The S&P 500 continues to show strong relative strength and momentum, though much of that muscle still comes from the mega-cap giants. The S&P 500 Equal Weight Index, a gauge of market breadth, continues to trade within its moving average bands—suggesting the rally hasn’t yet broadened out. Even so, Sowell’s technical indicators remain steadfast, keeping portfolios confidently fully invested.
The Shutdown Paradox: Wall Street Cheers as Washington Burns
The financial week that concluded Friday was another masterclass in market detachment, demonstrating once again that for many on Wall Street, bad news for the economy is simply a direct pipeline to dovish monetary policy. As the federal government entered a potentially protracted shutdown, the S&P 500 did not just yawn; it rose to fresh, all-time highs, closing the week up a notable 1.11%. The tech-heavy Nasdaq Composite followed suit, gaining 1.33%, as equity traders priced in an accelerated timetable for Federal Reserve rate cuts.
This remarkable calmness, or perhaps outright glee, in the face of congressional gridlock was fueled by a simple calculation: the more collateral damage inflicted by the shutdown, and the weaker the underlying economic data, the sooner the Fed would be forced to pivot aggressively. Even fixed income, the traditional refuge in times of uncertainty, gained +0.46%, reflecting mounting conviction that monetary policy easing is now a matter of "when," not "if."
The market's bullish wager received immediate validation from a suite of severely deteriorating economic indicators, made all the more critical by the data blackout caused by the shutdown (which rendered official weekly and initial jobless claims unavailable). The private sector stepped in to deliver the necessary jolt:
Labor Market Shock: The ADP Nonfarm Employment report delivered a stunning blow, with a decline of 32,000 jobs. This was the biggest drop since 2023 and significantly worse than consensus forecasts. Adding insult to injury, the previously reported August payroll figure was revised sharply down, from an initial increase of 54k to a loss of 3k, painting a picture of a rapidly accelerating labor market decline.
Waning Confidence and Activity: Consumer sentiment slumped, with the CB Consumer Confidence index falling to 94.2, against a forecast of the third-worst reading year-to-date. In the business sector, key purchasing managers' indices indicated contraction and uncertainty: the ISM Manufacturing New Orders Index fell to 48.9, and the critical ISM Non-Manufacturing Business Activity index dropped to 49.9, its lowest level in 2025.
These readings collectively provided the undeniable evidence that the economy is indeed waning, giving the Fed the green light to justify a faster pace of easing.
Known Unknowns: Political Gridlock and The Barbell Curve
The most immediate unknown remains the duration and political fallout of the shutdown, which commenced over an impasse concerning the extension of Affordable Care Act tax credits. While core federal functions—including the CIA, FBI, air traffic control, Social Security, and the VA—are protected, they will inevitably suffer operational drag from reduced staff and furloughs. The historical specter of the 35-day shutdown under President Trump's first term looms large, creating a headwind for short-term GDP growth.
Simultaneously, the Treasury market remains a study in contradiction. While yields declined overall in response to rate-cut hopes, the yield curve continues to exhibit a "barbell" structure, signaling deep-seated economic anxieties. Short-term yields, such as the 1-month paper, held steady at 4.24%, while the 30-year bond yield remained stubbornly high in the 4.71% range. This persistence suggests that while traders expect the Fed to ease immediately (lowering the front end), the market harbors deep, lingering concerns about stagflation—an inability to contain prices over the long haul, thereby requiring a risk premium on long-dated sovereign debt.
The Ultimate Hedge: Gold's Historic Climb
Finally, providing the clearest signal of heightened geopolitical and systemic risk, the price of gold continued its historic ascent, reaching a new record closing price of $3,910 per ounce. The yellow metal has gained over +46% YTD, establishing itself as the premier instrument of reserve diversification.
This rally is structurally underpinned by a global shift away from traditional dollar dominance. Goldman Sachs Research recently amplified this narrative, forecasting gold prices to reach $4,300 by December 2026. Their analysis emphasizes the sustained, strategic purchases by Emerging Market central banks over the next three years, citing the massive disparity in gold reserve holdings: whereas the U.S. and Germany hold approximately 70% of their reserves in gold, China holds less than 10%. Until that historical imbalance is narrowed, gold's ascendancy appears cemented, regardless of the drama unfolding on the floors of Congress or the Federal Reserve.
As we peer into the coming week, one is struck by a profound character flaw: it cheers the institutional incompetence of the legislature because it anticipates the economic largesse of the central bank. With the calendar rapidly approaching the October 28th FOMC meeting and the looming Q3 earnings season, the market now waits for the government to simply open its doors—if only long enough to release the all-important trade balance and, more critically, the unemployment report. Should Washington remain locked, the Fed will be forced to make a momentous policy decision based on vibes and tea leaves, not data. And that, in this age of institutional fragility, is perhaps the ultimate, unsettling unknown.
"And so what do you do if you're in a democracy? You go to the voters if you're a Democrat and you say, their policy is terrible. Next time, why don't you vote for us? That's how a democracy functions. But apparently, we don't live in a functioning democracy anymore. Now, if we don't like the policy that the majority party passes, we shut down the government."
— New York Times Columnist David Brooks, PBS NewsHour, October 3rd, 2025
Europe's Rearmament Illusion
Investors excited by Europe's "rearmament trade" should tread carefully. The recent surge in European defense shares appears to be unsustainable, as the spending story behind it is weaker than the headlines suggest. The problem is that Europe will not undertake a serious rearmament because it cannot afford to do so. The arithmetic is unforgiving.
The European Union is, in effect, structurally insolvent. Its states are already overwhelmed with unfunded liabilities, with pensions and healthcare alone measured in the tens of trillions. Demographic decline exacerbates this burden each year. Against this backdrop, the idea of sustainably increasing defense spending by several percentage points of GDP while preserving welfare systems seems implausible from our perspective.
Hollow Budgets
EU defense spending has ticked up from 1.5% of GDP in 2024 to a projected 2.1% this year, with Goldman Sachs forecasting 2.4% by 2027. However, those increases barely scratch the surface of the problem. After decades of underinvestment, an actual rebuilding would require something on the scale of a Marshall Plan—an estimated €1.5–2 trillion over the next decade. No one has budgeted for this.
Much of what has been allocated depends on creative accounting, funded by off-balance-sheet vehicles that utilize debt. Even Germany's much-trumpeted €100 billion special fund is expected to run dry by 2026.
Germany in particular illustrates the problem. Unless there is shooting on its borders, Berlin will continue to lag, relying on Poland's actual real commitment and, increasingly, on France and Britain's nuclear umbrellas as questions grow about American guarantees.
Reliability Tested
Ukraine has proved the limits of European resolve. Supposedly Europe's wake-up call, the war has instead shown how little appetite there is for true rearmament. Only the UK delivered consistently on its promises. France and Germany hesitated, delayed, or diluted their commitments. French equipment was also found to be lacking in the recent spat between India and Pakistan.
That record has not gone unnoticed abroad. The UK has secured major export wins, including the next-generation fighter program with Japan, as well as large warship contracts from Norway, Canada, Poland, and Australia—often at France's expense. The lesson for potential export customers is clear: when it comes to credibility as a defense supplier, the UK has pulled ahead while France, Germany, and even the United States have lost ground.
Russia's Real Trajectory
All of this would matter more if Russia were on track to become a dominant threat. But the reality is the opposite: Russia looks more like a state sliding toward failure.
Military spending officially stood at 7.1% of GDP in 2024, although the actual figure is higher when hidden costs are factored in—an unsustainable drain on the civilian economy. Inflation runs hot, interest rates remain punishingly high, and the government is already preparing tax hikes. This is the profile of a state starving its private sector to keep the war machine running.
The energy sector, Russia's lifeblood, is also under strain. Ukraine's drone strikes have disrupted nearly a fifth of refining capacity, while sanctions and a lack of technology block much-needed investment. As the Wall Street Journal recently observed, oil output is set for a slow decline.
Meanwhile, Russia's demographics are collapsing. Births fell to record lows in 2024, while war deaths, emigration, and aging erode the labor force. Increasingly, Moscow relies on mobilizing peripheral ethnic regions, a reminder that the Russian Federation is less a stable nation-state than the brittle core of a fading empire.
Europe’s Defense Boom May Be Built on Sand
Investors (and policymakers) hoping for a robust European rearmament cycle are likely to be disappointed. Fiscal constraints, political resistance, and institutional hesitancy mean Europe will not deliver on its rhetoric. Russia, meanwhile, is not a rising adversary but a weakening one—dangerous in its instability rather than its strength. Hence, the European defense boom looks overstated, and its foundations are far shakier than markets currently assume.
Of the investable opportunities, the UK stands out as an exception, with its firms securing export orders and its government demonstrating reliability. However, the listed companies appear expensive, and there are likely to be more macroeconomic problems in the country as the currently deeply unpopular left-wing government continues to unravel until the next scheduled elections in 2029 spectacularly. The good news is that this might prove a good entry point, and the next government is likely to take defense far more seriously than those of the past 30 years.
Disclosure: This material is for informational purposes only and should not be considered investment advice. An investor should consult with their financial professional before making any investment decisions. The opinions contained herein are subject to change without notice and do not necessarily reflect the opinions of Rayliant Investment Research. Indices cannot be invested in directly and are unmanaged.
Advisory services offered through Sowell Management, a Registered Investment Advisor. The views expressed represent the opinion of Sowell Management. The views are subject to change and are not intended as a forecast or guarantee of future results. This material is for informational purposes only. It does not constitute investment advice and is not intended as an endorsement of any specific investment. Stated information is derived from proprietary and non-proprietary sources that have not been independently verified for accuracy or completeness. While Sowell Management believes the information to be accurate and reliable, we do not claim or have responsibility for its completeness, accuracy, or reliability. Statements of future expectations, estimates, projections, and other forward-looking statements are based on available information and Sowell Management’s view as of the time of these statements. Accordingly, such statements are inherently speculative as they are based on assumptions that may involve known and unknown risks and uncertainties. Actual results, performance or events may differ materially from those expressed or implied in such statements. Investing in securities involves risks, including the potential loss of principal. While equities may offer the potential for greater long-term growth than most debt securities, they generally have higher volatility. International investments may involve risk of capital loss from unfavorable fluctuation in currency values, from differences in generally accepted accounting principles, or from economic or political instability in other nations. Past performance is not indicative of future results.
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WEEK AHEAD
October 6-10, 2025
The S&P 500 continues to show strong relative strength and momentum, though much of that muscle still comes from the mega-cap giants. The S&P 500 Equal Weight Index, a gauge of market breadth, continues to trade within its moving average bands—suggesting the rally hasn’t yet broadened out. Even so, Sowell’s technical indicators remain steadfast, keeping portfolios confidently fully invested.
The Shutdown Paradox: Wall Street Cheers as Washington Burns
The financial week that concluded Friday was another masterclass in market detachment, demonstrating once again that for many on Wall Street, bad news for the economy is simply a direct pipeline to dovish monetary policy. As the federal government entered a potentially protracted shutdown, the S&P 500 did not just yawn; it rose to fresh, all-time highs, closing the week up a notable 1.11%. The tech-heavy Nasdaq Composite followed suit, gaining 1.33%, as equity traders priced in an accelerated timetable for Federal Reserve rate cuts.
This remarkable calmness, or perhaps outright glee, in the face of congressional gridlock was fueled by a simple calculation: the more collateral damage inflicted by the shutdown, and the weaker the underlying economic data, the sooner the Fed would be forced to pivot aggressively. Even fixed income, the traditional refuge in times of uncertainty, gained +0.46%, reflecting mounting conviction that monetary policy easing is now a matter of "when," not "if."
The market's bullish wager received immediate validation from a suite of severely deteriorating economic indicators, made all the more critical by the data blackout caused by the shutdown (which rendered official weekly and initial jobless claims unavailable). The private sector stepped in to deliver the necessary jolt:
These readings collectively provided the undeniable evidence that the economy is indeed waning, giving the Fed the green light to justify a faster pace of easing.
Known Unknowns: Political Gridlock and The Barbell Curve
The most immediate unknown remains the duration and political fallout of the shutdown, which commenced over an impasse concerning the extension of Affordable Care Act tax credits. While core federal functions—including the CIA, FBI, air traffic control, Social Security, and the VA—are protected, they will inevitably suffer operational drag from reduced staff and furloughs. The historical specter of the 35-day shutdown under President Trump's first term looms large, creating a headwind for short-term GDP growth.
Simultaneously, the Treasury market remains a study in contradiction. While yields declined overall in response to rate-cut hopes, the yield curve continues to exhibit a "barbell" structure, signaling deep-seated economic anxieties. Short-term yields, such as the 1-month paper, held steady at 4.24%, while the 30-year bond yield remained stubbornly high in the 4.71% range. This persistence suggests that while traders expect the Fed to ease immediately (lowering the front end), the market harbors deep, lingering concerns about stagflation—an inability to contain prices over the long haul, thereby requiring a risk premium on long-dated sovereign debt.
Finally, providing the clearest signal of heightened geopolitical and systemic risk, the price of gold continued its historic ascent, reaching a new record closing price of $3,910 per ounce. The yellow metal has gained over +46% YTD, establishing itself as the premier instrument of reserve diversification.
This rally is structurally underpinned by a global shift away from traditional dollar dominance. Goldman Sachs Research recently amplified this narrative, forecasting gold prices to reach $4,300 by December 2026. Their analysis emphasizes the sustained, strategic purchases by Emerging Market central banks over the next three years, citing the massive disparity in gold reserve holdings: whereas the U.S. and Germany hold approximately 70% of their reserves in gold, China holds less than 10%. Until that historical imbalance is narrowed, gold's ascendancy appears cemented, regardless of the drama unfolding on the floors of Congress or the Federal Reserve.
As we peer into the coming week, one is struck by a profound character flaw: it cheers the institutional incompetence of the legislature because it anticipates the economic largesse of the central bank. With the calendar rapidly approaching the October 28th FOMC meeting and the looming Q3 earnings season, the market now waits for the government to simply open its doors—if only long enough to release the all-important trade balance and, more critically, the unemployment report. Should Washington remain locked, the Fed will be forced to make a momentous policy decision based on vibes and tea leaves, not data. And that, in this age of institutional fragility, is perhaps the ultimate, unsettling unknown.
"And so what do you do if you're in a democracy? You go to the voters if you're a Democrat and you say, their policy is terrible. Next time, why don't you vote for us? That's how a democracy functions. But apparently, we don't live in a functioning democracy anymore. Now, if we don't like the policy that the majority party passes, we shut down the government."
— New York Times Columnist David Brooks, PBS NewsHour, October 3rd, 2025
Europe's Rearmament Illusion
Investors excited by Europe's "rearmament trade" should tread carefully. The recent surge in European defense shares appears to be unsustainable, as the spending story behind it is weaker than the headlines suggest. The problem is that Europe will not undertake a serious rearmament because it cannot afford to do so. The arithmetic is unforgiving.
The European Union is, in effect, structurally insolvent. Its states are already overwhelmed with unfunded liabilities, with pensions and healthcare alone measured in the tens of trillions. Demographic decline exacerbates this burden each year. Against this backdrop, the idea of sustainably increasing defense spending by several percentage points of GDP while preserving welfare systems seems implausible from our perspective.
Hollow Budgets
EU defense spending has ticked up from 1.5% of GDP in 2024 to a projected 2.1% this year, with Goldman Sachs forecasting 2.4% by 2027. However, those increases barely scratch the surface of the problem. After decades of underinvestment, an actual rebuilding would require something on the scale of a Marshall Plan—an estimated €1.5–2 trillion over the next decade. No one has budgeted for this.
Much of what has been allocated depends on creative accounting, funded by off-balance-sheet vehicles that utilize debt. Even Germany's much-trumpeted €100 billion special fund is expected to run dry by 2026.
Germany in particular illustrates the problem. Unless there is shooting on its borders, Berlin will continue to lag, relying on Poland's actual real commitment and, increasingly, on France and Britain's nuclear umbrellas as questions grow about American guarantees.
Reliability Tested
Ukraine has proved the limits of European resolve. Supposedly Europe's wake-up call, the war has instead shown how little appetite there is for true rearmament. Only the UK delivered consistently on its promises. France and Germany hesitated, delayed, or diluted their commitments. French equipment was also found to be lacking in the recent spat between India and Pakistan.
That record has not gone unnoticed abroad. The UK has secured major export wins, including the next-generation fighter program with Japan, as well as large warship contracts from Norway, Canada, Poland, and Australia—often at France's expense. The lesson for potential export customers is clear: when it comes to credibility as a defense supplier, the UK has pulled ahead while France, Germany, and even the United States have lost ground.
Russia's Real Trajectory
All of this would matter more if Russia were on track to become a dominant threat. But the reality is the opposite: Russia looks more like a state sliding toward failure.
Military spending officially stood at 7.1% of GDP in 2024, although the actual figure is higher when hidden costs are factored in—an unsustainable drain on the civilian economy. Inflation runs hot, interest rates remain punishingly high, and the government is already preparing tax hikes. This is the profile of a state starving its private sector to keep the war machine running.
The energy sector, Russia's lifeblood, is also under strain. Ukraine's drone strikes have disrupted nearly a fifth of refining capacity, while sanctions and a lack of technology block much-needed investment. As the Wall Street Journal recently observed, oil output is set for a slow decline.
Meanwhile, Russia's demographics are collapsing. Births fell to record lows in 2024, while war deaths, emigration, and aging erode the labor force. Increasingly, Moscow relies on mobilizing peripheral ethnic regions, a reminder that the Russian Federation is less a stable nation-state than the brittle core of a fading empire.
Europe’s Defense Boom May Be Built on Sand
Investors (and policymakers) hoping for a robust European rearmament cycle are likely to be disappointed. Fiscal constraints, political resistance, and institutional hesitancy mean Europe will not deliver on its rhetoric. Russia, meanwhile, is not a rising adversary but a weakening one—dangerous in its instability rather than its strength. Hence, the European defense boom looks overstated, and its foundations are far shakier than markets currently assume.
Of the investable opportunities, the UK stands out as an exception, with its firms securing export orders and its government demonstrating reliability. However, the listed companies appear expensive, and there are likely to be more macroeconomic problems in the country as the currently deeply unpopular left-wing government continues to unravel until the next scheduled elections in 2029 spectacularly. The good news is that this might prove a good entry point, and the next government is likely to take defense far more seriously than those of the past 30 years.
Disclosure: This material is for informational purposes only and should not be considered investment advice. An investor should consult with their financial professional before making any investment decisions. The opinions contained herein are subject to change without notice and do not necessarily reflect the opinions of Rayliant Investment Research. Indices cannot be invested in directly and are unmanaged.
Chart Source: https://www.mordorintelligence.com/industry-reports/europe-military-aircraft-market
Advisory services offered through Sowell Management, a Registered Investment Advisor. The views expressed represent the opinion of Sowell Management. The views are subject to change and are not intended as a forecast or guarantee of future results. This material is for informational purposes only. It does not constitute investment advice and is not intended as an endorsement of any specific investment. Stated information is derived from proprietary and non-proprietary sources that have not been independently verified for accuracy or completeness. While Sowell Management believes the information to be accurate and reliable, we do not claim or have responsibility for its completeness, accuracy, or reliability. Statements of future expectations, estimates, projections, and other forward-looking statements are based on available information and Sowell Management’s view as of the time of these statements. Accordingly, such statements are inherently speculative as they are based on assumptions that may involve known and unknown risks and uncertainties. Actual results, performance or events may differ materially from those expressed or implied in such statements. Investing in securities involves risks, including the potential loss of principal. While equities may offer the potential for greater long-term growth than most debt securities, they generally have higher volatility. International investments may involve risk of capital loss from unfavorable fluctuation in currency values, from differences in generally accepted accounting principles, or from economic or political instability in other nations. Past performance is not indicative of future results.