Quarterly Insights – October 2025
- Mary Clinton
- Nov 13
- 7 min read
Major stock indices continued the 2025 rally and surged to new all-time highs in the third quarter as economic growth remained stable, tariff increases were no worse than feared and the Federal Reserve cut interest rates and began the long-awaited rate-cutting cycle. For the first time in a while, world equity markets outperformed the U.S. markets, as seen in the world map below.
Markets started the third quarter with a continuation of the year-to-date rally thanks, initially, to the passage of the One Big Beautiful Bill Act in early July. This legislation contained several pieces of economic stimulus including making the 2017 tax cuts permanent, reintroducing accelerated depreciation and committing billions to the development of domestic industries, providing both the markets and the economy with a fresh dose of fiscal stimulus.i
Second-quarter corporate earnings results (released in mid-July) were for the most part stronger than expected and importantly showed no significant signs that tariffs or policy uncertainty were weighing on results.ii In July, the Trump administration announced trade agreements with some of the largest U.S. trading partners including the EU, Japan and South Korea, while the U.S. and China agreed to extend their trade “truce” as the two sides negotiated toward a larger trade agreement. These trade “deals” reduced investor anxiety stemming from the re-imposition of reciprocal tariffs in early August and eased broader trade-related concerns among investors. These factors, along with stable economic and inflation readings, helped to push the S&P 500 steadily higher and the index rose 2.24% in July.
The beginning of August brought an economic surprise with weaker than projected job growth that temporarily paused the rally in stocks. The underwhelming employment data introduced the idea that the labor market was weaker than expected and that did slightly increase economic slowdown risks. However, the soft employment data also boosted expectations for a Fed rate cut (bad news is good news for the stock market), and at the Jackson Hole Economic Symposium Fed Chair Powell strongly hinted that a rate cut was coming at the September Fed meeting.iii Rising rate cut hopes helped to offset the underwhelming employment data and stocks ultimately continued their advance, as the S&P 500 rose 2.03% in August.
The rally accelerated in September despite growing signs that the labor market is indeed seeing some deterioration. The August jobs report was another underwhelming print showing just 22,000 jobs added that month, well below the consensus estimate. But like in August, the expectation for Fed rate cuts helped offset that negative employment report and the Fed did cut interest rates at the September meeting. Equally as important, Fed members signaled they expected two more rate cuts this year via the “dot plot.”iv The start of a Fed rate-cutting cycle, which should support the economy, combined with strong AI-related tech stock earnings from Oracle and Broadcom to send stocks higher and major U.S. stock indices all hit new all-time highs following that Fed rate cut, capping a moderate increase in September.
In sum, the third quarter was resoundingly positive for the U.S. economy and markets as economic data showed solid growth, inflation readings stayed mostly stable, the Fed cut interest rates, the U.S. reached trade agreements with major trading partners and AI-linked tech companies continued to produce better-than-expected earnings. Given these positives, major U.S. stock indices rallied solidly in the third quarter as seen in the chart below.
Fourth Quarter Market Outlook
Markets begin the final quarter of 2025 in a decidedly positive macroeconomic environment. However, while the current macroeconomic backdrop is positive, it is not without risks, and continued gains in stocks are not inevitable. And as always, there are risks to the markets and economy we must monitor.
Key Market Factors and Questions for Q4:
The rally has been powered primarily by 4 factors:
1. Artificial Intelligence (AI) investment and projected future efficiencies and increased profitability
2. Solid economic growth and a stable labor market
3. Inflation has remained under control and expectations of the Fed cutting interest rate
4. Tariffs have not had a material negative impact on the economy or inflation
While these factors have driven stocks higher, there is a lot of uncertainty remaining for each of them that we will be watching carefully.
1. Is AI a bubble?
a. Many AI related companies have had astronomical gains for companies of their size.
b. The issue with these AI companies isn’t a pricing problem, it’s a capital expenditure problem (cap-ex). The cap-ex boom around AI infrastructure has reached multi-decade highs, major tech firms are pouring their free cash flow into building out data centers and other AI infrastructure.
c. Currently, the amount of corporate free cash flow spent on AI infrastructure is more influential and more important than consumer spending right now.
d. Currently, from a valuation standpoint, AI is not a bubble. When looking at PEG (price earnings / growth rate) ratios, most technology companies are actually trading below the PEG of the S&P 500. Valuations are not in bubble territory despite the extreme price gains, because earnings growth has also been so intense.
What we’ll look for: when we hear businesses begin to speak about lowering infrastructure spending, this will be the 1st sign in their loss of confidence in AI. For the upcoming earnings season, we need to focus on
1) guidance and
2) capital expenditures announcements and intentions.
2. Is Growth Slowing?
a. The Service PMI level measures the health of service industry (retail, health, finance). If it drops below 50 for consecutive months that has historically been a sign of slowing growth and an increased probability of a recession. As seen in the chart below, the PMI Service index level has been above 50 the majority of the time but is currently at 50.
b. Business spending and investment has continued to rise despite tariff uncertainty. Consumer spending has also remained resilient despite the tariff uncertainty and slightly rising unemployment. We will be listening to bank earnings calls to see if retail consumers continue to spend and credit card delinquencies are not a problem
c. The labor market has started to weaken as seen in the chart below with the unemployment rate rising to 4.3%. The jobs added is also concerning for employment. We appear to be in a “not hiring, not firing” labor market. The unemployment rate has risen, but it’s not close to levels we’d associate with an economic slowdown. If the rate rises above 4.6% and jobless claims exceed 300k, that would be cause for concern.
In summary, growth is not slowing yet: While there has been a loss of economic momentum, we are not seeing any major economic metrics signaling growth is dramatically slowing and that is an important positive for this market.
3. Will Fed Cut Rates?
a. Markets have heavily priced in two more rate cuts for the rest of this year. As seen below.
b. However, the Fed dot plot shows a 50/50 split between one cut and two cuts. Fed is normally divided in a 70/30 split, never this neutral. Point being, the Fed may not be as dovish as the market is predicting.
c. CPI is still up at 3%, not concerning levels, but if there’s only 1 cut in October, and the Fed signals a “wait and see” what happens with CPI stance, you very well could have a 3-5% market pullback.
Will Fed Cut Rates as Expected? Yes, most likely.
The FOMC Minutes revealed that most Fed members are now more worried about the labor market than they are about inflation and that means they have an easing bias. However, tariff uncertainty cannot be ignored and CPI is still near 3%.
If Fed doesn’t cut as much as expected: if Fed only cuts once more in 2025, expect a pullback in stock by itself of (3% - 5%) as rates begin to rise.
4.Tariff Clarity?
a. Tariffs, which dominated headlines for much of the year, have almost become an afterthought, but they are starting to pick up with the rare earth rhetoric with China.
b. If tariffs are reversed by Supreme Court, the government could owe $165 billion back to companies that have paid them during this fiscal year. The government would likely appeal, and then we have even more uncertainty going forward on what businesses will owe, or if they are owed money back. If reversed, treasuries will surge, this will be a headwind on stocks. Most likely, Supreme Court will uphold, this could cause a rally. Focus on the 10 year and if it’s around 4.5% will be prime concern.
Do we get Tariff Clarity? Probably not. If tariffs begin to be a negative on consumer spending or boost inflation, that will be a new, negative influence on the stock market.
Bottom Line: the outlook remains positive, but these 4 situations are not settled. If we lose any of the 4 factors driving the rally, we will likely see a pullback in the market. To that point, we understand these risks and we are committed to helping you effectively navigate this investment environment.
As seen as recently as this past Friday, when the market dropped roughly 3% and before rebounding back on Monday, timing the market remains as difficult as ever and is rarely a successful investment strategy. Short-term swings are driven by fast-moving headlines - inflation data, Fed expectations, corporate earnings - all of which shift faster than investors can react. For that reason, maintaining a well-diversified balanced portfolio helps to mitigate portfolio risk.
Over the past decade, U.S. large-cap equities have been the dominant driver of returns, leading some investors to question the value of diversification. However, 2025 has provided a strong reminder that balance across asset classes is important. For example, gold, alternative investments and international equities have all played meaningful roles in stabilizing portfolios and generating alpha amid volatility in U.S. markets.v
Therefore, it’s critical for you to stay invested, remain patient, and stick to the plan, as we’ve worked with you to establish a unique, personal allocation target based on your financial position, risk tolerance, and investment timeline.
We thank you for your ongoing confidence and trust.
Please do not hesitate to contact us with any questions, comments, or to schedule a portfolio review.
Sincerely,
Greg Clinton, CFA
President
Kraematon Investment Advisors, Inc.
i https://www.uschamber.com/taxes/u-s-chamber-one-big-beautiful-bill-is-a-win-for-economic-growth-workers-and-american- communities
iv https://finance.yahoo.com/news/fed-signals-2-more-cuts-in-2025-raises-gdp-forecast-for-the-year-183031677.html
v https://www.truenorthwealth.com/why-portfolio-diversification-matters-in-a-volatile-market- environment/?utm_source=chatgpt.com
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