“There are no risk-free paths now.”
- Jay Powell, 9/17/25
“Was that the rattling of Sabers or the Cool September Wind?”
- “1968” by The Turnpike Troubadours
Markets got a long-anticipated interest rate cut from the Federal Reserve last month, taking the Fed out of “pause” mode and firmly into an “easing regime,” invoking a “don’t fight the Fed” stance in most market participants.
The Fed is that institution whose primary job seems to be to periodically rescue us from crises of its own creation. (Its staff of 25,000 includes over 400 PhD economists: answering the riddle: “How many economists does it take to change an interest rate?”)
In spite of unwelcome political pressure on the Fed, markets themselves tell us the Fed Funds rate was too high and remains so – the interest rate on the 2-year Treasury note (set by markets) remains about 0.5% lower than the Fed Funds rate (set by the Fed) after the cut.
Interest rate changes generally come in bunches, not in “ones,” so we may reasonably expect more. Barring a surprise economic decline or outbreak of a new war, periods of Fed easing represent low risk periods for markets in the near-term. Moreover, the calendar is soon to enter the best six-month period of seasonality for stocks.
The Other Side of the Coin
What’s not to like for now? For one, stocks have already priced in lots of good news – is it possible the full series of rate cuts is
already priced in? The price-to-earnings ratio of the S&P 500 based on actual reported
trailing earnings moved above 30x recently. That compares to a 30-year average of 23x. Levels above 30 have been rare, occurring on only three occasions, each either a period of distress (i.e., of collapsing earnings in the Global Financial Crisis of 2008-9, or the COVID Pandemic in 2020), or of euphoria (the Dot-Com Bubble). If rate cuts portend clear skies in the near-term, euphoric valuations may herald storm clouds in the distance.
Beyond monetary policy and market valuations, as Chairman Powell noted, this is an unusually tricky period for the economy with international disruptions and unusual uncertainty about inflation. Moreover, regarding multiple threats of war, we may have become inured to the frequent sound of saber rattling, but that doesn’t mean threats should be ignored. Additionally, as you’ve heard, a federal budget was not resolved in time, shutting down the government, and who knows what that will mean or how long it may persist.
A new wrinkle pertains to the costs of datacenter buildouts for AI. AI may bring the productivity boost needed to avoid an entitlements spending government debt implosion, but it comes with its own significant risks. Newly announced megadeals raise eyebrows not solely because of the massive amounts of money involved, but because the financing seems circular, in which A buys chips from B, and B invests in A, providing the very funds with which to buy the chips. It’s much more convoluted than that, and not limited to chip purchases, but includes payments for access to AI, leases for data centers, etc. But the dollar amounts are massive, and it raises the question: where will these funds really come from?
Market volatility, when it comes, arrives swiftly and unexpectedly, as we witnessed during this April’s trade war scare that sent market volatility soaring. While that episode passed relatively quickly, it serves as a reminder that today's calm can become tomorrow's storm with little notice.
Portfolio Positioning
Paced by international equities, this has been a good year for managed investment portfolios. But bargains are scarce, and we are tightly focused on tilting portfolios toward resilience rather than chasing the last gains of what may be a maturing cycle.
As we've learned repeatedly, uncertainty and occasional market downdrafts – even sudden and large ones – cannot be avoided or anticipated. Foster & Motley doesn't attempt to predict the unpredictable. Instead, we build portfolios designed to survive such uncertainty without permanent damage.
Let’s enjoy this phase while it lasts but know that this is not a new or permanent “normal,” and it will eventually change, likely suddenly and without warning. As change is the dominant market feature, all-weather portfolios are what we seek, not just portfolios optimized to thrive in good times.