📈 Weekly Market Update: The Great Rotation Takes Center Stage
The markets wrapped up August with a tale of two very different stories - while the headline indices posted solid gains for their fourth consecutive winning month, the real action happened beneath the surface.
Small-cap stocks exploded higher, the AI darling Nvidia stumbled despite beating expectations, and President Trump's unprecedented firing of Fed Governor Lisa Cook sent shockwaves through Washington. As we head into September - historically the market's worst month - investors are grappling with shifting Fed policy, rotation dynamics, and stretched valuations.
📰 What's Happening
The Small-Cap Renaissance
August delivered a historic performance divergence that few saw coming. While the Nasdaq 100 managed just 1.5% gains, the Russell 2000 small-cap index surged 7.3% - marking one of the most dramatic monthly outperformances since 1985. Interest rate-sensitive small caps benefited from Fed Chair Powell's dovish Jackson Hole speech, which all but guaranteed a September rate cut. This "great rotation" saw small caps deliver their best month of relative performance in nine months.
Nvidia's Mixed Victory
The world's most valuable company delivered another earnings beat - posting $1.05 per share against expectations of $1.01, with revenue jumping 56% year-over-year to $46.7 billion. But Wall Street wasn't impressed. The stock fell 4% in after-hours trading as investors fixated on data center revenue missing estimates for the second straight quarter and zero H20 chip sales to China. CEO Jensen Huang's proclamation that "the AI race is on" couldn't prevent the 3% Friday decline.
Trump vs. The Fed: Constitutional Crisis Brewing
In an unprecedented move, President Trump fired Federal Reserve Governor Lisa Cook, citing unsubstantiated mortgage fraud allegations. Cook, the first Black woman on the Fed board, immediately sued to keep her job, setting up a constitutional showdown over Fed independence. This marks the first time in 112 years a president has attempted to remove a Fed governor, escalating Trump's war with the central bank as he pressures for faster rate cuts.
🎯 Why It Matters
The Broadening Rally Changes Everything
For months, the market's gains were concentrated in just five mega-cap stocks. Now we're seeing genuine breadth as equal-weighted S&P 500 indices hit new highs and previously unloved sectors like financials, industrials, and consumer discretionary rally hard. This rotation isn't just technical - it reflects fundamental shifts as investors hunt for value after growth stocks hit extreme valuations.
September Seasonality Meets Policy Uncertainty
History isn't kind to September returns - the month has delivered negative average returns of -0.7% from 1980-2018 and -2.2% from 2019-2024. Combined with 86% odds of a Fed rate cut on September 16-17 and quarterly options expiration, we're heading into a perfect storm of volatility catalysts. The VIX already spiking mid-month as crucial economic data drops.
Fed Independence Under Attack
Trump's Cook firing isn't just political theater - it's a direct assault on monetary policy independence that could reshape how markets price Fed decisions. If successful, Trump could install rate-cutting allies across the board, fundamentally altering the risk-free rate environment that underpins all asset pricing. The dollar weakened 0.3% and Treasury curves steepened immediately after the news.
💰 Opportunity
Small-Cap Value Play
The Russell 2000 trades near multi-decade lows relative to large caps, yet small-cap earnings are projected to grow 22% in 2025 - outpacing large caps. These companies are highly leveraged to falling rates and prime M&A targets for cash-rich corporations. Regional banks, specialized tech, and niche manufacturing offer compelling risk-reward profiles.
Defensive Rotation Setup
With September's historical weakness and potential policy volatility, consider sector rotation plays. Healthcare has shown remarkable September resilience historically, while Utilities tend to outperform during volatile periods. Energy remains the most reliable September outperformer, particularly with ongoing geopolitical tensions.
Volatility as Asset Class
The VIX futures are pricing lower volatility ahead, yet we're entering a month packed with Fed meetings, quarterly earnings, and political uncertainty. Long volatility strategies or protective puts could provide asymmetric upside if September lives up to its brutal reputation.
⚖️ Bottom Line
August's market rotation signals a fundamental shift from narrow, growth-driven leadership to broader, value-oriented participation. While the S&P 500's 2% monthly gain extended the winning streak to four months, the real story is small caps awakening and mega-tech cooling.
The setup for September is treacherous: Historical seasonality, Fed policy pivot, stretched valuations, and political interference create multiple risk vectors. But within this chaos lies opportunity - particularly in overlooked small-cap value plays and defensive positioning ahead of what could be the market's most volatile month of 2025.
Smart money is rotating early. The question isn't whether September will bring turbulence - it's whether you're positioned to profit from the chaos or merely survive it.
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Disclaimer: This article constitutes the author’s personal views and is for entertainment and educational purposes only. It is not to be construed as financial advice in any form. Please do your own research and seek advice from a qualified financial advisor. From time to time, I have positions in all or some of the mentioned stocks when publishing this article. This is a disclosure - not a recommendation to buy or sell stocks.