Fourth Quarter 2025 Outlook: Opportunity Amid Transition

By Charles Luke, Chief Investment Officer, City National Rochdale

The fourth quarter begins with markets balancing cautious optimism against a still-fragile policy backdrop. After a volatile year defined by policy swings and geopolitical tension, investors are confronting fresh uncertainty from a partial U.S. government shutdown[BM1] , renewed trade friction with China, and another round of tariff and export control measures. Yet despite these headwinds, financial conditions remain relatively stable, corporate earnings are holding up, and inflation is in check.

Markets have taken [BM2] the government shutdown in stride, viewing it as more of a political impasse than a fiscal crisis. Still, the lapse in government funding delays economic data releases and clouds near-term visibility for policymakers. The larger story, however, is the persistence of global policy friction. In early October, the U.S. announced an additional 100% tariff on select Chinese goods and tightened export restrictions on advanced technologies, drawing the prospect of retaliatory measures from Beijing. The new trade actions underscore that global supply chains are once again being reshaped by policy rather than market forces—a dynamic that could weigh on margins and trade volumes as the year closes.

Meanwhile, the Federal Reserve finds itself at a delicate crossroads. Its credibility is under attack from multiple directions—political pressure from Washington, investor skepticism over its inflation commitment, and the lingering perception that policy has become reactive rather than proactive. The good news is that its most recent meeting provided a degree of reassurance: Chair Powell signaled that balance sheet runoff could conclude early next year, and reaffirmed that rate decisions remain data-dependent, not politically driven. That message, modest as it was, gave markets hope that true independence may yet be restored.

Beyond the headlines, the market narrative is gradually shifting from one of anxiety to adjustment. Headline iInflation is easing, growth remains positive, and the long-feared recession has yet to materialize. Equity indexes have recovered sharply from their April lows, credit spreads have narrowed, and volatility has fallen back toward pre-pandemic averages. Yet complacency would be premature. Investors are navigating a transition marked by slower growth, high nominal rates, and elevated political risk—conditions that reward discipline and selectivity more than broad risk-taking.

A Year of Adjustment and Resilience

2025 has been a year of extraordinary adjustment. The spring’s tariff shock and mid-year policy volatility tested investor conviction, but the economy proved resilient. The passage of the “One Big Beautiful Bill” provided fiscal clarity, making permanent several tax provisions permanent while keeping new spending contained. Inflation data consistently surprised to the downside through the summer, while corporate earnings proved more durable than expected. By October, financial conditions had eased meaningfully, supported by the cooling inflation and renewed confidence that the Fed might manage an orderly transition back to policy easing.

The result is a more balanced market environment—less driven by liquidity and more by fundamentals. Investors are refocusing on earnings quality, balance-sheet strength, and sustainable margins rather than on speculative growth narratives.

Economic Landscape: Slower Growth, Firmer Foundations

The U.S. economy continues to downshift without derailing, which reflectings softer consumer spending, slower job creation, and tariff-related drag on trade volumes. Still, the underlying picture remains constructive. Household balance sheets are healthy, housing demand is stabilizing as mortgage rates drift lower, and corporate reinvestment remains steady, particularly in technology infrastructure and supply-chain localization.

The labor market is cooling but not collapsing. Job growth has moderated, especially in export-oriented industries, yet layoffs remain limited, and wage growth is easing in line with productivity gains. Inflation is , while still above the Fed’s target, with some headline numbers continues to trending downwardlower, as with core measures are expected to end the year between 3.0% and 3.5%.

Policy: Independence Under Pressure

The Federal Reserve remains the anchor of market sentiment, even as its independence is questioned. Persistent political scrutiny—heightened by the shutdown and public criticism from both parties—has raised concerns that monetary policy could become an extension of fiscal priorities. While Chair Powell’s latest remarks helped calm those fears, restoring full credibility will require consistent communication and policy restraint.

The Fed’s announcement that balance sheet runoff could end early next year was viewed as constructive but secondary to the broader question of its autonomy. Markets are already looking ahead to the next phase: a gradual easing cycle beginning continuing through in early 2026, driven by disinflation, rising unemployment, and expectations for below-trend growth. Whether the Fed can execute that the pivot without political interference will be a defining test for its institutional legitimacy—and a key driver of market confidence heading into next year.

Fiscal policy, by contrast, remains relatively neutral. The OBBBA’s extensions of business tax incentives provide some support for capital investment, while gridlock in Congress limits the prospect of large new spending initiatives. Combined, fiscal and monetary policy are transitioning from restrictive to balanced—an environment conducive to steady but unspectacular growth.

Markets: Constructive, But Selective

Equities have climbed to near record highs, supported by resilient earnings and improving visibility on inflation. Profit margins remain healthy, particularly in sectors tied to technology and industrial automation. Importantly, much of this year’s rally has been driven by earnings growth rather than multiple expansion—a sign of underlying corporate strength.

Fixed income markets have stabilized as yields approach a plateau. Intermediate-duration bonds now offer compelling real yields, while credit spreads remain tight but reasonable given the fundamentals. The risk-reward balance between equities and fixed income is more even than at any point in recent years.

Gold and other real assets continue to benefit from global diversification demand as investors hedge against policy uncertainty, currency weakness, and fiscal slippage.

Global Dynamics: Trade Tension and Capital Realignment

Global conditions remain defined by the interplay between policy and capital flows. The escalation of U.S.–China trade measures, coupled with export controls on advanced semiconductors, highlights the ongoing fragmentation of global supply chains. Both sides appear intent on protecting strategic industries, even at the cost of slower global growth.

At the same time, the dollar’s recent softness and moderating U.S. yields have encouraged renewed capital flows into non-U.S. markets. Select emerging economies and commodity producers are benefiting from this rebalancing, though global growth remains uneven.

Risks to Monitor

While the near-term outlook is constructive, key risks remain:

1. Policy Missteps: An extended shutdown or political interference in Fed policy could undermine confidence.
2. Margin Pressure: Higher input and tariff costs may squeeze profitability if demand weakens.
3. Geopolitical Escalation: Retaliatory trade measures or export restrictions could disrupt supply chains.
4. Fiscal Credibility: Rising debt service costs could weigh on Treasury markets and long-term yields.
5. Labor Market Friction: Slower hiring could dampen sentiment and delay consumption recovery.

The Bottom Line

The fourth quarter opens with cautious optimism but no shortage of complexity. The economy continues to adjust, inflation is trending lower, and markets have proven resilient in the face of policy uncertainty. Yet credibility—both fiscal and monetary—remains the central challenge. The latest Fed meeting offered a reminder that independence can still be asserted, even amid political crosswinds.

Investors should remain balanced and discerning. Opportunities persist, but so do risks tied to policy, trade, and confidence. In this environment, fundamentals matter most—quality balance sheets, stable cash flows, and disciplined allocation remain the surest guides through what promises to be another consequential quarteres