• Artificial intelligence (AI) remains a dominant market driver, with strong infrastructure investment and economic contributions. However, lofty expectations — as highlighted by NVIDIA’s muted earnings reaction — are becoming a headwind. Federal Reserve policy expectations are shifting, with growing anticipation of interest rate cuts. This has sparked renewed interest and a rotation toward rate-sensitive sectors. September and October have historically brought increased market fluctuations and softer returns. However, these headwinds tend to be short-lived, with markets often rebounding strongly afterward. Investment discipline remains key, as the market digests summer gains and leadership potentially broadens. A well-diversified portfolio may benefit from the expanding opportunity set across asset classes in a cooling but fundamentally strong market.
  
  
• As the summer winds down, investors return to a market that remains hot. August marked the fourth consecutive month of gains, fueled by an insatiable appetite for AI and growing expectations of lower interest rates ahead. The market’s summer rally has been impressive, but autumn tends to test investor resolve. Historical patterns point to a bumpier ride in the months ahead, even as underlying fundamentals remain supportive. With AI trends intact and broader opportunities emerging, this seasonal pause may offer a valuable moment to reassess, rebalance, and prepare for the next leg of the cycle. Here is our take on AI trends and the potential for Fed easing as we kick off September.
  
  
• Last week, all eyes were on NVIDIA — the world’s most valuable company and a bellwether for AI — as it reported earnings this season. Its significance is underscored by a staggering $4.2 trillion market capitalization, now accounting for 8% of the S&P 500. Given the stock’s outsized influence on the index and its remarkable rally (up 35% this year, following gains of 171% and 239% in the prior two years), NVIDIA’s quarterly results were among the most anticipated of this earnings season.
  
  At first glance, the results were solid. Revenue rose 56% year over year, beating consensus expectations and reinforcing strong demand trends. However, the stock reaction was muted, as investors focused on two modest blemishes:
  
  1. Sales for its data center business, which has driven growth over the past two years, was a touch light relative to estimates.
  2. Sales guidance for next quarter did not blow away expectations to the extent it had in the past. But this guidance does not assume chip sales to China, which could provide an upside if a deal is worked out with the Trump administration.
  
  

  

• While NVIDIA’s results didn’t shift the broader market narrative, it reaffirmed that the AI race is far from over. Key takeaways include the following:
  
  * AI infrastructure demand remains strong — Cloud providers and major tech firms continue to invest heavily in AI. Amazon, Google, Microsoft and Meta have collectively doubled their annual infrastructure spending to an estimated $600 billion over the past two years. Only time will tell whether companies will reap the benefits of their investments, but for now the perception is that the missed opportunities for innovation and the cost of not investing in AI are greater than the cost of investing.
  
  * AI investment supports the U.S. economy — Though equipment and intellectual property investment represent a small slice of GDP, they made a notable contribution in the second quarter. Investment in computer hardware surged 61% annualized, while software investment rose 26%, the largest quarterly gain in 22 years.
  
  * Lofty expectations are becoming a headwind for mega-cap tech — NVIDIA’s muted stock reaction despite impressive growth underscores the challenge of high investor expectations. While AI infrastructure demand remains robust, growth rates will naturally moderate over time. Still, we believe AI adoption is in its early innings and will continue to be a dominant market theme.
  
  

  

• While AI demand is fueling strong earnings growth for tech, shifting expectations around Fed policy are sparking a healthy rotation in previously overlooked areas of the equity market. Interest rate-sensitive small-cap stocks surged 7.5% in August, their best month of relative outperformance versus the S&P 500 in nine months. Autos, airlines and homebuilders also posted strong gains, and the equal-weighted S&P 500 reached new highs, signaling broader market participation.
  
  At the Fed’s annual Jackson Hole conference, Chair Powell acknowledged rising risks to the labor market, subtly opening the door to renewed monetary easing. Leaning into this message, bond markets are now pricing in about an 85% probability of an interest rate cut at the Fed’s Sept. 17 meeting.
  
  Meanwhile, Friday’s core PCE reading, the Fed’s preferred inflation gauge, ticked up slightly to 2.9% from 2.8%, in line with expectations. This suggests that for now, the Fed’s focus may remain on labor market conditions.
  
  Historically, Fed rate cuts tend to be supportive for equities when the economy is not in recession, and current conditions suggest we are on that path. Revised second-quarter GDP data released last week confirmed that the U.S. economy remains on solid footing, growing at a 3.3% annualized pace after contracting 0.5% in the first quarter.
  
  
• One way to assess the potential market impact of any further Fed easing is by examining financial conditions. These can be thought of as the overall availability and cost of money in the economy — essentially, how easy it is for businesses and consumers to borrow, invest and spend. Various indexes track financial conditions by looking at key indicators such as interest rates, credit spreads, the strength of the U.S. dollar, and equity prices. These indexes help gauge whether conditions are loose (supportive of growth) or tight (restrictive to growth).
  
  Financial conditions are more accommodative than they were a year ago and easier than when the Fed began raising rates in 20221. With the Fed expected to gradually lower its policy rate through 2026, further loosening could continue to support the economy and financial markets. Sectors that have been under pressure — particularly manufacturing and housing — may begin to recover in 2026.
  
  From an investment perspective, this environment could fuel a broadening rally, with mid- and small-cap stocks, value-style investments and cyclicals potentially gaining momentum. However, the flip side of easier financial conditions is the risk of excess liquidity flowing into financial assets, potentially fueling speculative behavior reminiscent of 2000, 2007 and 2021. As has happened in the past, a Fed tightening cycle may uncover vulnerabilities, but that doesn’t appear likely for at least another year or two.
  
  

  

• As summer winds down, the market remains on solid footing, buoyed by AI tailwinds, rising corporate profits and expectations of a more accommodative Fed. We believe the outlook for stocks remains constructive over the next 12 months.
  
  That said, we wouldn’t sound the “all clear” on volatility just yet. Historically, the next two months have been seasonally challenging for equities, often marked by wider daily swings and softer returns.
  
  The good news: these seasonal headwinds tend to be temporary, with markets typically rebounding strongly in the months that follow. This underscores the importance of maintaining investment discipline and setting realistic expectations after a period of strong gains.
  
  We continue to see opportunity in U.S. large-cap stocks with high exposure to AI. However, given these stocks’ multiyear outperformance, investors may consider using any pullbacks to deploy fresh capital into areas with catch-up potential, such as U.S. mid-caps and cyclical sectors such as financials and parts of consumer discretionary. Additionally, appropriate allocations to international equities may help hedge against the growing risk of U.S. dollar softness, especially as the administration intensifies efforts to reshape the Fed.
  
  As the seasons shift, a market cooldown may offer a healthy pause, allowing stocks to digest recent gains and leadership to broaden. A more expansive investment opportunity set could provide a favorable backdrop for well-diversified portfolios.
  
  

  

• Final Words: Market indicates Greed. No new buys.
  
  

  

  Below is last week sector performance report.
  
  Weekly Sector Performance for Aug 25-29, 2025:
  
  $XLE Energy: 2.55%, RSI: 70.71
  $XLK Technology: 0.01%, RSI: 50.83
  $XLC Communication: 0.07%, RSI: 62.24
  $XLY Consumer Discretionary: -0.58%, RSI: 59.92
  $XLP Consumer Staples: -2.05%, RSI: 44.33
  $XLF Financial: 0.78%, RSI: 64.46
  $XLV Health Care: -0.54%, RSI: 58.70
  $XLI Industrials: -0.74%, RSI: 52.49
  $XLB Materials: 0.11%, RSI: 62.02
  $XLRE Real Estate: -0.07%, RSI: 57.05
  $XLU Utilities: -2.00%, RSI: 44.18
  

  

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.