• Inflation remains manageable but not resolved. July’s CPI was in line with expectations, but sticky services inflation and rising producer prices suggest upside risks persist. The Fed pivot appears to be gaining traction, with inflation coming in less severe than feared and labor-market data showing signs of cooling, pushing market-implied odds of a September rate cut to more than 80%. An "insurance" cut may be warranted as a preemptive move next month. Upcoming Fed easing, with the economy still resilient, may help broaden market leadership. Last week's outperformance of small-caps, value stocks, and the equal-weighted S&P 500 may have provided a taste of that. Timely opportunities in equities may include rate-sensitive sectors like consumer discretionary and financials, while mid-caps could offer cyclical upside with a quality tilt. In fixed income, we think short-term bonds offer liquidity and stability, and seven- to 10-year maturities provide attractive yields in a potentially lower-rate environment.
  
  
• To cut or not to cut—that looks to be the question the Fed now faces, as mixed inflation readings give way to growing signs of labor-market softness. Though the path to rate cuts remains uncertain, the narrative is tilting toward a cautious move, perhaps marking a meaningful shift in tone ahead of Chair Powell’s speech at the Jackson Hole Symposium on August 22. We offer our take on July's inflation data and its potential implications for Fed policy and portfolio positioning.
  
  Markets were closely watching last week’s consumer price index (CPI) report, anticipating a potential tariff-driven uptick in July inflation. The headline CPI held steady at 2.7%, thanks in part to a decline in gasoline prices. Meanwhile, core CPI, which excludes food and energy, rose to 3.1% from 2.9%, its highest level since February. Both figures came in largely in line with expectations, offering some relief to equity and bond investors.
  
  However, the underlying details revealed some surprises. Goods prices increased just 0.2% month-over-month, matching June’s pace, while services prices accelerated by 0.4%, driven by notable increases in airfares, medical services, and auto repairs.
  
  The glass-half-full interpretation is that tariffs, one of Fed Chair Powell’s key concerns, were not the primary driver of the core inflation uptick. Still, it may be premature to draw firm conclusions. Notably, producer prices also rose more than expected last week, marking the fastest pace of wholesale inflation in three years. This helps raise the possibility that businesses could begin passing higher import costs onto consumers, something they’ve largely avoided so far.
  
  Also, the renewed momentum in services costs underscores the risk of declaring victory over inflation too soon. That said, we see no signs of a 2022-style inflation surge on the horizon. Any tariff-related price pressures are likely to be temporary, and the broader inflation outlook remains manageable for now, in our view.
  
  
  
  

  

• At its July meeting, the Fed held rates steady in the 4.25%–4.5% range, but, notably, Governors Bowman and Waller dissented, favoring a quarter-point cut. Their divergence hinted at growing internal concern over economic momentum. Since then, inflation has come in softer than feared, and labor-market conditions appear to have cooled, with the three-month pace of job gains now the slowest since 2020. Had the committee had this data in hand, it’s reasonable to think they might have opted to cut, in our view. Reflecting this shift, bond-market expectations for a September rate cut have surged to 85%, up from just 40% before the latest employment and inflation reports. Some investors are even debating the size of the cut, a standard quarter-point or a more aggressive half-point move. We believe an "insurance" cut next month is warranted given labor-market softness, but not guaranteed. Calls for a larger cut may be premature, especially with consumer spending continuing to grow at a brisk pace and inflation risks still lingering. Importantly, there’s still one more CPI reading and jobs report before the Fed’s September 17 decision, and both could reshape the narrative. However, we think that inflation would need to surprise significantly to delay a cut, and we expect Chair Powell to use the Jackson Hole conference to lay the groundwork for the Fed’s return to easing.
  
  

  

• Last week’s market action offered an early glimpse of how investors may position for a potential Fed pivot in September. Small-cap stocks, which are more sensitive to interest rates due to their reliance on debt financing, rose over 3% for the week. Meanwhile, value-style investments and the equal-weighted S&P 500, which gives each company the same influence regardless of size, outperformed the traditional cap-weighted index, signaling a welcome broadening of market leadership.
  
  In past cycles, the market’s response to Fed easing depends on whether rate cuts are preemptive ("insurance cuts") or reactive.
  1. Insurance cuts, like those in 1995, 1998, and 2019, aim to support the economy before clear signs of trouble and tend to be bullish for equities.
  2. Recession-driven cuts (reactive), such as in 2001 and 2007–2008, often coincide with poor risk sentiment and weaker market returns.
  Today’s backdrop suggests the former: while labor demand appears to be cooling, jobless claims and unemployment remain historically low, and corporate profits and GDP continue to grow at a healthy pace.
  
  
• Measured rate cuts this year and next could help further boost investor sentiment. Potential beneficiaries include rate-sensitive and cyclical industries, such as homebuilders, real estate, and banks. We favor the consumer discretionary and financials sectors, which could get a lift from the upcoming Fed pivot. Our slight overweight to health care reflects near-record low valuations relative to the broader market.1 At the asset-class level, mid-caps could offer a way to position for lower rates while avoiding some of the risks associated with smaller-cap stocks. If the U.S. dollar weakness persists, given other central banks are closer to neutral, emerging-market equities could benefit, and we maintain a neutral allocation there.
  
  
• Fed rate cuts typically drive short-term yields lower, as they closely track policy rates. While long-term yields may also decline, they could remain elevated due to inflation and fiscal concerns. In this environment, we think short-term bonds offer stability and liquidity for near-term needs, while longer-term bonds provide attractive yield opportunities. We favor bonds with seven- to 10-year maturities, and we maintain our view that the 10-year Treasury yield will remain in the 4%–4.5% range over the coming months. Yields may move to the low end of the range next year as Fed policy potentially moves closer to neutral.
  
  

  

• To sum up, the path to rate cuts may be uneven, as we have seen over the last two years, where markets have been eager for rate cuts and sometimes disappointed that the Fed has not delivered them. But we believe the direction of travel for rates is likely to remain lower. With inflation treading water and labor-market strains becoming more pronounced, the balance of risks may soon tip toward action. Chair Powell’s upcoming remarks at Jackson Hole could validate the now-high expectations that, after a seven-month pause, rate cuts will resume in September.
  
  In this environment, we believe diversified portfolios, which include both growth-style investments benefiting from long-term AI tailwinds and value-oriented exposures poised for a cyclical boost from easing policy, may be well-positioned for the evolving Fed narrative.
  
  
• Final Words: Market indicates Greed. No new buys.
  
  

  

  Below is last week sector performance report.
  
  Weekly Sector Performance for Aug 11-15, 2025:
  
  $XLE Energy (Change: 0.74%), (RSI: 48.15)
  $XLK Technology (Change: -0.08%), (RSI: 59.44)
  $XLC Communication (Change: 3.58%), (RSI: 68.56)
  $XLY Consumer Discretionary (Change: 2.35%), (RSI: 63.65)
  $XLP Consumer Staples (Change: -0.56%), (RSI: 55.05)
  $XLF Financial (Change: 1.18%), (RSI: 52.36)
  $XLV Health Care (Change: 4.65%), (RSI: 59.50)
  $XLI Industrials (Change: -0.26%), (RSI: 49.30)
  $XLB Materials (Change: 1.90%), (RSI: 53.30)
  $XLRE Real Estate (Change: 0.19%), (RSI: 46.24)
  $XLU Utilities (Change: -0.65%), (RSI: 55.56)
  
  

  

  S&P 500 Price-to-Book Value is extremely elevated.
  
  

  

If you are looking for investment opportunities, you can take a look at our Hidden Gems section, and if you want to see our past performance, visit our Past Performance section. If you are looking for safe and low cost Exchange Traded funds(ETFs), check out our ETF recommendations.

Currrent Shiller PE (see below) is showing overbought conditions as index is far above mean/media and our AryaFin engine is indicating caution. Have a good weekend.