Author: slightbourne@noblecapitalmarkets.com

U.S. stocks slipped on Friday as investors locked in profits heading into the long weekend, but the pullback wasn’t enough to erase August’s gains. The S&P 500 retreated 0.7% after notching a fresh record earlier in the week, while the Nasdaq Composite dropped 1.2% and the Dow Jones Industrial Average fell 123 points, or 0.3%.

Despite the losses, August remains another winning month for equities. The Dow is tracking a roughly 3% gain, the S&P 500 is up nearly 2%, and the Nasdaq has advanced more than 1%. That would mark the fourth consecutive month of gains for the broad market index, underscoring investor resilience even as inflation data and policy uncertainty remain in focus.

A key driver of Friday’s caution was the latest reading of the Federal Reserve’s preferred inflation gauge. Core Personal Consumption Expenditures (PCE) rose 2.9% year-over-year in July, matching expectations but accelerating from the prior month. The increase, the highest since February, highlighted ongoing price pressures just as the Fed prepares for its September policy meeting.

While inflation remains sticky, market consensus still points to a rate cut next month. Analysts note that the Fed is increasingly balancing inflation concerns against signs of cooling in the labor market. For now, many strategists believe the central bank will move forward with a cut, although the pace and magnitude of easing remain open questions.

Friday’s weakness also came against the backdrop of strong recent performance, leading some to view the decline as simple profit-taking. The S&P 500 had just closed above the 6,500 level for the first time, and investors often trim positions after fresh highs ahead of holiday weekends.

Earnings season added another layer to the cautious mood. Nvidia, which recently reported 56% revenue growth and reaffirmed its position at the center of the AI trade, slid 3% as traders digested headlines about China’s Alibaba developing a more advanced chip. The update raised questions about long-term competition and underscored the geopolitical risks surrounding U.S. technology exports.

Elsewhere, tariff worries resurfaced after Caterpillar warned of a potential $1.5 billion to $1.8 billion hit this year from new U.S. trade measures. Retailer Gap also flagged pressure on profits, highlighting how trade policy remains a headwind for corporate America.

Looking ahead, September looms as a potential test for the rally. Historically, the month has been the weakest for stocks, with the S&P 500 averaging a 0.7% decline since 1950, according to The Stock Trader’s Almanac. Bespoke Investment Group notes that the index has posted especially lackluster September performances over the past decade.

Still, momentum heading into the new month suggests investors are willing to look past near-term headwinds. With inflation cooling gradually, the Fed leaning toward easing, and earnings broadly holding up, the market may find support even as seasonal trends turn less favorable.

Fresh inflation data released Friday, August 29, 2025, showed that prices ticked higher in July but remained in line with forecasts, reinforcing expectations that the Federal Reserve will move forward with an interest rate cut in September.

The Personal Consumption Expenditures (PCE) Price Index, the Fed’s preferred inflation gauge, showed that core prices—excluding food and energy—rose 2.9% year-over-year, the highest since February and up from 2.8% in June. On a monthly basis, core PCE climbed 0.3%. The headline index increased 2.6% annually and 0.2% month-over-month.

While inflation is still running above the Fed’s 2% target, the pace was anticipated by markets, easing fears of a policy shift. Energy costs declined 2.7% from a year earlier, while food prices rose just 1.9%. Services remained the main driver of inflation, advancing 3.6% compared with a modest 0.5% increase in goods.

Despite higher prices, consumer activity remained resilient. Personal spending grew 0.5% in July, matching forecasts, while personal income rose 0.4%. The strength in household demand suggests that U.S. consumers continue to support the economy even as tariffs and price pressures persist.

The figures indicate that recent tariff measures imposed by President Donald Trump, including a 10% baseline levy on imports and reciprocal duties on key trading partners, are filtering through the economy but not yet significantly curbing demand.

While inflation remains slightly elevated, policymakers have shifted their focus to the labor market. Payroll data for July revealed slower job creation and downward revisions to previous months, raising concerns that employment growth may be softening more sharply than anticipated. Fed Chair Jerome Powell noted last week that both labor supply and demand are cooling, increasing the risk of higher unemployment.

Fed Governor Christopher Waller reiterated his support for a 25-basis-point cut in September, noting that downside labor risks outweigh modest inflation pressures. He added that he would consider a larger move if August employment data, due September 5, shows further weakening.

Markets continue to price in a strong likelihood of a September 17 rate cut, with traders expecting a quarter-point reduction. Analysts suggest that unless upcoming inflation releases—such as the Producer Price Index (PPI) and Consumer Price Index (CPI) in mid-September—surprise sharply to the upside, policymakers will move ahead with easing.

Equities remained under pressure following the release, with the S&P 500 down around 0.7% in midday trading. Treasury yields held firm, reflecting expectations for lower borrowing costs in the months ahead.

For investors, the Fed’s path suggests a supportive environment for equities, particularly small- and mid-cap firms that benefit most from lower financing costs. Fixed income markets may also find support as yields adjust lower. Meanwhile, commodities such as gold are likely to retain a bid, with lower rates reducing the opportunity cost of holding non-yielding assets.

The bottom line: while inflation remains above target, the Fed appears set to prioritize employment risks, keeping September’s policy meeting squarely on track for a rate cut.

The U.S. government’s surprise move to take a nearly 10% stake in Intel has raised fresh questions about whether similar investments could be directed toward defense contractors. Commerce Secretary Howard Lutnick signaled this week that defense remains a central area of discussion, citing its deep ties to government funding and its strategic importance to national security.

The comments sent shares of major defense primes such as Lockheed Martin and Northrop Grumman higher, underscoring how sensitive the sector is to policy developments. But beyond the established giants, investors are now weighing whether small-cap defense firms could become the next beneficiaries of heightened federal interest.

Unlike the household names of the defense world, many smaller contractors play critical yet less visible roles in the military supply chain. These firms often specialize in advanced components, niche technologies, cybersecurity solutions, or unmanned systems. With Washington openly considering how to finance munitions acquisitions and strengthen industrial capacity, smaller players could find themselves on stronger footing.

For small-cap stocks, the potential upside comes from two angles. First, government scrutiny of prime contractors could create opportunities for subcontractors to capture a greater share of defense budgets. If policy shifts encourage more competition in procurement, companies developing next-generation drones, satellite systems, or precision components could see contracts flow their way. Second, direct or indirect investment by the U.S. could help shore up balance sheets and provide access to growth capital that is often scarce in the sector.

The Intel deal also signals a broader shift in Washington’s approach to industrial policy. By taking an equity stake rather than simply providing subsidies, the government aligned its financial interests with a major company’s success. If similar mechanisms are applied in defense, even at smaller scales, it could transform the risk–reward profile for publicly traded small-cap contractors. Investors would be betting not just on execution, but on the implicit backing of federal policy.

Still, risks remain. The defense sector is highly regulated, and the prospect of deeper government involvement raises questions about oversight and shareholder rights. The Intel deal gave the U.S. no board seat or governance role, but uncertainty lingers over how similar arrangements might play out in defense. Additionally, defense budgets are subject to political cycles, making small-cap firms vulnerable to swings in appropriations and shifting strategic priorities.

Market reaction to Lutnick’s remarks illustrates how policy talk alone can move stocks, but investors should be cautious about reading too much into early signals. Large primes like Lockheed Martin remain deeply entrenched as key suppliers, and any structural changes would take time to ripple through the industry. For smaller contractors, however, the current environment could present a rare window of opportunity.

If the government follows through on exploring new financing models for defense, small-cap stocks could benefit disproportionately, gaining visibility, liquidity, and growth momentum. For investors willing to tolerate the volatility, Lutnick’s comments may have opened the door to a new chapter in defense-sector investing—one where the biggest opportunities lie not only with the giants, but with the up-and-coming firms that keep the supply chain moving.