What Shutdown?
Despite widespread concerns about an economic slowdown and disruptions from a government shutdown, U.S. markets have delivered a remarkable V-shaped recovery in 2025. The Russell 2000 surged nearly 40%, and major large-cap indices gained around 35% between the April 2nd Liberation Day announcement and the end of Q3. Markets have largely shrugged off the political uncertainty surrounding the shutdown, suggesting investors remain focused on fundamental economic drivers and corporate earnings rather than Washington gridlock.
Labor markets show signs of weakening; the August jobs report disappointed as it showed just 22,000 new jobs and an unemployment rate that rose to 4.3%. However, consumer spending remains resilient, as evidenced by retail sales jumping 0.6% month-over-month (M/M) and durable goods orders surging 2.9%. Perhaps most telling is the composition of this rally: lower-quality, weak balance sheet companies have handily outperformed their higher-quality peers, suggesting investors are positioning for a sustained period of lower interest rates rather than bracing for economic contraction. As of this writing, the Fed looks likely to reduce the Fed Funds rate by an additional 25 basis points at its October meeting.
Meanwhile, global markets present a mixed picture, with India’s economy growing at a robust 7.8% annually and the Eurozone hitting a 16-month activity high, while China struggles with a 13.9% plunge in property investment and Japan’s GDP revision to 2.2% provides only modest encouragement amid ongoing tariff concerns. The question is not whether the economy is slowing—it clearly is—but whether this deceleration represents a healthy normalization or the prelude to something more concerning.
Despite Strong GDP Growth, Labor Markets & PMIs Exhibit Underlying Weakness
U.S. employers added just 22,000 new jobs to the economy in August, well below the 75,000 estimate. The unemployment rate increased to 4.3%, and while the July report was revised slightly higher, the June report was revised down. Average hourly earnings grew 0.3% M/M, or 3.7% year-over-year (Y/Y). The broader U6 unemployment rate surged to its highest level since October 2021 at 8.1%. In addition, the BLS annual revision showed a drop of 911,000 jobs from the economy for the year prior to March 2025. Combined, labor markets are clearly weakening, and this weakness provided sufficient support for the Fed to cut rates at its September meeting. Another weak reading came from the September ADP report on private payrolls, which fell by 32,000 versus the estimate for a 45,000 job gain.
The ISM Manufacturing PMI showed slight strength last month, with the headline reading increasing from 48.7 in August to 49.1 in September. While manufacturing remains in contraction territory (figures below 50 indicate contraction), the production and employment components strengthened, but not by a sufficient amount to offset weakness in new orders and prices. The U.S. service sector exhibited weakness based on the ISM Services PMI, which fell from 52.0 in August to 50.0 in September. Business activity and new orders drove the weakness.
Retail Sales & Durable Goods Orders Show Underlying Strength for Consumers & Businesses
Retail sales in the U.S. increased 0.6% M/M in August 2025, the same as an upwardly revised 0.6% rise in July and beating market expectations of a 0.2% gain. Sales excluding food services, auto dealers, building materials stores, and gasoline stations—which are used to calculate GDP—jumped 0.7%. Durable goods orders in the U.S. surged 2.9% M/M in August, beating expectations and rebounding from July’s 2.7% decline. Orders for non-defense capital goods excluding aircraft, a closely watched proxy for business spending plans, rose by 0.6% in August.
Source(s): Bureau of Labor Statistics; Federal Reserve Bank of Dallas; Note: Gray Area Illustrates Estimate Range
Eurozone Activity Hits a 16-Month High on a Pickup in Services; Manufacturing Momentum Fades
Eurozone business activity grew at its fastest pace in 16 months in September but remained modest as new orders stagnated after briefly expanding in August, potentially raising concerns about the sustainability of economic growth. Services in the Eurozone drove the overall expansion, with the sector’s PMI rising to 51.3 from 50.5 in August—the highest reading in eight months. However, manufacturing lost momentum, with its headline index dropping into contraction territory at 49.5 from 50.7 in August. Germany was a key driver of growth in September, while France saw activity decrease for the 13th consecutive month.
Eurozone Inflation Steadies, Japan’s GDP Beats Expectations
Eurozone inflation held steady at 2.2% in September with core inflation sitting at 2.3%. Most of the increase was due to energy price base effects which should subside in the coming months. The stronger euro and falling commodity prices should help bring down inflation moving forward. For now, we expect the ECB to remain on hold for future rate cuts. Japan’s economy expanded much faster than initially estimated in Q2, driven by upward revisions in private consumption and inventories. GDP grew at an annualized rate of 2.2% in Q2, up from the 1.0% initial reading. Tariff concerns should keep the BOJ on the sidelines for any immediate rate hikes.
Source: Cabinet Office, Japan
Chinese GDP Meets Estimates, but Property Investment Falls Off a Cliff & PMIs Highlight Weakness
China’s economy grew 4.8% Y/Y in Q3, the slowest pace in a year but in line with analyst expectations despite the ongoing real estate slump. September activity data showed continued weakness in domestic demand, partly due to poor business and household confidence. Investment growth slowed, with property investment falling 13.9% Y/Y in September after falling 12.9% Y/Y in August. Consumer demand remained muted, with real growth in retail sales slowing sharply to 3.5% from 4.1% previously. Industrial production was a bright spot, rising by 6.5% in September. China’s exports to the U.S. fell by 27% Y/Y last month, but shipments to the EU, Southeast Asia, and Africa grew by 14%, 15.6%, and 56.4%, respectively, as the country works to diversify away from the U.S. market.
China’s manufacturing activity shrank for a sixth month in a row in September, according to an official survey, suggesting companies are waiting for further stimulus and additional clarity on a U.S. trade deal to boost domestic demand. The official manufacturing PMI rose to a six-month high of 49.8 in September versus 49.4 in August. A separate private-sector survey of smaller factory managers from RatingDog showed the fastest expansion since March, buoyed by rising new orders and accelerated production growth, including an uptick in new export orders. The official non-manufacturing PMI, which includes services and construction, edged lower to 52.9 in September from 53.0 in the prior month, while the RatingDog general services PMI eased to 50.0 from 50.3.
India’s GDP Growth Shows Resilience and Exceeds Expectations
India’s economy grew at a faster-than-expected annual rate of 7.8% in Q2, boosted by the manufacturing, construction, and service sectors. The Reserve Bank of India (RBI) has raised its projection of India’s GDP growth rate to 6.8% for 2025–26 from 6.5%. The RBI believes the Indian economy has been more resilient in 2025, and some structural reforms should provide a boost later in the year. The World Bank and International Monetary Fund project that the country’s economy will grow 6.3% and 6.4%, respectively, for fiscal year 2026.
Lower-Quality, Weak Balance Sheet Companies Have Led the Rally Since Liberation Day
U.S. small caps and other risk assets have rocketed higher since the April 2nd Liberation Day announcement and subsequent short-lived market drawdown. While many of the “Magnificent 7” participated in the market rebound, much has been written about the lower-quality nature of the rebound. This makes sense considering the economic backdrop showing signs of decelerating growth, labor market weakness, and likely Fed easing. Around 45% of companies in the Russell 2000 generate no earnings, and this unprofitable market cohort handily outperformed companies with positive earnings. Similar data from Goldman Sachs shows outperformance by companies with weak balance sheets relative to higher-quality companies with strong balance sheets. Lower interest rates tend to benefit lower-quality, weaker balance sheet companies that are often highly levered.
Sources: Bloomberg, Apollo Chief Economist
AI vs. Tech Bubble Comparisons Are Unfounded
There is a lot of talk about an AI bubble similar to the tech bubble in the late 1990s. However, valuations in the late 1990s were driven more by speculation than profits. Today, companies at the forefront of the market rally—such as Nvidia—are generating strong revenue growth, cash flow, and earnings. Valuations are elevated but remain below levels seen during the dot-com bubble. AI names could be ahead of themselves, but bubble comparisons seem unfounded given the fundamental strength of market-leading companies.
The charts and information in this presentation are for illustrative purposes only, and are based upon sources of information that Sunpointe, LLC generally considers reliable, however we cannot guarantee, nor have we verified, the accuracy of such independent market information. The charts and information, and the sources utilized in the compilation thereof, are subjective in nature and open to interpretation. FOR USE WITH INSTITUTIONAL INVESTORS AND INVESTMENT PROFESSIONALS ONLY. NOT FOR PUBLIC DISTRIBUTION. PAST PERFORMANCE IS NO GUARANTEE OF FUTURE RESULTS.
