October 2025
US Economy: Diverging Data.
The Federal Reserve lowered rates by 0.25% due to a weaker labor market and persistent inflation. The first cut since December 2024 comes as unemployment has ticked up to 4.3%, and inflation (PCE) remains stubbornly above 2%. However, Q2 GDP was once again revised upwards as the third and final estimate showed growth of 3.8% up from 3.0% at the initial release, consumer spending was again cited as a primary driver.
US Stocks: AI Spending Continues.
With the rate cut as a tailwind and stronger than expected earnings results, US equities saw a largely positive September. The S&P 500, Dow Jones Industrial Average and Nasdaq each hit new all-time highs in September as AI-related capital spending continued. No surprises then as Technology (+7.5%), Communication Services (+6.7%) and Growth (+5.1%) outperformed.
Foreign Stocks: Emerging Markets Rally.
Tailwinds aplenty in emerging markets as Mexico was up 9.7% in September (and nearly +50% YTD) as the peso rose against the dollar and positive effects of nearshoring continued. South Korea (+10.9%) saw a surge in semiconductor exports and has joined the AI boom with China (+9.8%). India (+0.5%) was a notable laggard with disappointing earnings and continued reallocation towards China.
Fixed Income: Fed Cut Sees Gains.
In an up and down month the 25bps cut from The Federal Reserve initially saw long-term yields rise before ending the month lower alongside signs of labor market weakness. Most bond sectors continued to perform well, especially long corporates (+3.2%) amid elevated yields. In what may be a theme this year, consistent inflows into municipals helped soak up another month of strong issuance.
Real Assets: Gold Leads, Oil Lags.
Continuing the story from most of this year, gold (+11.8%) and infrastructure equities (+1.5%) led while the dollars 2025 slide stalled. Public REITs (+0.4%) on the other hand haven’t seen much benefit from significantly lower new supply and a pullback in construction starts. Oil (-1.5%) continues to lag on oversupply, rising U.S. crude inventories and concerns around global growth.
Alternatives: Private Credit Outperforms.
Managed Futures (+3.7%) were positioned well with market trends and benefited from some of the macroeconomic tailwinds mentioned above. Meanwhile, broad market uncertainty, including growth and interest rates, has made decisions like buying and selling companies more difficult, leading to liquidity challenges and a historic drought in distributions from private equity funds.
Source of data: Bloomberg
Equities Total Return
| SEPT | YTD | 1 YR | |
|---|---|---|---|
| U.S. Large Cap | 3.6% | 14.8% | 17.6% |
| U.S. Small Cap | 3.1% | 10.4% | 10.7% |
| U.S. Growth | 5.1% | 16.8% | 24.8% |
| U.S. Value | 1.5% | 11.5% | 9.3% |
| Int’l Developed | 1.9% | 25.1% | 15.0% |
| Emerging Markets | 7.2% | 27.5% | 17.3% |
Fixed Income Total Return
| SEPT | YTD | 1 YR | |
|---|---|---|---|
| Taxable | |||
| U.S. Agg. Bond | 1.1% | 6.1% | 2.9% |
| TIPS | 0.4% | 6.9% | 3.8% |
| U.S. High Yield | 0.8% | 7.1% | 7.2% |
| Int’l Developed | 0.4% | (0.8%) | (1.8%) |
| Emerging Markets | 0.0% | 3.6% | 5.4% |
| Tax-Exempt | |||
| Intermediate Munis | 0.8% | 4.5% | 3.5% |
| Munis Broad Mkt | 2.5% | 2.4% | 1.4% |
Non-Traditional Assets Total Return
| SEPT | YTD | 1 YR | |
|---|---|---|---|
| Commodities | 2.2% | 9.4% | 8.9% |
| REITs | 0.4% | 4.5% | (4.0%) |
| Infrastructure | 1.5% | 19.7% | 16.8% |
| Hedge Funds | |||
| Absolute Return | 0.5% | 4.0% | 4.8% |
| Overall HF Market | 1.4% | 5.6% | 5.8% |
| Managed Futures | 3.7% | (2.8%) | (3.0%) |
Economic Indicators
| SEPT-25 | MAR-25 | SEPT-24 | |
|---|---|---|---|
| Equity Volatility | 16.3 | 22.3 | 16.7 |
| Implied Inflation | 2.4% | 2.4% | 2.2% |
| Gold Spot $/OZ | $3859.0 | $3123.6 | $2634.6 |
| Oil ($/BBL) | $67.0 | $74.7 | $71.8 |
| U.S. Dollar Index | 120.9 | 126.9 | 121.5 |
Our Take
A lesson learned some time ago is when there is an elephant in the room, introduce it. As October begins, the U.S. government has entered a shutdown. As of this writing, a deal both parties are willing to accept to reopen the government has yet to emerge. The immediate repercussions are some 750,000 furloughed civil servants (their pay delayed until the government reopens) and privy to the topic at hand, the usual Bureau of Labor Statistics reports will be delayed. Chairperson Powell described the September rate cut as a ‘risk management’ move, citing a labor market that is ‘no longer solid.’ With two Fed meetings remaining in 2025, further rate cuts will likely depend on incoming jobs data—now delayed due to the shutdown.
In our Q4 Economy Commentary, due out later this month, we dive into what has been a strong first three quarters in markets, how the government shutdown can influence how markets wrap up 2025 and the implications for portfolio positions. Below are some additional topics we are keeping an eye on for now:
Where does The Federal Reserve go from here: The Federal Reserve is expected to continue easing monetary policy through the remainder of 2025, with two additional 25bps cuts projected. The Fed’s decision to cut or pause will hinge on persistent softness in the labor market, where job gains have slowed and unemployment is projected to rise, and inflation remains above the 2% target.
AI spending sustainability: AI spending remains a powerful market driver, with major tech firms like Meta, Microsoft, and Amazon ramping up investments. Oracle’s $300 billion multi-year cloud contract with OpenAI signals broader infrastructure commitment. However, free cash flow growth is slowing, and saturation in key revenue segments is raising valuation risks. While tools like ChatGPT and Copilot offer productivity gains, their introductory pricing models may prove unsustainable, potentially impacting profitability and adoption.
U.S. consumer: Consumer sentiment has declined steadily since midyear, with the University of Michigan’s index hovering near pandemic-era lows. Spending is shifting toward essentials, with notable pullbacks in travel, autos, and apparel.
Labor market: The U.S. labor market appears to be entering a more cautious phase for the remainder of 2025. Unemployment has edged up to around 4.3%, the highest since 2021, and job creation has slowed significantly, with August payrolls adding just 22,000 jobs. While sectors like healthcare and tech remain relatively strong, traditional industries such as retail, manufacturing, and government are showing cracks. Employers are increasingly relying on AI and automation to maintain output without expanding headcount, and business leaders are doubling down with more public statements to that point – they expect productivity increases but not headcount increases.
Despite a strong Q3 and a particularly bright September, headwinds from the government shutdown, softening consumer sentiment, and labor market uncertainty should not be overlooked. We mentioned back in July that so long as people have jobs, spending levels are not likely to drop off significantly nudging the economy towards growth. We have certainly seen growth so far, however broad employment data has wavered and the, albeit temporary, government shutdown has added to the number of people not receiving paychecks. Upward revisions to Q2 GDP are encouraging, but elevated U.S. valuations suggest that new allocations may be best directed toward short-term fixed income or cash, where yields remain compelling.
