CNR Speedometers^®

It feels like summer was just a blink and it’s clear the market is gearing up for the last four months of 2025.

The data remains somewhat mixed, but the overall growth picture looks good for the third quarter. Activity measures are improving overall, and fears of a near-term recession have eased. Our baseline view is that the economy will avoid recession, and in fact, the probability of a downturn has trended significantly lower since the start of the year. The one area that’s starting to become a problem is employment. The most recent report was disappointing, with payrolls growing by only 22,000 versus expectations of 78,000, and the unemployment rate ticking up to 4.3%. This all but seals a Fed rate cut at its September seventeenth meeting. The committee began shifting its stance on monetary policy back in July, and with today’s labor market data, most members have now upgraded their view for September.

Dial 1: Monetary Policy, 1:12— Our Monetary Policy Speedometer has moved into the green. Rate cuts are now not just likely, but nearly certain as we approach the end of the year. Looking ahead, we expect a gradual series of cuts over the next six to nine months. History tells us that Fed easing tends to be supportive for most asset classes, especially equities, with small caps and lower-quality stocks often outperforming when recession is avoided.

Dial 2: Yield [Rate] Curve, 1:34— We also upgraded our Rates Speedometer, which remains yellow but is likely to go green if the current environment stays in place. The combination of weaker job growth, muted consumer demand, and moderating inflation suggests that ten-year yields will remain stable or drift lower from here. Lower borrowing costs should provide some relief to households and businesses, even if lending standards get a little bit tighter.

On the consumer side, spending is not much above its December level, but it’s still solid. Wages are growing faster than inflation, which is helping to offset tariff-related price pressures. Balance sheets remain healthy, though confidence is fragile and very responsive to fiscal and monetary policy developments. This fits with what we’re hearing on Main Street: households are cautious, but they’re still spending, and businesses are investing where they see durable demand, particularly around technology and artificial intelligence.

Stocks still have room to move a little higher, supported by strong corporate earnings and continued AI-driven capital investment, but we need to acknowledge the risks. Policy risk remains, with tariffs and fiscal negotiations still in flux. Geopolitical risk persists in Eastern Europe and the Middle East. Labor market revisions may create further uncertainty. And U.S. equities remain heavily concentrated in a handful of very large technology companies, which means market performance is vulnerable if expectations around spending or profitability change. That places asset allocation at the forefront of our thinking. We’re scanning the market for areas that may be more stable if tech leadership starts to falter.

One of the biggest areas of interest is the increasingly constructive case for international equities. There are several reasons. Capital flows are beginning to shift toward foreign markets as investors weigh the impact of U.S. policy decisions and potential changes in leadership. Relief on the tariff front is creating better visibility, as trade deals reduce uncertainty and open opportunities abroad. International markets also offer more durable sector balance compared to the technology-heavy U.S., helping with diversification and risk reduction. Valuations are historically attractive on a relative basis. And finally, defense spending is poised to increase globally, particularly in Europe, as the U.S. takes a step back from its traditional role as global insurer. For now, it remains an area of growing interest, and one we continue to monitor closely.

As we head into September, the key message is steady improvement in the policy backdrop, with monetary easing now in place, rates moving in the right direction and recession risk fading. Consumers and businesses are still participating in growth, even if cautiously. Equities remain supported by earnings, but risks require discipline. And on the horizon, international markets are starting to look more attractive. It’s a moment that calls for patience, perspective and a balanced approach.