Market & Economic Snapshot - As of Fall 2025

Recalibration, Not Retreat

The Economy

The Federal Reserve continues to walk a fine line, balancing between unemployment ranging from 4.0%-4.2% and 2% YOY inflationary trends. Unemployment has hovered close to the policy goal range from January to September at 4.0%- 4.3%. On the contrary, YOY inflationary trends have shown stubbornness in their alignment with the 2% Fed marker, receding from 2.99% YOY Core PCE in December ‘24 to 2.61% in May ‘25, only to regain upward momentum, reaching 2.91% as of August. Thus, policymakers have remained cautious and patient.  While inflation slowly moderates, ISM measurements have suggested that the underlying economic health of 2025 remains a mixed reading. Manufacturing activity hovered in the contradictory range of 48 - 49 for a majority of the year, falling from its 50.9 January peak. Service-based ISM held steady in modest expansionary territory of 52 - 50 from January to September. This divergence underscores a goods-sector cooldown even as domestic demand for services persists.

GDP Growth

Q2 Growth of 3.8% saw a large uptick from a (.06%) Q1 start, with consumer and business spending rebounding faster than expected. Furthermore, this acceleration can be partially attributed to manufacturing and construction facilitated by the CHIPS Act and the Inflation Reduction Act. The volatility, however, elevates concern about the greater 2025 economic sustainability of the nation. Momentum built on stimulus and investment surges can be and usually are attributed to a fade.

Inflation

Both Core PCE and Core CPI saw modest YOY trend declines across 2025. The easing of inflationary pressure, however, has been sluggish to say the least, and compelling data has not emerged to indicate a full return to the Fed’s 2% target within the next few months. Core CPI YOY trends ranged from 3.26 %, 3.12%, 2.79%, and 2.78% across January, February, March, and April respectively, before an uptick. From May to August, Core CPI re-climbed from 2.79% to 3.11%, discouraging previous Q1 disinflation trends. However, recent September data saw YOY Core CPI falling to 3.02%. Therefore, inflation has slowed, but not stopped.

The Core PCE composition matters: shelter, insurance, healthcare, and other labor-intensive services continue to show sticky pricing, even as durable goods pricing has largely normalized. In other words, this is the “last mile” of disinflation; we’re no longer getting easy relief from supply chains or falling goods prices, and now the bottleneck is wage-heavy service sectors. The Fed knows this. Inflation is no longer about overheating demand; it’s about embedded cost structure.

Meanwhile, long-term real yields, the key lever for discounting future earnings and therefore for valuations, are still historically elevated. In October 2025, the 10-year real interest rate was about 1.57%. The interplay of a modestly easing inflation rate combined with structurally elevated real yields suggests that the disinflation process is entering its final, most difficult phase.

Sentiment & Activity

Consumer confidence deteriorated through the first half of 2025, before a rebound this summer. Surveys such as the University of Michigan Sentiment Index and Consumer Confidence Index both reflected these psychological swings rather than wage erosion. Q1 & Q2 saw large downward mobility across consumer confidence, partially induced by the onset of geopolitical trade uncertainty in Q2 during the wake of Trump’s tariff threats. The UMich Sentiment index fell from 71.7 in January to 52.2 in May. While CCI fell from 77.14 to 56.164 during that same period, the summer however, provided grounds for a rebound, most likely attributed to lagging inflationary stabilization. From May to August, the CCI rose from 56.164 to 62.62, with a peak of 66.386 in July. 

Labor Market

The labor market provided in-line and consistent data across 2025, with unemployment ranging from 4.0% - 4.3% from January to August in line with the Fed’s 4.0% - 4.2% range. Unemployment metrics show no cause for concern, all in line with natural unemployment. Furthermore, Non-Farms Payroll (NFP) never fell below 159,000 jobs per month, well within target range of 100K - 150K jobs per month, showing no signs of overexpansion or a potential weakness. Labor supply and demand are roughly in sync with no indication of large-scale layoffs. Nor are there signs of a potential tightness, I.E. 3.5% unemployment. Firms are cautious but not distressed; meanwhile, steady consumption continues to be supported by household income.

Equities

Q2 GDP’s rebound influenced positive earnings growth for the period; however, market breadth remains slim, being narrowly led by large caps within Services, Tech, and Energy. While industrials and materials saw lags. Small to mid caps lagged due to cost of capital sensitivity. Q2 - Q3 witnessed stronger than expected S&P 500 EPS growth of around 8 - 9% YOY vs 2 - 3% expectations in spring 2025. GDP, Labor, and inflation data above trend growth contributed to this, while labor cooling and controlled wages helped margin stabilization. This uptick in Q2 - Q3 supported revenues, bringing prices more in line with earnings rather than multiple valuations. Sticky inflation leading to delayed rate cuts has prompted the cost of capital to remain high. A higher discount rate limits multiple expansion; therefore, the market is trading on real earnings and not pure optimism, with prices rising roughly in line with EPS rather than P/E. This dynamic defines late-cycle equilibrium, with growth being strong enough to sustain profits, but not soft enough to ease policy.

Post-pandemic yields have remained high, between 3 - 4.5%, slightly falling with decreasing inflationary pressure. The higher the yield, the higher the discount rate, capping forward P/E multiples. Therefore, equity markets must present a higher premium and fair pricing to attract investors. Yields have remained high yet fairly stable, reflecting a mix of strong growth, persistent inflation, and a cautious Fed policy. This yield resistance is limiting equity multiple expansion but confirms that nominal growth is healthy. Yields will most likely remain high until inflation convincingly moves below 2.5%.

Currently, a negative FCI has granted supplemental market liquidity, whilst coming against higher post-pandemic Federal Funds rates. At roughly -0.54 as of October 2025, the Financial Conditions Index sits well below its long-run mean, a level historically associated with abundant liquidity and risk-seeking behavior. This negative FCI measurement can be attributed to relatively low market volatility and persistent equity earnings of the past 6 months. Furthermore, narrowing OAS yields reflect a stronger risk appetite and improved market liquidity, falling from near 8% in April to 6.48% in September. While these numbers are still elevated from pre-tightening levels, the spread compression indicates that the cost of capital has declined from midyear peaks. Narrow spreads prompt corporate borrowing, and now at a lower interest rate. The spreads also serve as an insight into investor psychology, with a greater risk appetite and a decreasing ERP.

Gold

Gold began its rapid appreciation in September of 2023, not slowing down its pace, with rapid acceleration across the past 6 months, breaking previous price highs consistently. The reason for such appreciation is two-fold. As always, investors flock to gold as an inflationary hedge, as nominal yields decrease due to a sticky core PCE. Furthermore, investors anticipate a rate cut, leading to lower returns on federal debt instruments. A weaker USD Index also continues to help the safe-haven asset class. Furthermore, in the past few years, the strengthening BRICS regime has used gold as a vessel for de-dollarization, purchasing gold reserves as they aim to distance themselves from the Western banking system.