4th Quarter 2025 Market Outlook:
As we enter the final quarter of 2025, there are three primary market drivers to watch: the political landscape, Federal Reserve policy, and technical indicators. Examining these determinants together provides a balanced perspective on both current conditions and the near-term outlook.
Political Landscape:
At the start of this administration, President Trump emphasized a focus on “Main Street, not Wall Street.” Many initially interpreted this to mean that he would prioritize middle-class economic well-being even at the expense of market performance. Yet, experience has shown that the President is unwilling to let prolonged market weakness persist.
For example, he initially pressed forward with aggressive tariffs but paused once equity and credit markets began to falter. This pattern is consistent: while his methods are often controversial, his actions demonstrate a willingness to support markets when needed. During the COVID-19 crisis, he deployed direct stimulus measures, including checks to households, to bolster the economy.
Whether these policies prove beneficial in the long run remains open to debate, but in the near term, history suggests that the administration will continue to take steps aimed at sustaining market strength.
Federal Reserve Policy:
On September 17, the Federal Reserve lowered its recommended target range for the federal funds rate by 0.25%, bringing it to 4.25%. It is worth noting that the Fed does not directly set rates but instead influences interbank lending costs through its guidance. These signals, while indirect, have broad effects across financial markets.
Interestingly, the most recent cut was followed immediately by a rise in short-term rates (September 17–18). Looking forward, we expect short-term rates to gradually decline, while long-term rates remain relatively stable. Mortgage rates, therefore, should remain mostly unchanged.
Lower rates are generally supportive of technology companies and small-cap firms, which rely more heavily on accessible and affordable financing. This suggests pockets of opportunity within those sectors.
Technical Analysis:
From a technical standpoint, the S&P 500 has maintained a distinctly bullish profile. In June, the index achieved a golden cross—when the 50-day moving average moves above the 200-day moving average—widely regarded as a signal of sustained upward momentum.
Since then, the index has not only held its gains but also pushed to new highs, establishing a strong upward trend line. While the stochastic oscillator suggests that a minor pullback could be due, history shows that markets can continue climbing for an extended period before such a correction materializes.
Conclusion:
Taken together, politics, Federal Reserve policy, and technical signals all point toward a continuing bull market. Volatility is always possible, but the broader forces appear aligned in favor of growth.
At Cornerstone, we intend to remain fully invested at our target allocations. Specifically:
- Maintain a core position in short-duration, high-quality credit, with only a modest shift toward mid-duration in this rebalance.
- Preserve our large international weighting to complement domestic exposure.
- Slightly increase allocations to small-cap funds to balance market capitalization.
These adjustments, while measured, are designed to maximize returns while keeping portfolio volatility at a manageable level in the months ahead.
Bibliography:
https://www.wsj.com/economy/jobs/u-s-jobless-claims-fell-last-week-8c746e4b Jobless claims declined
https://www.whitehouse.gov/articles/2025/04/icymi-president-trump-is-president-for-main-street-not-wall-street/
https://www.federalreserve.gov/newsevents/pressreleases/monetary20250917a.htm