The Federal Reserve chair Jerome Powell recently hinted that the Fed might finally lower interest rates in September this year. Market consensus now expects a 0.25% cut.
Earlier in the year, many anticipated a series of rate cuts throughout 2025. But the Fed has so far held rates steady at 4.5%.
Ongoing uncertainty around inflation and trade tariffs has led the Fed to take a cautious approach.
What’s changed?
A great deal has shifted in the US economy over the past few months.
Let’s start with the labour market. In the first three months of the year, there were early signs the job market is showing some cracks. These weren’t significant enough to alter the Fed’s position.
The second quarter painted a different picture.
Between May and July, the US added just 106,000 jobs – down sharply from 380,000 in the first quarter.
Figures for May and June were steeply revised down by a combined 258,000 from when they were first reported. This unusually large revision even led to US President Donald Trump firing Bureau of Labor Statistics commissioner Erika McEntarfer.
Another concern for the Fed will be slowing economic growth.
The economy grew 1.2% in the first half of 2025, significantly lower than 2.5% for the first half of 2024.
The International Monetary Fund (IMF) expects the US to grow just 1.9% in 2025 compared to 2.8% last year.
With economic momentum slowing, the Fed could consider cutting interest rates to stimulate growth by encouraging spending and investment.
The tariff factor
The Fed is also closely monitoring the impact of new tariffs.
In April, President Trump announced sweeping tariffs on several key trading partners. These were temporarily paused to allow new trade deals to be negotiated before a 1 August deadline
That deadline has now passed, and the tariffs have taken effect –including a 50% tariff on Brazil and a 39% tariff on Switzerland. This back-and-forth tariff policy could prompt the Fed to act proactively to cushion any negative economic fallout.
Why they might not cut
Although the consensus is heavily leaning on an interest rate cut in September, not every data point is flashing red.
A key metric the Fed will be watching is inflation.
Despite all the concerns that tariffs and tax from Trump’s ‘Big Beautiful Bill’ could drive inflation higher, so far inflation has only edged up to 2.7%.
It’s still above the Fed’s 2% target though. To reach the target, they might need to remain persistent and keep interest rates at their current level.
The Fed’s next move will be a delicate balancing act – managing elevated inflation against a backdrop of a weakening labour market and slowing economic growth.
How have US stock markets performed?
The US stock market grew 13.13% over the last 12 months to the end of August 2025. Smaller companies lagged their larger peers but still retuned a respectable 7.51%.
It’s been a volatile 12 months though.
The market rallied following Donald Trump re-entering the White House as expectations that his pro-market agenda would keep the stock market trending upwards.
But in April significant tariffs caused markets to tumble.
After the turbulence he paused the additional levies to allow trade agreements to be made, which gave the market confidence to keep rising.
More recently, the market has been volatile as investors continue to scrutinise AI companies which are some of the largest companies in the world. Money has poured into the so-called winners of AI which has seen some of their share prices reach all-time highs.
But some investors fear it’s gone too far and that AI isn’t yet having a material effect on companies’ profits.
From a sector point of view, the consumer discretionary sector was the best performing over the last 12 months returning 21.82%*. The healthcare sector was the worst-performing sectors, returning -13.48%.
One-year stock market performance
How have our Wealth Shortlist funds performed?
US funds on the Wealth Shortlist delivered mixed performance over the past year, with some faring better than others.
A year is a short time to assess the skills of a fund manager though. Managers with different strengths, styles and areas of focus will perform differently over time.
Investing in these funds isn’t right for everyone. Investors should only invest if the fund’s objectives are aligned with their own, and there’s a specific need for the type of investment being made. Investors should understand the specific risks of a fund before they invest, and make sure any new investment forms part of a diversified portfolio.
This article isn’t personal advice. Investments and any income they produce will rise and fall in value, meaning you could get back less than you invest. If you’re not sure if an investment is right for you, ask for financial advice. Remember, past performance is not a guide to the future.
For more details on each fund and its risks, you can use the links to their factsheets and key investor information below.
The strongest performing US fund on the Wealth Shortlist over the last year was the Baillie Gifford American fund.
The fund rose 36.92%* over the past 12 months, outperforming the IA North American sector average which returned 10.66%.
Our analysis shows the managers’ stock selection was the main driver of returns.
An investment in software company Cloudflare, technology company Shopify, and video game company Roblox were some of the biggest contributors to performance.
The managers prefer to invest in a smaller number of stocks – between 30 and 50. This means each one can contribute significantly to returns, although this approach increases risk, as does some investments in smaller companies.
The weakest performer over the past 12 months was FTF Royce US Smaller companies, returning -1.42%, behind the IA North American Smaller Companies sector average which returned 3.05%.
The manager’s stock selection held the fund back especially in the industrial and healthcare sector. Longer-term performance has been stronger though and we still view the fund as a good way to invest in lesser-known, though higher-risk, US smaller businesses.
While we believe Wealth Shortlist funds have long-term performance potential, they won’t perform the same way at the same time.
We think it’s important for investors to build a portfolio filled with managers who have different approaches and investing styles to help generate long-term returns.
Annual percentage growth
31/08/2020 To 31/08/2021 | 31/08/2021 To 31/08/2022 | 31/08/2022 To 31/08/2023 | 31/08/2023 To 31/08/2024 | 31/08/2024 To 31/08/2025 | |
|---|---|---|---|---|---|
Baillie Gifford American | 35.42% | -48.46% | 6.36% | 18.1% | 36.92% |
IA North America | 28.18% | 0.61% | 4.14% | 19.17% | 10.66% |
FTF Royce US Smaller Companies Fund | 39.90% | 6.86% | 5.03% | 6.82% | -1.42% |
IA North American Smaller Companies | 37.06% | -6.39% | -1.99% | 11.85% | 3.05% |