By Ellen Hazen, CFA®, Chief Market Strategist

What We Are Watching for in September

• Federal Reserve September 17. The Fed is meeting on September 16-17 and markets currently expect (85% probability, according to Bloomberg) a 0.25% cut in the Federal Funds rate. At his speech at the Jackson Hole symposium on August 22, Chair Jerome Powell opened the door to an interest rate cut in September, citing rising risks to the labor market, even as inflation remains above target
• Equities performance. After returning 10.8% through August, the S&P 500 Index forward price-to-earnings multiple has increased from 19.3x to 21.5x. Over the past 20 years, September has proven to be a volatile month for US stocks; with an average return of -0.5%, it is historically the weakest month of the year. We would not be surprised to see additional volatility given tariff uncertainty
• Tariff clarity? Weighted average tariffs have increased from 2.4% in 2024 to over 11% in 2025 at current rates, according to Forbes. Tariff revenue collected in August ($30.9 bn) was roughly flat with July’s level ($29.6 bn), and well above the 2024 average level of $8.2 bn. However, on August 28 the US Court of Appeals for the Federal Circuit upheld a prior ruling that the Trump administration had overstepped its authority in implementing the tariffs. Enforcement is delayed until Oct 14, 2025, which gives the administration time to appeal the decision to the Supreme Court

Notable August Observations

• Jackson Hole August 21-23. As noted above, Chair Powell stated that the Fed will consider changes to the policy stance given that “the downside risks to employment are rising”
• Labor market cooling. The July new nonfarm payrolls number was lower than expected, at 73,000 vs. expectations of 104,000. However, significant negative revisions to the initial reports of new jobs created in both May and June indicate many fewer jobs. May new jobs created was revised down from 139,000 to only 19,000, while June was revised down from 147,000 to only 14,000
• Inflation still sticky and above 2%. Both the Core Personal Consumption Expenditure (PCE, reported August 29) and the Consumer Price Index (CPI, reported August 12), remained above the Fed’s 2% target, with the Core PCE at +2.9% Y/Y and CPI at +2.7% Y/Y
• Small Cap and International stocks outperformed. During August, small cap stocks, as reflected by the S&P Small Cap 600 Index, appreciated by 7.5% and international stocks, as reflected by the MSCI EAFE Index, appreciated by 4.6%, both notably outpacing the S&P 500 Index’s 2.7% return. Year-to-date, the MSCI EAFE is the best-performing major equity index at +23.5%
• NVIDIA outlook in-line. Artificial intelligence (AI) semiconductor company NVIDIA, the largest company by market capitalization, reported July quarter earnings growth of +56% on revenue growth of +54%, slightly better than expectations. The company continues to see strong demand for its processing chips, indicating that the AI-driven stock market rally may continue

State Capitalism

What are investors to make of the federal government’s decision in mid-August to take a 9.99% stake in US semiconductor giant, Intel, in exchange for $11 billion in CHIPS Act grant money that the government had already agreed to give them, subject to their meeting certain milestones? Critics on both the left and the right are pointing to the irony of a Republican administration taking an active stake in a private corporation, when the traditional Republican position vis-à-vis business has been laissez-faire rather than the state owning the means of production. There are reasons to be concerned. More active government intervention in corporate America runs certain risks: 1) Capital misallocation leading to slower growth; 2) Potential shareholder dilution from equity offerings leading to higher equity risk premiums – and thus lower equity valuations – due to less certainty about the size of one’s ownership stake; and 3) The risk of corruption by the government officials administering the programs.

Despite these potential risks, industrial policy (or state capitalism), has been around for decades. Prior US examples include the Chrysler bailout in 1980, the US Savings and Loan bailouts in the late 1980s, multiple bailouts during the Global Financial Crisis in 2009 (The Asset Guarantee Program for Citigroup, Bank of America and other major banks, General Motors, Fannie Mae, and Freddie Mac), and COVID response programs like the Paycheck Protection Program (PPP).

More recent examples under the current administration include the “Golden Share” that the US government will get in the Nippon Steel-US Steel merger, the contract to buy rare earth minerals from MP Materials at above-market prices, and the approval for chipmakers NVIDIA and AMD to sell into the Chinese market only if they pay 15% of their China sales to the US government. Commerce Secretary Howard Lutnick even mused on CNBC this month about the government taking a stake in defense company Lockheed Martin. These are qualitatively different than the examples cited above, as these are not bailouts in response to a crisis, but strategic investments.

It’s been a global phenomenon for decades as well: Chinese state capitalism is perhaps the most recent salient example, but Japan, Taiwan, and South Korea all successfully nurtured domestic industries for years, in the end aiding in the creation of globally dominant companies in autos, appliances, heavy industry, and electronics.

Government interventions have increased globally in recent years, not just in the US. Before the current administration, we saw US-centric industrial policy efforts (Biden-era CHIPs Act, Infrastructure Act, and Inflation Reduction Act), China’s Made in China 2025 program, and the European Chips Act. The increase in the number of harmful trade policy measures identified by Global Trade Alert illustrates one measure of the increase in state intervention.

State capitalism can take many forms. Many countries’ governments explicitly own substantial parts of private companies, including Germany’s position in Volkswagen and Deutsche Telekom, Japan’s position in NTT and JSR, Norway’s position in Equinor, Saudi Arabia’s position in Aramco, and Italy’s position in Enel and Eni. Also, many states have sovereign wealth funds, including Norway, Singapore, China, Abu Dhabi, and Indonesia. Public pension plans can own large stakes in companies, such as the Canadian Pension Plan Investment Board or Japan’s Government Pension Investment Fund. Development banks (finance institutions that provide risk capital for economic development projects on a non-commercial basis) also invest in private companies. According to the OECD, 25% of the largest companies in the world are state-owned enterprises, up from 20% in 2017 and only 7% in 2000.

Why is state capitalism on the rise? Analysts point to trends that are common across many countries: rising debt levels, aging demographics, geopolitical shifts, and economic nationalism. Countries want to secure critical and strategic infrastructure in a world with rising geopolitical tensions, ameliorating the dependence on other countries – particularly strategic rivals – that came with decades of globalization.

Where will the US government go next as it expands its exercise of state capitalism? Critically, unlike bailouts in prior decades, the goal of today’s state capitalism is not to prop up weak or declining industries, but rather to achieve economic independence, particularly in areas of strategic national interest.

Examining recent targets reveals some common themes: areas which are of strategic importance (technology, energy, materials), areas in which there are capital constraints or materials constraints, and areas in which the US is now dependent as a result of having let other countries assume, develop, and deepen core expertise.

The federal Cybersecurity & Infrastructure Security Agency (CISA) has identified sixteen Critical Infrastructure Sectors that are vital to the US. CISA “advocates a national policy to strengthen and maintain” critical infrastructure, ranging from agriculture and healthcare to defense and nuclear reactors to energy and communications. Where we can observe bottlenecks and/or lost national capability within these sectors is a good place to start when surmising where we might see additional US economic intervention. We currently expect this may happen in heavy industries (steel, construction, shipbuilding), energy (electric grid, battery technology, gas turbines), and defense. Naturally, technology is a top target (think of cybersecurity), but many technology companies do not need capital injections and thus government intervention may take a different form – for example, restrictions on sales or technology transfers.

Thinking a bit farther afield, in addition to capital and materials constraints, labor may prove to be a constraint in the US as the labor pool inevitably ages as a result of demographics and constrained immigration. Humanoid robots are at a much earlier stage of development than many of the above technologies, but if labor constraints exacerbate, we could see the state target that technology area as well.

When paired with regulatory and policy rules, state capitalism can lead to enhanced national security, to higher economic growth from associated fiscal stimulus, and accelerated technological development. Even so, risks abound, including potential corruption, inefficient capital allocation, and equity holder dilution, as noted above. Moreover, misalignment of priorities can lead to suboptimal outcomes. For example, how will the Federal Trade Commission’s enforcement of antitrust change if the monopolist in question is also the recipient of a government investment?

What impacts should investors expect from the rise of state capitalism? A 2018 study of government investments made globally between 1987 and 2013 in publicly traded firms found that the arm of government making the investment matters. When the government division is an industrial or financial arm of the government, the stock of the recipient outperforms by an average of 4.4%, whereas if the investment is made by a political arm of the government, the recipient’s stock underperforms by an average of -1.8%. In all cases, return on equity declined, although in the case of political investments, employment increased.

Equity investors can identify areas in which government investment may be more probable and which therefore may benefit from stock appreciation. Criteria to examine include whether the investment is purely political or made for financial or industrial reasons. Benefits may be amplified if such an investment occurs alongside complementary policies and regulations. Equity investors should prioritize, though, investing in industries that currently are (or have a path to be) economically sustainable – investing in an economically challenged sector merely to capture anticipated government largesse runs the risk of being abandoned when political winds change.

Bigger picture, continued state capitalism may very well require higher fiscal spending, both stimulating the economy and driving higher debt issuance. These in turn may cause higher long-term yields and reinforce a steeper yield curve – trends that aging demographics are already propelling.

The late twentieth-century decades were in large part characterized by laissez-faire economics, a belief in free markets, and the belief in the superiority of the marriage of capitalism and democracy. Yet in recent years, China has emerged as a world power without adhering to that US-exemplified protocol, and rising inequality and populism has led many in the West to question unfettered capitalism. Whether state-directed capitalism as being implemented today enhances Adam Smith’s famous “invisible hand” or proves to be a gilded fist has yet to be determined.

Disclosures