OCTOBER 6, 2025

Throughout the third quarter, markets continued their recovery from the lows we experienced in April. The S&P 500 is now up 14.83% year-to-date. Markets have justly rewarded the steadfast as always, but there have been some very positive, unique developments in 2025 worth highlighting. Market breadth has expanded dramatically beyond the previously dominant tech titans, with segments such as small cap, domestic manufacturing and infrastructure showing strength.

The U.S. economy demonstrated remarkable resilience in the quarter. A strong Q2 GDP report eased fears of a mid-year recession, and growth expectations picked up for the rest of 2025. Consumer spending held at healthy levels, while businesses resumed capital investment plans, especially in those projects focused on AI infrastructure.

Labor market data raised some concerns, as large revisions to non-farm payrolls figures revealed considerably more sluggish employment growth. However, softer demand for workers, paired with reduced labor supply from immigration policy, kept the jobs market roughly in balance.

Tariff costs also began filtering into consumer prices, though the impact was so far muted as companies worked through pre-tariff inventories before passing on meaningful price increases.

The Federal Reserve maintained a cautious stance over the summer, assessing whether tariffs posed greater risks to inflation or growth. The Fed cut its policy rate by a quarter point in September, judging that risks to its full employment mandate required more attention. Its new dot plot projections pointed to some disagreement on the forward path of policy. The median respondent expected two more cuts in 2025, though many policymakers remained unconvinced that further reductions were needed.

However, the risk of an economic downturn is possible, consistent with other late-stage expansions in U.S. history. Moving into the final months of 2025, there are several key dynamics to monitor with implications for the ongoing expansion and markets. Here is what we will be watching in Q4-2025 as earnings reports start next week and for the rest of the year:

• Earnings & Corporate Guidance: Corporate earnings are expected to continue to broaden beyond the mega-cap tech leaders, particularly for small caps that should benefit from lower interest rates and tax breaks under the One Big Beautiful Bill Act (OBBBA).
• Capital Spending: Higher tariffs and tax incentives are encouraging businesses, especially in technology and AI, to accelerate spending. These capital expenditures should lead to direct economic stimulus, but investors should cast a skeptical eye as to whether those large investments will ultimately bear fruit.
• Inflation Effect of Tariffs: Tariffs are expected to add another 0.5–1.0% to inflation over the next 6–12 months. While businesses have absorbed much of this cost so far, consumers are expected to gradually bear more of the burden.
• Federal Reserve Easing: The Fed is likely to weigh the risks of labor market weakness and persistent inflation when deciding on further rate cuts. A base case of 1–2 more cuts before year-end may contribute to a steepening yield curve and continued easing of financial conditions.

Federal Reserve and Bond Market Update

In September 2025, the Federal Reserve trimmed interest rates by a quarter point, a more cautious move than the half-point cut anticipated by the bond market. Investors also expected more dovish language from the Fed, but the absence of both led to a brief spike in bond yields as markets adjusted expectations. Since this initial reaction, yields have trended lower, signaling expectations of further rate cuts, potentially by the January 2026 meeting, where a half-point reduction is now being priced in.

However, the ongoing government shutdown poses a risk. Prolonged disruption could limit the Fed’s access to timely economic data, potentially forcing a pause in policy adjustments until the situation resolves. Despite this uncertainty, investment-grade bond markets have shown resilience, maintaining strong supply and robust liquidity. The Fed’s transparent communication has provided issuers and traders with valuable predictability, fostering confidence in navigating economic and rate trends.

Key Takeaway

Monitor the shutdown’s impact on Fed actions and stay agile with bond investments as markets anticipate further rate shifts. Consult your Nicollet Wealth Advisor to align strategies with these dynamics.

Ownership Transition

As you may be aware, Nicollet’s ownership transitioned to a new partner group last month. We remain independent and 100% employee owned. The process has been seamless, with a focus on maintaining business continuity. We are currently implementing a technology upgrade to enhance our trading and reporting platforms for improved efficiency. Additionally, we are pleased to announce that Uzi Rosha has joined our team as Chief Compliance Officer.

We wish you all a wonderful fall!

The Team at Nicollet Investment Management