The S&P Global final services PMI for the US in September was 54.5, down from a preliminary 55.4. Despite this, the service sector’s expansion in August was the second strongest recorded this year, supporting a robust 2.4% annualised growth rate for the US economy in the third quarter.
Order book growth has led to increased staffing, with service providers hiring more and manufacturing also seeing a hiring uptick. Consumer spending on services remains subdued due to low household confidence, but demand for financial services is growing strongly. However, business optimism for the future has fallen to its lowest in three years, driven by federal policy uncertainties and tariffs increasing price pressures.
Inflation Concerns
Concerns over inflation have risen due to input cost increases, which have led to higher service charges. The data suggest potential risks to economic growth while suggesting rising inflation risks owing to import tariffs impacting the prices of goods and services.
The latest services data shows the US economy is currently on solid ground, which should support markets for now. The numbers suggest a respectable 2.4% annualized GDP growth, giving us little reason to be aggressively bearish in the immediate term. This report, combined with the August jobs data from last week that showed a healthy 195,000 positions added, paints a picture of resilient economic activity.
However, we must pay close attention to the decline in business optimism for the future. This is a clear warning sign that executives are growing concerned about what lies ahead, particularly regarding government policy and potential tariffs. While current order books are full, this drop in confidence signals that companies may pull back on investment and hiring in the fourth quarter.
The most significant risk highlighted is the resurgence of inflation, with input costs rising steeply. We saw this in the last CPI report for July 2025, which showed headline inflation ticking up to 3.4%, reminding us that the fight is not over. This persistent price pressure means the Federal Reserve is unlikely to consider cutting rates anytime soon, putting a ceiling on how high equity markets can go.
Portfolio Strategy
Given this conflict between current strength and future risk, we should consider hedging our portfolios. Buying VIX call options with October or November expiries is a direct way to position for the rising uncertainty mentioned in the report. This allows us to protect against a potential market downturn without having to sell our current long positions.
We can also look at adding some bearish positions in rate-sensitive sectors. The Nasdaq 100 has been a strong performer this year, but a “higher for longer” interest rate environment is a direct headwind for growth and tech stocks. We could initiate positions using put spreads on the QQQ to define our risk while betting on a modest decline.
Historically, we can look back to the market environment of late 2023, when strong economic data kept the market afloat even as underlying inflation concerns caused significant volatility. That period taught us that headline strength can mask underlying weakness for a time, but risks eventually come to the forefront. Therefore, while we can ride the current positive momentum, adding protective derivative positions is the most prudent response over the coming weeks.
