September 2025 Webinar

Market Overview & Speedometers

• We upgraded the Interest Rate and Consumer Spending speedometers following the first Federal Reserve cuts since 2023, signaling the start of a renewed easing cycle expected to extend into 2026.
• Consumer spending remains resilient — supported by wage gains, improving sentiment among higher-income households and fiscal programs that continue to flow into the economy.
  
• Financial conditions are easing: Equities remain at or near all-time highs, credit spreads are stable, and housing activity is responding quickly to lower mortgage rates.

Economic Forecasts

• We introduced 2026 guidance, projecting gross domestic product (GDP) growth slightly above 2% as tariffs impacts fade, fiscal spending expands and easing continues from the Fed — shifting the narrative toward modest reacceleration.
  
• For 2025, we raised our corporate profit growth; lowered consumer price index (CPI) expectations but still expect to finish just above 3%, reflecting firmer housing and wage inputs; and lowered both our federal funds rate and 10-year estimates.
  
• Corporate profits remain solid but slower — earnings growth has eased from around 14% in late 2024 to about 11% in mid-2025. We are in line with consensus for 2026 but remain mindful of margin stability.
  
• Overall, 2025 has been busy and is setting 2026 up for stronger growth and healthier balance sheets as easing policies gain traction.

Inflation & Input Pressures

• The CPI will likely reaccelerate into fall and finish above 3% this year, before moderating to 2.5%-3% by the end of 2026 if goods inflation stabilizes and tariff effects fade.
  
• Import prices are rising, and producer price index (PPI) trade margins turned negative, signaling that corporate margins may have peaked, even if they remain well above average.
  
• Shelter (roughly 40% of CPI) has cooled but could rebound if rate cuts spur renewed housing activity, limiting the disinflation offset we have enjoyed this year.

Consumer & Housing

• New-home sales surged approximately 20%, and mortgage applications rose about 30%, underscoring strong sensitivity to the Fed’s recent easing and pointing to a potential housing rebound.
  
• Consumer optimism continues to rise — especially among higher earners, who drive around 80% of U.S. spending — and refinancing trends may lift disposable income through 2026.

Fed Outlook & Policy Path

• We anticipate another 50 basis points (bps) in cuts for 2025 (October and December) and see the potential for three more in 2026, bringing the policy rate to 2.75%-3% by the end of 2026.
  
• The September dot plot centered near 3.625% for the end of 2025, matching our internal view; a single dissent favoring 50 bps highlights that the Fed’s credibility and independence remain.
  
• With the softening labor data, the Fed is prioritizing employment, reinforcing policy flexibility even as inflation remains above target. 

Equity Markets

• All four major U.S. indexes — S&P 500, Nasdaq 100, Russell 2000 and Dow — hit simultaneous highs, an event seen only 25 times this century; the S&P equal-weight index also reached record territory, confirming broad market strength.
  
• AI leadership remains dominant: Magnificent 7 revenues, at more than $500 billion per quarter, continue to illustrate the support for AI spending. Order backlogs continue to grow as generative AI revenues are forecasted to continue growing from around $300 billion in 2025 to about $2 trillion by 2032.
  
• We are overweight in technology and communication services, balanced by consumer staples and energy, offering value and pricing power, and are set to continue benefiting from growing AI capital expenditures.
  
• Underweights include industrials and financials, in which valuations are stretched, and manufacturing purchasing managers indexes (PMIs) may contract if domestic growth slows due to increases in input costs from tariff pass-through inflation. For financials, while better net interest margins are present, it is likely not enough to boost lending spreads.

Fixed Income & Credit Markets

• The 10-year Treasury peaked near 4.8%, and the 30-year peaked above 5% earlier this year; we now see potential for sub-4% 10-year yields by 2026 as easing deepens.
  
• High-yield spreads (about 240 bps) are at the low end of historical norms — tight but underpinned by strong balance sheets and favorable technicals.
  
• Intermediate maturities (1-10 years) continue to offer the best mix of carry and reinvestment protection; corporates are up 7% year to date, with potential for an additional ~1.4% if the Fed delivers another 50 bps.
  
• Municipal issuance is up around 20% year over year and about 40% versus the five-year average, driven by infrastructure needs and budget replenishment, yet demand has absorbed supply efficiently.
  
• Emerging market debt outperformed on higher yields and dollar weakness, while private credit (direct lending) maintains approximately 9% in 10-year annualized returns with comparable loss rates to High Yield — manager quality remains crucial.

International Markets

• The prior international outperformance cycle coincided with a roughly 38% U.S. dollar decline; excluding foreign exchange, foreign returns were modest.
  
• We treat non-U.S. exposure as strategic diversification, not a primary growth engine —helpful for dollar hedging and risk reduction amid elevated U.S. valuations.

Small Caps

• Since Aug. 1, small caps have outperformed the S&P by about 5.5%; in historical slow-cut cycles, small caps have led by around 5.3% in the 12 months following the first cut versus just about 1.4% in fast-cut cycles.
  
• We maintain an overweight tilt given supportive conditions, broadening participation and attractive relative valuations.

Four Key Takeaways

1. Easing cycle reignited: Fed cuts in September signal an extended easing path into 2026, boosting liquidity and growth potential.
   
2. Inflation remains sticky: Shelter (about 40% of CPI) may be the key swing factor as goods prices continue to rise; inflation will likely be above 3% in the near term before easing.
   
3. Breadth plus AI power: Strong market participation plus ongoing AI-driven earnings strength continue to anchor equity momentum.
   
4. Carry with discipline: Credit spreads remain tight; we favor intermediate duration, high-quality carry and selective emerging market and private credit exposure.

In Summary

We expect 2025 to act as a bridge year — moderate growth and sticky inflation setting up a reacceleration in 2026 as policy easing, fiscal expansion and resilient consumers align. Equity markets remain supported by AI leadership and broad participation, while fixed income remains a ballast in portfolios. Our base case: continued market strength into 2026, with vigilance on inflation drivers, potential margin compression, and spread normalization.

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