As we close out the third quarter of 2025, markets have continued to reward patient investors. Both equities and fixed income delivered positive returns, supported by moderating inflation, a resilient labor market, and steady corporate earnings growth. While short-term headlines continue to create noise, the underlying fundamentals of the U.S. economy remain sound.
Inflation: Back to Normal Levels
Inflation has come a long way since its 2022 peak of 9.1%. As of the latest data, inflation stands at 2.9%, right in line with the 100-year average of roughly 3%.
We expect inflation to hover around 3% through 2025 before gradually declining in 2026. While recent tariffs may add some upward pressure, we view these as a one-time adjustment, not the start of a new inflation trend.
In short, inflation is back to “normal,” and we don’t see it as a threat to economic stability or corporate profitability going forward.
Earnings and Growth: A Solid Foundation
Corporate America continues to deliver. Earnings growth has remained healthy, with projections of 7–8% year-over-year growth through the third quarter of 2025. These figures reflect both the adaptability of U.S. companies and the ongoing strength of consumer spending and productivity.
Even with slowing momentum in some sectors, the earnings picture supports our positive outlook for equities through year-end.
Interest Rates: The Fed’s Next Moves
Interest rates have begun to move lower, reflecting confidence that inflation is under control. The Federal Reserve is expected to continue cutting rates into 2026, though the pace remains uncertain. Trade tensions and tariff policies—especially with China—add a layer of unpredictability to the Fed’s decision-making.
Lower rates typically benefit both borrowers and investors. For bondholders, the tailwind of falling yields should support fixed-income prices, while for equity investors, easing financial conditions can sustain risk appetite and valuations.
Labor Market: Slower, But Still Strong
The U.S. labor market remains one of the bright spots of the economy. The unemployment rate of 4.3% indicates that job conditions are still healthy, even as hiring has slowed modestly. This gradual cooling is actually a welcome sign—it gives the Fed room to reduce rates without stoking inflation.
A balanced labor market supports sustainable growth, keeping the economy on track without overheating.
Volatility and Global Uncertainty
Market volatility subsided in the third quarter, offering investors a smoother ride than earlier in the year. However, negotiations and tariff discussions with China could reintroduce short-term fluctuations. While uncertainty is always part of investing, we believe markets are well-positioned to absorb these developments without derailing the broader trend.
The AI Effect: Powering Growth and Innovation
Artificial intelligence continues to be a powerful driver of both economic activity and market enthusiasm. Estimates suggest that $3–4 trillion could be spent on AI infrastructure by the end of the decade, fueling innovation across sectors from manufacturing to healthcare.
While we don’t believe we’re in a bubble yet, investor optimism in AI-related industries has been a dominant force in market performance. As with any transformative technology, there will be periods of exuberance and consolidation—but the long-term productivity gains are real.
Consumer Strength: A Key Support
One underappreciated aspect of today’s economy is the strength of U.S. households. Consumer debt relative to net worth is at a 60-year low, underscoring the strong financial position of many families. This solid balance sheet helps cushion the impact of higher prices and interest rates and supports continued spending, which remains the engine of U.S. growth.
Looking Ahead: A Constructive Outlook
We do not anticipate a U.S. recession in 2025. With inflation normalizing, earnings growing, and the Fed positioned to provide further support, our outlook for equities remains positive.
That said, markets rarely move in a straight line. A short-term pullback would be entirely normal after the strong run we’ve seen, and could even present opportunities for long-term investors.
Fixed income should continue to perform relatively well, though we expect it to lag equities over the next several quarters as the economic expansion persists.
Bottom Line
The third quarter reinforced a simple truth: disciplined investors are being rewarded. Inflation has cooled, corporate earnings are healthy, and both stocks and bonds are delivering positive results. While uncertainty around tariffs, Fed policy, and global growth will keep markets on their toes, we remain confident in the underlying strength of the U.S. economy.
Now, more than ever, maintaining a well-diversified portfolio aligned with your goals and time horizon is key.
At Provista Wealth Advisors, we continue to monitor market developments closely and make adjustments where needed, but we remain guided by long-term fundamentals, not short-term noise. If you’d like to review your portfolio in light of recent market trends, we’re always here to help.