As the third quarter of 2025 comes to a close, investors continue to navigate a market shaped by mixed economic signals. Equity markets have remained resilient, supported by steady corporate earnings and improving investor sentiment, while bond markets have reacted to shifting expectations around Federal Reserve policy. Although inflation has moderated from its peaks, it remains above target levels, keeping policymakers cautious. Meanwhile, global trade tensions and widening fiscal deficits add layers of uncertainty to an already complex backdrop.
Economic and Monetary Policy Overview
Federal Reserve policy shift:
In September, the Federal Reserve delivered its first interest rate cut of the cycle, signaling a pivot toward monetary easing. This shift followed signs of a cooling labor market and slower economic growth. Market participants are closely watching how the Fed will balance its goals of supporting employment and controlling inflation through year-end.
Inflation trends:
While headline inflation has eased, core inflation continues to hold above the Fed’s 2% target. Persistent service costs and the impact of new tariffs have kept inflation from declining as quickly as policymakers might prefer. These dynamics suggest that the path toward price stability could remain uneven.
Labor market signals:
Revisions to earlier job growth data indicate that the labor market is cooling, providing the Fed with flexibility to focus more on supporting growth. However, wage gains and tightness in some sectors remain potential sources of inflationary pressure.
Government shutdown impact:
A brief federal government shutdown during the quarter delayed several key economic data releases, adding to near-term uncertainty and potentially softening consumer confidence.
Investment Themes and Considerations
Fixed income opportunities:
As interest rates begin to adjust lower, fixed income is increasingly being viewed as a meaningful component of portfolio construction. Municipal bonds currently provide relatively attractive tax-equivalent yields for investors in higher tax brackets.
Selective equity opportunities:
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- International stocks: Last month, we increased our allocation to international equities in client portfolios to seek exposure to evolving opportunities outside the U.S. Diverging monetary policies and varying economic growth rates across regions have created a more favorable relative landscape, reinforcing the importance of maintaining global diversification within portfolios.
- AI and technology: At the beginning of 2025, we implemented an allocation to an artificial intelligence-focused fund as part of our effort to gain exposure to innovation trends within the technology sector. The fund provides exposure to companies positioned at the forefront of AI development and adoption, while complementing our broader equity diversification.
Market Risks and Headwinds
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- Tariff and trade policy: Renewed trade tensions and tariff adjustments could affect both inflation trends and global supply chains.
- Fiscal imbalances: Elevated debt levels and the potential for reduced fiscal discipline continue to be key watchpoints for long-term bond investors.
- Geopolitical instability: Persistent geopolitical risks and regional conflicts remain potential sources of volatility for both equity and fixed-income markets.
Looking Ahead to Q4 2025
As we move into the final quarter of the year, attention will likely remain focused on the Federal Reserve’s policy path and its impact on both economic growth and market sentiment. Earnings season may provide additional insight into how companies are adapting to higher costs and moderating demand. A disciplined, diversified approach anchored in quality holdings remains important in navigating this late-cycle environment.
If you’d like to review your current allocation or discuss how the current economic/market outlook could impact your holdings, please reach out and we can schedule time to talk.
As always, thank you for your continued trust and partnership. We’re grateful to work with you and remain committed to helping you stay aligned with your long-term goals.
Tom Dale, CFP® | It is our mission to help you think differently about your wealth so you can LIVE WELLthy™ today and tomorrow.
