The State of the Markets (August 2025)

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“The first rule of compounding is to never interrupt it unnecessarily.” – Charlie Munger

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This is a special edition of the Week in Charts where I break down the state of the markets. Here’s a snapshot of what’s happening across the major asset classes and the economy…

1) Stocks

In one of the most remarkable comebacks in history, the S&P 500 has now rallied 34% from the April lows, hitting 18 all-time highs on the year.

Corporate earnings have continued to climb, with S&P 500 profits hitting another new high in the second quarter, up 11% year-over-year (TTM).

With stock prices up over 20% in the past year, we are once again seeing multiple expansion. The price to peak earnings ratio for the S&P 500 has climbed to 26.7, over 50% above the historical median and at its highest level since 2000.

The S&P 500 is now trading at over 3.2x sales, its highest price to sales ratio in history.

Entering the year, US stocks had outperformed International stocks for over 16 years, by far the longest run of outperformance in history.

But so far this year, we’re seeing a reversal, with International stocks up 23% vs. an 11% gain for the S&P 500.

Within International, Europe has been the standout performer with the Eurozone ETF ($EZU) up over 30%.

Within the US equity market, we’re seeing a number of extremes:

• The ratio of Growth stocks to Value stocks hit a new all-time high this month, surpassing the dot-com bubble peak in March 2000.

• Tech sector outperformance is also at a new record high, moving above the peak from last year and March 2000.

• The ratio of Large caps to Small caps is at its highest level since April 1999, more than 3 standard deviations above the historical mean.

• Nvidia, Microsoft, and Apple now make up over 21% of the S&P 500, the highest weighting for any three stocks in the index on record. The 38% combined weighting of the 10 largest US stocks in the index is also a record high.

2) Bonds & the Fed

The US bond market is still working through its longest drawdown on record at 5 years and counting. If yields remains at current levels, it will take another year before bonds hit a new total return high.

High yield spreads have rapidly tightened off of their April wides (461 bps down to 290 bps), with no fear of recession or defaults currently priced into the market.

Emerging Markets (Local currency, sovereign, and high yield) are leading all major bond categories while Long-Term Zero-Coupon Treasuries ($ZROZ) are lagging once again as long-term yields have risen. The aggregate bond ETF ($AGG) is up close to 5%, with the decline in short and intermediate-term rates boosting returns.

Why are interest rates falling, particularly on the short end? The market is currently expecting (>90% probability) the Fed resume their rate cuts in September with a 25 bps move down to 4.00-4.25%. After that, more cuts are priced in with the Fed Funds Rate expected to move down to 3% by the end of 2026.

What could derail those expectations? A rise in the Fed’s preferred measure of inflation (core PCE) which at 2.8% remains well above the Fed’s 2% target.

What could accelerate those rate cuts?

Deterioration in economic conditions, particularly weakness in the labor market. While the Unemployment Rate remains low at 4.2%, jobs growth is slowing (+1% YoY) and the last 3 months saw fewer than 100k jobs created (after big revisions in the previous two months).

3) Real Estate & Housing

While the S&P 500 has hit 75 all-time highs since the start of 2024, US Real Estate stocks ($IYR ETF) remain over 10% below their peak from early 2022.

This is, in part, a result of the decline in US commercial real estate prices which are still down 17% from their peak 2022 levels.

Due to persistent underperformance, the ratio of US real estate to the S&P 500 is now at its lowest level since 2000.

Shifting to the residential housing market, affordability – or the lack thereof – continues to be the biggest story.

The median household income necessary to purchase the median priced home for sale in the US ($124k) is now 57% higher than the current median household income ($79k). This is the most unaffordable housing market in history.

How did we get here? Home prices in the US are up over 90% in the last 10 years, more than double the increase in wages.

But housing inventories have been steadily rising, with the months’ supply of existing homes moving up to 4.7, the highest we’ve seen since 2016.

And there are now 511,000 new homes for sale in the US, the highest inventory since October 2007.

Home sellers are now estimated to outnumber buyers by nearly 500k, the largest gap on record with data going back to 2013.

If this relationship holds, price appreciation should continue to moderate. On that point, US home prices rose just 2% over the past year, the slowest growth rate in two years.

And four major cities have turned negative on a YoY basis, with the number expected to grow in the coming months.

Meanwhile, the rental market in the US continues to become more affordable, as high vacancy rates (7.1%) have put a lid on prices. Rents have now declined on a year-over-year basis for 26 consecutive months with median rents still below peak 2022 levels. Renting a home is cheaper than paying a mortgage in all 50 of the largest metros in the US.

₿ 4) Commodities, Currencies, and Crypto

Gold has been the biggest story in Commodity markets this year, with a gain of nearly 28%. This is on pace for its best year since 1979.

Not to be outdone, Bitcoin is now up over 30% on the year, leading all major assets for the 3rd straight year.

Bitcoin surpassed $124,000 this week for the first time, its 16th $1,000-dollar milestone of the year.

Supporting the narrative behind both Bitcoin and Gold:

• The rapid decline in the US Dollar Index, which suffered its worst first half of the year on record.

• The inability of the Federal government to reign in spending, with the budget deficit still running at $2 trillion and National Debt surpassing $37 trillion for the first time.

• The resumption of Money Printing with M2 back at record highs, growing at its fastest pace in 3 years.

5) The Economy

After falling 0.5% in Q1, real GDP snapped back in Q2, advancing 3%. This was driven by the reversal of the net exports category which was a big detractor in Q1 and a big contributor in Q2.

The US economy has now been in an expansion for over 5 years.

And the expansion is expected to continue for at least another quarter, with Q3 GDP tracking at +2.5% according to the latest estimate from the Atlanta Fed.

Robust consumer spending continues to drive economic growth, with the most important chart for the real economy moving in the right direction. Wages have now outpaced inflation on a YoY basis for 27 consecutive months, a great trend for the American worker that hopefully continues.

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