temporary soft patch, or a pivot to a dovish monetary stance. The former might offer limited support to markets, while the latter could signal a stronger tailwind for equities and bonds as long as it is not accompanied by either a spike in inflation or a precipitous slowdown in growth.

What’s next?

The market narrative continues to oscillate, and future predictions continue to be very difficult to make. Going through the volatility in April and subsequent rally, which continued in August, we have witnessed how important it is to have “time in” the markets rather than “timing” the markets. Diversification by asset class, region, and sector continues to remain key.

Global equity

Japan equities was the best performing large region in August after underperforming the rest of the world in the first half of 2025. US-Japan trade deal clarity and rising expectations of Fed cuts seemed to have driven strong performance, particularly in the first two weeks of the month. Earnings season in Japan was relatively solid with more companies surprising on the upside vs missing on the downside. 

China equities was the second best performing large region in August (and the best performing year-to-date). The performance was heavily skewed towards the China onshore market, which rose 11% for the month, largely on the back of moderating US-China tensions, the “anti-involution” initiative, which is helping with over capacity and pricing, and the strong liquidity on the back of retail risk appetite.

By sector, materials and healthcare were the best performers. Materials benefited from the strong performance of Gold, with Gold rising about 5% for the month, and gold miners rising 22%. Healthcare and biotech both performed well as laggards to other sectors.

Similar to the performance by region, we saw a wider range of sectors performing throughout 2025, improving the breadth of performance.

Global fixed income

Fixed Income had a positive month on the back of a dovish Fed stance and generally tight credit spreads.

US fixed income markets performed well across both investment grade and high yield. Emerging market bonds also did well after a brief pause in July. Both local and hard currency debt posted strong returns, but EM local currency debt in particular has performed well year-to-date, driven by the weaker USD. 

The European fixed income market, however, saw mixed performance. While economic data in the Eurozone was overall resilient, the political uncertainty in France weighed on sentiment and caused long term yields to be volatile.