Financial Forum October 2025
Market Commentary – Full Speed Ahead! Rate Cuts Have Begun with Stocks at Record Highs!
The U.S. equity markets delivered a remarkably strong third quarter, pushing indexes to fresh all-time highs. The rally was underpinned by a Fed rate cut, robust earnings growth, and continued enthusiasm around AI spending. In September, investors got their first rate cut of 2025, as the Federal Reserve slashed short-term rates by 0.25%, even though inflation has been running above the Fed’s two percent target. As you may recall, the Fed has a dual mandate – full employment (jobs) and price stability (inflation). According to the central bank, their justification for the cut was a “weakening labor market,” which they believe to be more dangerous to the U.S. economy than stubborn inflation. Chairmen Powell also signaled another one-half percent (50 basis points) of cuts by year end. Immediately following the announcement, the U.S. dollar fell to its lowest level since February 2022, while gold rallied to new record highs. This marked the first Fed interest rate cut with core inflation at 2.9% in 30-plus years. According to the Fed’s own economic analysis, it appears they believe stagflation is a real economic risk. In the central bank’s post-meeting statement they said, “Risks to inflation are tilted to the upside, and risks to employment are tilted to the downside.” That sounds like stagflation to us. The market is now pricing in approximately four more cuts by next September.
2025 now marks just the third year since 1996 where rate cuts happened with the S&P 500 at record highs. The previous two years were 2019 and 2024. In the past, when the Fed cut rates within two percent of all-time highs, the S&P 500 was up an average of 14% in 12 months. When Chairman Powell was asked about this, he replied that he was focused on containing inflation and unemployment, not the stock market. He did acknowledge that we are now at the point where all alternatives contain risks. In other words, “You’re damned if you do; damned if you don’t.”
Why are Stocks Continuing to Hit New Highs?
Despite the many over-discussed headwinds facing stocks, most of the major indexes finished the quarter at or near all-time highs. In our opinion, here’s the reason why: There are now three separate forms of economic stimuli hitting the economy and companies, and those are combining to increase expectations for eco-nomic growth and corporate earnings. The Fed has cut rates but, more importantly, signaled that a rate-cutting cycle has started. That matters because it means monetary stimulus is now occurring, which is positive for the economy and, peripherally, risk assets.
Monetary stimulus now joins two other previously existing stimuli already helping the economy: fiscal and private. Fiscal stimulus is occurring via the passage of the One Big Beautiful Bill, which solidified and boosted tax cuts, as well as unleashed billions in Federal dollars across various industries. Private stimulus, meanwhile, is occurring through massive AI-linked capital expenditures from major tech companies, such as Meta, Microsoft, Amazon, and others (remember, these mega-cap tech firms could spend more than $500 billion on AI infrastructure over the next two years!). The result is a powerful three-way tailwind on stocks that has sent the major averages to new highs.
While there are three tailwinds on risk assets, it doesn't mean this is a risk-free market. First, economic growth can slow. Obviously, the labor market is weakening and it’s entirely possible that negative impacts of tariffs and other policy changes begin to weigh on growth in the fourth quarter or early next year. Essentially, it would mean that rate cuts were too late. If growth slows unexpectedly, we will have a pullback, or worse, in stocks. Second, AI enthusiasm could wane. What’s happening in AI is not the same as the tech bubble of the late 90s but there are similarities, and the idea that the cap-ex bubble pops if AI isn’t adopted as quickly as expected shouldn’t be discounted.
Bottom Line:
There are powerful stimuli forces supporting risk assets and, as long as economic growth is solid and we do not see the AI cap-ex pace begin to slow or break, then the path of least resistance for stocks is higher. However, if growth starts to slow or doubts emerge about AI adoption and the pace of cap-ex does start to slow, then the market will be suddenly very vulnerable to a pullback or worse—and that should not be ignored amidst the currently bullish sentiment.
As we stated in last quarter's newsletter, we will continue to monitor the 10-year Treasury yield because that will let us know if markets are concerned about inflation and U.S. deficits. If the 10-year yield begins to creep toward and through 5.00%, that will be a signal that the global bond markets are starting to worry about the U.S. fiscal situation and, at that point, markets will care about deficits and debt. If yields rose to those levels, we would expect stocks to decline sharply. We will also pay close attention to jobless claims, housing, the ISM PMIs (which are both below 50, signaling a contraction) and the monthly jobs report. These reports will let us know if an economic slowdown is forthcoming.
What does the Fed Rate Cut Mean for the Housing Market?
According to the Census Bureau, home buying demand has hit its second lowest level on record, near the 2009 Great Recession lows. This has occurred despite the fact that rates had already dropped in anticipation of the Fed doing so. However, as we see it, for the Fed to have any real impact on housing, rates must drop enough to incentivize the approximately 55% of homeowners with sub-4% mortgages to move. Otherwise, limited supply will still be an anchor holding back sales. There are simply not enough newly built homes to support the market.
Quarterly thought…Be careful what you wish for…
“Be careful about drooling over other people's blessings. It may look good on them, but it may not be the right prescription for you.”
― Germany Kent
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Pinnacle Wealth Management Group, Inc.
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Works Cited
Yahoo Finance - Stock Market Live, Quotes, Business & Finance News, https://finance.yahoo.com/. Accessed 1 October 2025.
“Barchart on X: "When the Fed cuts interest rates within 2% of stock market all-time highs, the S&P 500 has gone on to finish higher over the next 12 months 20 out of 20 times (100% hit rate) 🚨🚨🚨 https://t.co/JtrQxybKEt."” X, 17 September 2025, https://x.com/Barchart/status/1968115534324781351. Accessed 1 October 2025.
“U.S.” Census Bureau, https://www.census.gov/economic-indicators/. Accessed 1 October 2025.
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