Economic and Financial Market Outlook Q4 2025

Investment Outlooks
Written By Marietta Investment Partners

A Diverging Global Cycle

The global economy is progressing toward a soft landing where inflation eases as growth slows. The IMF projects global GDP moderating from 3.3% in 2024 to around 3.0% in 2025 and 2026. The notable exception to this global trend is the United States, which is running hotter than the rest of the world. We are encouraged by the strength of the US economy while noting that inflation remains a lingering concern. Though the paths of the major global economies have diverged into contrasting accelerating and decelerating environments, US and international policymakers are simultaneously pursuing similar stimulative measures. This collective boost should spur on the global expansion, with the US exhibiting a sharp turn toward above-trend growth. The diverging economic conditions will present very different scenarios and opportunities for companies, consumers, and investors.

US Economy: Enviable Growth, With an Inflationary Catch

The US economy has rebounded stronger than consensus projections, powered by robust private demand and investment, particularly among higher-income consumers and large businesses. We expect above 3.0% GDP growth through the end of the year, carrying significant momentum into 2026. Massive investments in datacenters and Artificial Intelligence capabilities are fueling the unexpectedly strong advance and causing demand surges for certain raw materials and electricity. Productivity has risen and retail sales in aggregate are healthy as higher income consumers are spending, driven by investment gains and prospects of lower taxes. These positives are partially offset by distress in subprime auto loans and low-income household spending flatlining. This is evidence of a K-shaped economy, where one portion of the population is thriving while another is struggling. More balanced growth will be necessary to sustainably advance the expansion.

Alongside some imbalance in the US economy, the labor market is showing signs of weakness. Unemployment claims and jobless rates are at levels consistent with a healthy labor market, however unemployment rates are edging up, labor sentiment is souring, and there is mounting evidence that companies are not adding to their workforce. Data shows hiring plans so far this year are the lowest since 2009, corroborating the recent employment data showing near zero growth in payrolls for several months. In response, the Fed has stepped in to lower rates for the first time in nine months to support their mandate for maximum employment. Chair Powell addressed the situation by indicating that the balance of risks has tipped toward labor market weakness and the FOMC is less concerned about accommodative policy causing price spikes. The Fed is in a difficult position, as historically above-trend growth and government stimulus leads to structurally higher inflation. Thus, we expect the US to continue to endure above-target inflation well into 2026 as price dynamics influenced by monetary policy, deficit spending, and tariff-related pressures accumulate, but do not project a major flareup like we experienced in 2022.

US Stock Markets: Follow the Money

US stock market leadership is likely to remain narrow, where companies that can leverage scale, capital efficiency, and pricing power win. We continue to favor industries and sectors with demonstrable earnings and secular growth, provided valuations are grounded in real earnings:

  • Technology: AI and cloud infrastructure, and productivity tools supported by capex and operating leverage.

  • Energy Consumption: Grid investment, power generation, transmission, thermal and efficiency technologies tied to rising computing demand.

  • Mega-cap companies: the largest companies are price givers, not price takers, which should have outsized benefits in a structurally higher inflation environment.

Corporate profits provide a solid foundation for rising stock markets, and they are set to soar by double digits in 2025 and 2026, with the technology sector expected to report the highest earnings growth rate of all eleven sectors. The combination of Fed easing, the economy exhibiting strong growth, and outstanding corporate profits puts the stock market outlook on very solid fundamentals. High valuations reflect this propitious backdrop, but high valuations alone will not shift the positive narrative.

International: Soft Landing, Lower Valuations

Outside the US, the dominant pattern is slow but steady growth with easing inflation, supported broadly by accommodative monetary policy. The Euro Area is stabilizing with monetary policy easing and selective fiscal stimulus taking effect, with 2025 GDP expected to come in at 1.2% and consumer prices at 2.0%. If these targets are met, they will have navigated a soft landing, which is a strong outcome for financial markets. Chinese technology companies have recently participated in the AI theme but from a much lower valuation starting point. China is a formidable AI player because of their access to cheap power, open-sourced approach to innovation, and ample supply of precious metals. We favor international markets and sectors with three attributes: reasonable valuations, credible policy frameworks, and structural links to technology and manufacturing ecosystems. We are more cautious regarding emerging markets, where natural resource profiles and currency stability can reveal opportunities, but global trade risks and political uncertainties are felt more acutely.

Money Markets Lose Appeal as Bond Yields Shift

As the Fed lowers the Federal Funds Rate, money market yields will decline, making holding cash a less compelling “safe” alternative to investing. There will be ripple effects in the bond market – particularly short duration bonds. We expect short-term yields to move lower alongside additional Fed cuts. Long-term yields will be less impacted by policy, remaining relatively elevated given rising US debt levels. We favor high-quality short-to-intermediate maturity bonds and maintain a strong preference for investment-grade credit over high yield given tight spreads.

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Marietta Investment Partners
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