Economic and Market Outlook Dashboard
4th Quarter 2025
The Economy
The Markets
Interest Rate Outlook
Asset Allocation Outlook
The U.S. economy grew 3.8% in the third quarter. Consumer spending and business investment rose while government spending and residential investment declined. The expectation is for 2.5% growth in the third quarter before falling to 0.5% growth in the fourth quarter.
The impact of tariffs, federal government cutbacks, and declining immigration is slowing the U.S. economy, but most of the negative effect will be felt in the fourth quarter.
The One Big Beautiful Bill Act should be stimulative to the economy in early 2026 via strong income tax refunds. While serving to boost economic activity in the first half of 2026, once this refund effect fades, it is expected that growth will slow in the second half, leaving the effects of higher tariffs and lower immigration.
The September jobs report is delayed due to the government shutdown. The August report showed a slowdown in hiring with only 22,000 jobs added and the unemployment rate increasing to 4.3%.
In the second quarter, S&P 500 companies had earnings growth of 10.7% year‐over‐year. Sales and margins were the key drivers with higher earnings growth contributions from technology companies. While companies have borne most of the tariff increases thus far, management teams are evaluating supply chains, price increases, capital expenditures, and hiring plans.
The S&P 500 was up 8.1% in the third quarter due to a positive second quarter earnings season and a resilient macro backdrop. Growth stocks continued to outperform value stocks and small cap stocks narrowly outpaced large cap stocks.
In International markets, Developed Equities (MSCI EAFE) were up 7.4% in the third quarter due to strong performance in Canada, Japan, and the UK.
Emerging Markets (MSCI EM) were up 11.0% in the third quarter. Chinese markets saw the strongest gains given policy support for domestic chipmakers along with artificial intelligence spending.
The Federal Reserve resumed its easing cycle at its September meeting, cutting the federal funds rate by 0.25% to a range of 4.00%‐4.25%. The cut was seen as a risk management move given the softer labor market. We expect the Fed to cut rates one or two more times in 2025 with another two cuts possible in the first half of 2026.
The Fed’s economic forecasts remain unchanged, reflecting expectations for slower growth, higher inflation, and higher unemployment in the near term.
Headline inflation increased 2.9% year‐over‐year in August while core inflation (excluding food and energy) remained flat at 3.1%. Tariffs have just started to impact the data, but the effect is likely to intensify in the coming months. It is anticipated that inflation could increase to 3.7% by year end.
This level could be sustained into the early part of 2026 given the impact of higher income tax refunds on consumer spending. However, inflation could approach the Fed’s target of 2% by the end of 2026.
We expect policy uncertainty surrounding tariffs and immigration along with geopolitical tensions to continue driving market volatility.
Although we continue to be constructive on U.S. equities for the long term, we have increased our allocation to international equities given current valuation levels. Our focus remains on high‐quality companies with strong balance sheets and sustainable earnings.
Long‐term growth prospects, improving fundamentals, favorable valuation levels, and further decline in the U.S. dollar support our increased allocation to international equities, both developed and emerging.
Bonds offer attractive levels of income and protection against an economic downturn. High quality core fixed income with attractive yields continues to be our focus.
We continue to invest for the long term and to advocate for diversified portfolios as the best way to combat market volatility.
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