Fourth Quarter 2025 Update

January 1, 2026

Key Points

• The economic backdrop suggests a gradual cooling rather than a sharp downturn. Recent data confirm slower payroll growth and rising unemployment, yet layoffs remain contained and job openings, while lower, still exceed pre-pandemic norms. This pattern points to firms managing through softer demand with caution rather than capitulation, favoring labor hoarding and productivity gains over broad-based cuts.
• At its December 9–10, 2025 meeting, the Federal Open Market Committee (FOMC) delivered its third consecutive 25-basis-point rate cut, lowering the target range for the federal funds rate to 3.50%–3.75%, the lowest level since late 2022.
• Equities advanced broadly in the fourth quarter, with major indexes posting solid gains and most sectors delivering positive returns. The gains were fueled by easing inflation trends, expectations of continued monetary policy accommodation, and resilient corporate earnings, even as investors navigated lingering geopolitical risks and fiscal uncertainty.

4th QUARTER 2025 MARKET COMMENTARY

Below, we’ve highlighted broad market returns for the current quarter and year-to-date time periods:

Source: Refinitiv

THE GLOBAL ECONOMY

After stumbling early in the year, the U.S. economy accelerated meaningfully into the summer: according to the Bureau of Economic Analysis initial report, real Gross Domestic Product (GDP) grew at an annualized 4.3% in Q3 2025, up from 3.8% in Q2. That strength sits alongside a more uneven labor backdrop: nonfarm payrolls increased 64,000 in November 2025 following a sharp October decline, and the unemployment rate rose to 4.6%, signaling a gradual cooling in hiring and broader slack emerging in the job market. Against this mixed backdrop, the Federal Open Market Committee (FOMC) cut the federal funds rate by 25 bps to a 3.50% – 3.75% target range on December 10, 2025, extending a cautious easing path aimed at supporting employment without reigniting inflation. Price pressures remain above target but are not re-accelerating: the BEA’s PCE Price Index rose 2.8% year-over-year in Q3 2025 (core PCE at 2.9%), consistent with a slow drift lower in underlying inflation. Reflecting that trajectory, the Fed’s December Summary of Economic Projections places 2025 PCE inflation at 2.9%, acknowledging persistent, yet easing, pressures as policy navigates between resilient growth and a softening labor market.

EQUITIES

Equities advanced broadly in the fourth quarter, with major indexes posting solid gains and most sectors delivering positive returns. The gains were fueled by easing inflation trends, expectations of continued monetary policy accommodation, and resilient corporate earnings, even as investors navigated lingering geopolitical risks and fiscal uncertainty. While inflation remains above the Federal Reserve’s target, its steady moderation has tempered policy concerns and supported a more constructive tone in equity markets. When the quarter ended, the S&P 500 Index was higher by 2.66%.  International stocks generated positive results during the quarter and overall performed in line with US equities.  The MSCI EAFE Index of developed markets stocks was higher by 4.9%. Emerging markets stocks were higher, as the MSCI Emerging Markets Index advanced by 4.7%.

FIXED INCOME

At its December 9–10, 2025 meeting, the Federal Open Market Committee (FOMC) delivered its third consecutive 25-basis-point rate cut, lowering the target range for the federal funds rate to 3.50%–3.75%, the lowest level since late 2022. The decision reflected growing concern over downside risks to employment amid a cooling labor market, even as inflation remains above the Fed’s 2% goal. Fixed income markets extended their rally through the fourth quarter, buoyed by a combination of moderating inflation, continued Fed easing, and growing expectations for a softer economic landing.

SUMMARY

The economic backdrop suggests a gradual cooling rather than a sharp downturn. Recent data confirm slower payroll growth and rising unemployment, yet layoffs remain contained and job openings, while lower, still exceed pre-pandemic norms. This pattern points to firms managing through softer demand with caution rather than capitulation, favoring labor hoarding and productivity gains over broad-based cuts.

From a macro perspective, the probability of a soft landing remains credible. Inflation is trending lower, supply chains have normalized, and the Fed’s pivot to gradual easing reduces the risk of overtightening. These factors create space for modest growth even as policy makers and corporate leaders calibrate responses carefully. Corporate fundamentals also provide a buffer. Profits rebounded in Q3, and liquidity remains ample, enabling firms to service debt and maintain investment plans. Where caution prevails, companies are prioritizing efficiency, such as reallocating resources and delaying nonessential hiring, rather than resorting to deep workforce reductions. This approach preserves institutional knowledge and positions businesses for a smoother recovery if demand strengthens.  

The consensus among analysts is that risks persist but appear manageable. A sharper deterioration in labor conditions or an external shock, such as energy price volatility or geopolitical disruption, would warrant reassessment. Structural issues like labor participation and demographic trends remain slow-moving headwinds, while technology adoption introduces both transitional challenges and long-term productivity upside. Overall, the balance of evidence favors a scenario of slower but sustained growth, with policy and corporate strategy aimed at stability rather than stimulus-driven acceleration.

Information provided is for informational purposes only and should not be construed as investment advice. The views expressed are current only as of the publication date, are based on information that St. Clair Advisors believes to be accurate, and subject to change without notice. All investment decisions must be evaluated as to whether they are consistent with your investment objectives, risk tolerance and financial situation. St. Clair disclaims any liability for any direct or incidental loss incurred by applying any of the information in this publication. Indexes are unmanaged and one cannot invest directly in an index. Past performance is no guarantee of future results.

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