Summary
- Government shutdown likely; markets unshaken; historical downside limited.
- Isolated labor market weakness is moderating expectations for future rate cuts.
- AI trades are back; momentum and high beta stocks outperform.
- Market gains are uneven with investors chasing themes.
Relatively Muted: Government Shutdown Volatility
With the October 1st deadline looming and no deal in sight, a government shutdown is likely. Since 1981, there have been 14 shutdowns, ranging in duration from 1 day to 35 days.
Historically, reactions from the financial markets have generally shown limited downside.
Throughout September, the VIX and VIX1D stayed below 17, signaling no investor panic.
Isolated Job Market Weakness
Fed Chairman Powell cited labor market softness when delivering the ‘risk management cut.’
However, the economy and consumers remain resilient,
and until layoffs pick up, there are no immediate concerns.
Tamed Expectations for Rate Cuts
With job market weakness not reflected in the broader economy, financial markets have moderated their expectations for future rate cuts (proxied by homebuilder performance) following the Fed’s September move.
Dominant Factors: Momentum & High Beta
In this Goldilocks environment, past winners retook the reins, and high-beta stocks continued to march forward. Large-cap and Growth stocks saw modest advantages.
Source: BAS' calculation
AI Trades Make a Comeback
Following an August pause, AI trades have resumed.
Source: BAS' calculation
M7 Stocks Continued to Lead
Supported by strong fundamentals, high ratings persist for the Magnificent Seven,
with some upgraded by our proprietary models.
Value Earnings Catching Up;
Small-caps Getting More Expensive
Neither has broken the downward trend yet, but we see Value narrowing the earnings gap, while Small continues to lag further behind.
Uneven, Themed Market
Investors continue to chase themes, and returns remain highly disparate, with certain sought-after pockets of the market outperforming others (chart performances as of 9/26/2025).
Sectors in Favor
There are signs that sector returns are also being influenced by the AI theme.
(MTD as of 9/29/2025)
Chart of the Month - Gold Hits All-Time High
Driven by concerns over U.S. debt growth, gold received another boost from government shutdown volatility, reaching a record high in September.
