Introduction
The third quarter of 2025 opened on a strong note for U.S. equities, as better-than-expected manufacturing data reignited optimism around economic resilience and fueled a broad-based market rally. On July 1, the Institute for Supply Management (ISM) reported a surprise uptick in its Manufacturing Purchasing Managers’ Index (PMI), signaling expansion in the industrial sector for the first time since early 2024.
Markets responded with enthusiasm. The S&P 500 gained 1.3% to close at 5,243.85, the Dow Jones Industrial Average rose 1.1% to 39,152.76, and the Nasdaq Composite climbed 1.7% to end at 16,546.20. Investors interpreted the data as a sign that the U.S. economy may be regaining momentum without reigniting inflation, increasing confidence in a soft-landing scenario.
This article examines the ISM report, its implications for growth and inflation expectations, and how different asset classes and sectors responded as the second half of the year began.
Body
ISM Manufacturing PMI Surprises to the Upside
The ISM Manufacturing Index for June rose to 50.6, beating the consensus forecast of 49.4 and marking the first reading above 50 since February 2024. The key components driving the improvement included:
- New Orders Index: 52.1 vs. 48.9 prior
- Production Index: 53.4 vs. 50.0 prior
- Employment Index: 49.7 vs. 48.4 prior
- Prices Paid Index: 56.2, down from 58.7
The data suggests that industrial activity is gaining traction, with firms reporting increased demand, improved supply chains, and easing input costs. Importantly, the moderation in prices paid implies that inflationary pressures may be softening even as output rises—an ideal backdrop for markets.
The report aligns with anecdotal signs of stabilization in capital goods orders and regional Fed manufacturing surveys, offering encouragement that the manufacturing sector is emerging from a prolonged contractionary phase.
Equity Market Reaction: Risk-On Rally
Stocks surged across the board, with cyclical sectors leading the gains. The technology-heavy Nasdaq outperformed, bolstered by strength in semiconductors and cloud computing. Notable performances included:
- Nvidia (NVDA): +2.8%
- Microsoft (MSFT): +2.1%
- Apple (AAPL): +1.9%
Industrial and materials stocks also rallied, reflecting improved sentiment around manufacturing. The S&P 500 Industrials sector rose 1.5%, led by gains in General Electric (+3.2%) and Caterpillar (+2.7%).
Other top-performing sectors included:
- Financials: +1.4%, as higher growth expectations supported bank earnings outlooks.
- Consumer Discretionary: +1.6%, led by Amazon (+2.4%) and Home Depot (+2.1%).
Defensive sectors such as utilities and consumer staples lagged but remained in positive territory.
Treasury Market and Fed Outlook
The upbeat manufacturing data tempered expectations for an imminent Fed rate cut, pushing yields slightly higher. The U.S. 10-year Treasury yield rose 5 basis points to 4.37%, while the 2-year yield climbed to 4.72%.
Despite the upward move, the market continues to price in a 60% probability of a rate cut at the September FOMC meeting, according to CME FedWatch. The Fed’s dual mandate—balancing inflation control with full employment—suggests that further labor data will be pivotal.
Fed officials have reiterated their data-dependency, and the June Nonfarm Payrolls report due July 5 will be closely scrutinized. A strong labor report could push rate cut expectations into Q4, while softer data may confirm dovish positioning.
Commodities: Oil Steadies, Gold Retreats
Oil: Crude prices rebounded modestly after recent declines. Brent rose 1.1% to $70.53 per barrel, while WTI gained 1.3% to $66.88. The move was supported by improving risk sentiment and hopes that demand may stabilize amid stronger manufacturing activity.
Gold: Risk-on sentiment weighed on safe-haven assets, with gold falling 0.9% to $2,398 per ounce. The decline followed a strong month in June and reflects lower demand for defensive positioning.
Copper: Prices rose 1.5% to $4.36 per pound, buoyed by the ISM report and expectations for improved industrial demand.
Currency Markets: Dollar Mixed, Risk Currencies Rebound
The U.S. Dollar Index (DXY) held steady at 105.10, with mixed performance across FX pairs. The euro rose 0.2% to 1.0680, while the British pound firmed to 1.2625. The Japanese yen weakened slightly to 160.40 per dollar.
Risk-sensitive currencies such as the Australian dollar and Canadian dollar posted gains, up 0.5% and 0.4% respectively, on improved sentiment and rising commodity prices.
Crypto: Bitcoin Holds Firm
Bitcoin was little changed on the day, trading around $73,500. Ethereum gained 0.8% to $3,975. The crypto market showed resilience, continuing to benefit from institutional inflows and investor interest in blockchain infrastructure amid broader risk appetite.
Macro Outlook: Soft Landing Narrative Reinforced
The ISM data reinforced the narrative that the U.S. economy may achieve a soft landing, avoiding both recession and resurgent inflation. If confirmed by upcoming jobs and inflation data, this outcome would support risk assets while giving the Fed room to gradually adjust policy.
Other indicators to watch this week include:
- JOLTS Job Openings (July 2)
- ADP Private Payrolls (July 3)
- Nonfarm Payrolls (July 5)
If employment data confirms slowing but stable job growth and core inflation remains contained, markets could remain in risk-on mode.
Global trends, however, remain more fragile. Eurozone and Chinese PMIs continue to signal weakness, and geopolitical risks in the Middle East and Asia warrant caution. Nevertheless, the U.S. remains the engine of global growth, and its industrial rebound is a positive signal for the global cycle.
Conclusion
U.S. stocks began the third quarter with a strong rally on July 1, driven by unexpectedly strong manufacturing data that reinforced hopes of economic resilience. The ISM Manufacturing PMI’s return to expansion territory marks a potential turning point for the industrial economy and bolsters confidence in a soft landing scenario.
Equity markets responded with broad gains, led by tech, industrials, and consumer cyclicals. Treasury yields rose modestly as Fed rate cut expectations adjusted, while commodities and risk currencies also benefited from the upbeat mood.
As the second half of the year begins, investor focus will shift to labor market data, inflation trends, and corporate earnings. The trajectory of U.S. growth—and the Fed’s policy path—will remain central to market dynamics.
Key questions for investors include:
- Will July labor data confirm economic momentum or signal renewed cooling?
- Can industrial growth continue without stoking inflationary pressures?
- How will the Fed balance strong data against its easing bias?
For now, the combination of steady growth and moderating inflation is a welcome development for equity bulls, setting an optimistic tone as Q3 gets underway.
