The S&P Global final services PMI for the US in September was 54.5, down from an earlier estimate of 55.4. Even so, the service sector grew strongly in August, marking the second best performance this year. This growth supports a solid annualized growth rate of 2.4% for the US economy in the third quarter. Increased order books have led to more hiring, with service providers employing more staff and manufacturers also picking up the pace. However, consumer spending on services is still low because of weak household confidence. On a positive note, demand for financial services is increasing. Yet, business optimism has dropped to its lowest point in three years due to uncertainty around federal policies and rising tariffs that are increasing costs.

Inflation Concerns

Inflation worries are growing as rising input costs lead to higher service charges. This data raises potential risks for economic growth and suggests that inflation may increase due to tariffs affecting the prices of goods and services. Current service data indicates that the US economy is stable, supporting markets for now. With a projected 2.4% annualized GDP growth, there’s little reason to expect a significant downturn in the short term. The recent jobs report also showed a healthy addition of 195,000 positions in August, reflecting resilient economic activity. However, the decline in future business optimism is alarming. It indicates that company leaders are increasingly worried about what lies ahead, especially regarding government policy and tariffs. While current orders are strong, this drop in confidence suggests that companies might slow down investments and hiring in the fourth quarter. One major risk is the return of inflation, with input costs rising sharply. The July 2025 CPI report noted that headline inflation reached 3.4%, signaling that the struggle against inflation is ongoing. This persistent price pressure indicates that the Federal Reserve is unlikely to cut rates soon, which could limit how much equity markets can rise.

Portfolio Strategy

Considering the balance between current growth and future risks, we should think about hedging our portfolios. Buying VIX call options that expire in October or November is a direct way to prepare for the rising uncertainty mentioned in the report. This approach allows us to safeguard against a potential market decline without having to sell our current long positions. We may also want to add some bearish positions in rate-sensitive sectors. The Nasdaq 100 has performed well this year, but enduring high interest rates pose challenges for growth and tech stocks. We could establish positions using put spreads on the QQQ to limit our risk while targeting a modest decline. Historically, looking back at late 2023, we saw strong economic data keep the market steady, even amidst inflation worries that caused significant volatility. This period taught us that strong headlines can obscure underlying issues temporarily, but risks eventually surface. While we can enjoy the current positive momentum, adding protective derivative positions is wise in the coming weeks. Create your live VT Markets account and start trading now.

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