Investment Review & Outlook - October 2025

Cautiously Optimistic

US economic growth remains positive, driven by the American consumer’s penchant to spend, as well as corporate spending related to the build out of artificial intelligence (AI), among other factors. Remarkably, AI-related capital expenditures contributed more to US economic growth than consumer spending in Q2.

At the same time, a softening labor market and its potentially negative impact on consumer spending, which represents two-thirds of GDP, have implications for the economy. Rising unemployment and weak demand for new hires will force consumers to tighten their budgets.

Currently, the US unemployment rate stands at 4.3%, up from 4% in January 2025 and the post-Covid low of 3.4% reached in 2023. This near-term increase has been driven mainly by younger workers, ages 20 to 24, who have persistent employment challenges and a higher-than-average unemployment rate of approximately 9.2%, increasing from 7.9% at the start of the year.

Finding new jobs has become more difficult and is taking longer for those who have been laid off. Rising labor costs and economic uncertainty regarding tariff policies have made employers hesitant to hire. Additionally, AI implementation has increased job market challenges for recent college graduates and entry-level roles, as employers evaluate how AI can boost productivity without the need to hire additional workers. The hiring rate, an indicator of how actively employers are adding new workers, was 3.8% before the pandemic but currently stands at 3.3%.  While wage growth is rising, it is growing at only 4.7%, year-over-year, from August 2024 to August 2025, versus the long-term average of 6.2%. With inflation still high, real wage growth is relatively low.

The administration, however, appears intent on pulling as many levers as possible to strengthen the economy heading into the midterm elections, so fiscal policy should serve as a tailwind to growth. Corporate tax breaks in the One Big Beautiful Bill (OBBB), such as the provision for 100% expensing of capital investments, are intended to spur economic growth. In June, the Tax Foundation estimated that the overall stimulative effect of the OBBB would boost GDP by 0.9% in 2026. Additionally, current US dollar weakness is expected to boost export growth as US goods become cheaper for overseas buyers.

Similarly, legislation has been proposed in Congress to send tariff refund checks of at least $600 to every adult and dependent child, which would support consumer spending if enacted, especially among lower-income Americans. This speaks to the lengths Congress and the administration will go during an election year to garner votes. Unless the labor market deteriorates significantly in the next few months, fiscal stimulus should help forestall any recession for the time being.

Consumer Strength & Retail Sales

The landscape is bifurcated between higher- and lower-income consumers, forming a K-shaped economy where different segments of the economy experience widely different outlooks. Many younger consumers with lower incomes are struggling with student loans and credit card debt. Recent data from a Fed survey estimate that 36% of adults under 40 with at least a four-year college degree have outstanding student loan debt. Student loan delinquencies have risen significantly after the cessation of 5 years of loan forgiveness programs, reflecting the financial stress on this group. In addition, the administration is planning to garnish the wages of borrowers in default. As of April, there were 42.7 million student loan borrowers owing more than $1.6 trillion in student debt, of which only about one-third are current on loan repayments. The rise of “buy now, pay later” financing, which typically targets younger consumers, also indicates spending beyond current means, posing a risk if economic conditions worsen.

According to a recent Bloomberg report, the average consumer credit score in the US has declined the most in one year (from 2024 to 2025) since the aftermath of the global financial crisis in 2009, marking a second consecutive year-over-year decline. This drop is attributed to higher rates of credit utilization and delinquencies, including student loans. In addition, the US savings rate has dropped to pre-pandemic levels. 5% is not a big cushion in the event of an economic downturn, as constrained consumers may already lack adequate savings to meet their current expenses.

US Personal Savings Rate

Source: U.S. Bureau of Economic Analysis

On the other side of the K-shape are higher-income consumers who have helped drive the economy as beneficiaries of the ‘wealth effect’, resulting from a strong stock market that has supported solid spending by this group. Approximately 50% of all retail sales are made by consumers in the top 10% income bracket. However, should the equity market experience a sharp correction, the broader US economy may face pronounced disruptions as this group of consumers rethinks its spending patterns.

Inflation Remains Murky

Despite the Fed’s continued commitment to a 2% target, inflation has remained persistently higher. Although declining from the annualized rate of 9% reached in June 2022, inflation has plateaued at around 3% for the past year. It remains stubbornly high in certain areas, including food, housing, healthcare, energy, and services, leaving many consumers feeling financially strained.

The administration’s tariff and immigration policies have put upward pressure on inflation. While tariffs themselves may be more of a tax on consumers, which reduces spending on other items, the goal of tariffs to re-shore expensive manufacturing tends to be inflationary. In addition, ongoing global supply chain disruptions due to geopolitical tensions and increased protectionism contribute to volatility in the prices of raw materials and labor costs. Efforts to stack the Federal Open Market Committee (FOMC) with dovish participants in a push for significantly lower rates are fueling inflation concerns.

The Fed Dual Mandate Dilemma

The Fed faces a difficult choice between managing persistent inflation and supporting a labor market that is showing clear signs of cooling. To fight inflation, the Fed raised rates sharply starting in 2022, adopting a “higher for longer” stance. While savers benefit from higher rates on savings accounts and CDs, higher borrowing costs spill over into mortgages, car loans, and commercial loans for businesses looking to expand.

However, last month the Fed approved a quarter-point interest rate cut, the first reduction in nine months, with an expectation for two additional rate cuts later this year. Fed Chairman Jerome Powell and other FOMC officials likely will tread carefully with any rate cuts, aiming to avoid stoking inflation while also responding to the softening job market. The September rate cut appeared to indicate that a softening labor market is the greater concern.

An Independent Fed

The credibility and independence of the Fed in implementing monetary policy are crucial factors for US economic stability and for enabling the US to fund its massive debt at preferential interest rates. Growing political pressures on Fed policy decisions complicate an already challenging US economic environment. The importance of an independent Fed as a global financial institution is a significant consideration. A lack of trust in Fed independence will lead investors to demand higher yields on US Treasuries to compensate for the risk of higher inflation and concerns about long-term economic stability. US government debt has surpassed $37 trillion, increasing by $2.2 trillion in just this calendar year, and now stands at more than 120% of US GDP. These amounts are staggering, driving home the point that debt service will become a significant economic drag, if not a fiscal crisis, if investors demand higher rates.

The Strength of the Dollar

The absence of a clear plan to address debt levels has resulted in a roughly 20% decline in the US dollar over the last 12 months. Other reasons for the decline include uncertainty surrounding tariff policy, rising protectionism, concerns about Fed independence, and foreign investors’ efforts to hedge their exposure to US assets due to geopolitical concerns.

On the positive side, a weaker dollar can serve to make US exports more competitive to overseas buyers. At the same time, imports become more expensive for US consumers and businesses, which can prove to be inflationary. A weaker dollar also reduces the appeal of US assets to global investors, which goes back to the issue of higher financing costs for US debt if foreign demand wanes.

Equity Markets

Mega-Cap Driven

Equity market performance has been driven by a select group of AI-related mega-cap companies, which represents approximately 41% of the S&P 500 market capitalization. This concentration in the US market is similar to other periods when an abundance of optimism was focused on new technology or a particular group of very dominant companies. The following table compares the current conditions to other high points of market concentration and valuation.