Interest Rates Cut as Expected
Last week reminded investors to cherish a predictable Federal Reserve. The quarter-point rate cut coupled with the expectation of two additional cuts before the year-end was aligned with consensus expectations and so the US dollar and bond prices remained stable while the Morningstar US Market Index gained 1.3%.
Rise in Communication and Technology Stocks
US communications stocks led these gains, driven primarily by Alphabet GOOG which accounts for 40.2% of the index and gained 5.7% over the week. In doing so, it became the fourth company to reach a $3 trillion valuation. Having risen 30% in 2025, communications stocks are now trading above fair value for the first time since July 2021, lessening their appeal as an attractively priced way of accessing Magnificent Seven companies.
US technology stocks also rose sharply, led by Intel INTC on the announcement of a $5 billion dollar investment by Nvidia NVDA and a collaboration agreement between the two firms. Coming less than a month after the US government acquired a 9.9% stake in the business, this latest investment will provide Intel with capital to develop a more competitive manufacturing capability and may reduce the Nvidia’s reliance on Taiwan Semiconductor Manufacturing Company over the long term. The significance for struggling Intel can be seen in the 33% increase in fair value assigned by Morningstar technology analyst Brian Colello. In contrast, Nvidia’s stake amounts to less than 20% of its last quarter’s profits and does not represent a substantial commitment or move Brian’s assessment of the fair value of the AI giant.
This announcement on the heels of Oracle’s ORCL results demonstrate both the broadening impact of AI on the technology sector and the huge sums being invested in a traditionally cyclical industry in the hope that this time will be different. While such investments can boost stock prices in the near term, over-investment destroys value over the longer term.
Although it is too early to say what the correct level of investment should be in the current cycle, ignoring the potential for cyclicality when investing at high valuations can be treacherous. To get a better understanding of the semiconductor market, check out this new outlook published by our technology research team.
The Role of Defensive Stocks in a Portfolio
In contrast, healthcare and consumer defensive stocks remained out of favor. Despite both sectors lagging the broad market over the year to date, these traditionally defensive stocks provide fundamentally different characteristics for investors. While healthcare companies continue to be priced below fair value due to a combination of policy uncertainty and pricing concerns, consumer defensive stocks remain a little above fair value with the underperformance primarily reflecting the lower growth characteristics of these businesses.
While both sectors should provide diversification in the event of a decline in more popular stocks, stronger returns in a downturn typically come from undervalued stocks where the bad news is already priced in and consequently Morningstar’s investment team currently favors healthcare over consumer defensives when seeking diversification in an increasingly concentrated US market. This reminds us that the current characteristics of the proposed investment are as important as an understanding of historical relationships.
Brazilian Stock Market Outperforms, Still Undervalued
Developed markets outside the US were flat over the week while emerging markets continued to gain ground, with Brazil being especially strong in US dollar terms, supported by a 1% gain in the Brazilian real, as the central bank maintained interest rates at 15% in an effort to lower inflation. Despite the ongoing trade pressure from the US, the Brazilian market has risen 39.7% in US dollars over the year to date and yet remains one of the most attractively priced markets, illustrating the importance of looking beyond recent performance and media headlines.
PCE, GDP Data Up Next
Commentators will have lots to keep them occupied this week with numerous speeches by Federal Reserve governors and the third estimate of second quarter GDP. However, inflation is likely to draw the greatest attention as the Fed’s preferred measure of price rises, Personal Consumption Expenditures, is released on Sep. 26. This is expected to show a decline in core inflation, which excludes volatile food and energy prices, over the last month. The headline inflation rate of 2.90% remains above the Fed’s target and so any surprise in this data is likely to lead to a reassessment in the future path of interest rates and asset prices. This data and other market news can be tracked on this calendar.