End of Year Market Outlook: Navigating Late-Cycle Tensions

Authored by: Chris Vidler, CFP^®, CIMA^®, October 2025

As we head into the final months of the year, markets continue to reflect a complex and often contradictory economic landscape. Despite signs of slowing growth and labor market softness, equity markets have remained resilient—buoyed by investor optimism, AI-driven investment, and expectations for continued monetary easing.

Economic Overview

The U.S. economy is showing clear signs of late-cycle behavior. GDP growth held steady in Q3 following a slowdown earlier in the year, supported by strong business investment in technology and moderate consumer spending. However, labor market data has softened, with hiring demand weakening and payroll growth revisions pointing to a more fragile employment backdrop.

Inflation remains a concern, particularly as tariffs continue to ripple through supply chains. While the Federal Reserve resumed rate cuts in September and signaled more to come, its dual mandate is being tested. Inflation remains above target, but employment concerns are increasingly taking precedence.

Looking ahead, fiscal stimulus from the One Big Beautiful Bill Act and ongoing AI infrastructure investment are expected to provide support in 2026. However, these tailwinds may fade beyond the next 12 months, limiting the potential for early-cycle style growth.

What Clients Are Asking

Why Are Markets Rising Even When the Economy Feels Uncertain?

Markets are forward-looking. Investors are anticipating lower interest rates, government stimulus, and continued investment in AI and infrastructure—all of which could support growth in 2026. That’s why stocks have remained strong despite mixed economic data.

Why Haven’t Tariffs Caused a Spike in Inflation or a Recession?

While tariffs have added pressure to goods prices—especially in import-heavy categories like appliances, apparel, and personal care—other areas such as housing and services have seen disinflation. The labor market, though softening, has remained stable enough to support consumer spending.

That said, the full impact of tariffs may still be unfolding. Businesses are adjusting supply chains and pricing strategies, and we’ll be watching closely through the holiday season to see how consumer behavior responds. The risk of delayed inflationary effects or margin pressure remains, especially for retailers and manufacturers.

What’s Going On With Jobs?

Hiring has slowed, but layoffs remain low. This suggests companies are cautious but not panicking. Wage growth has helped support spending, though we’re watching closely to see how holiday shopping trends unfold. The labor market is still a key factor in the Fed’s decision-making, and any significant deterioration could influence future rate cuts.

Equity Markets

Equities have continued their upward trajectory, with the S&P 500 reaching new highs in Q3 and posting a year-to-date gain of 13%. Market leadership remains narrow, driven by mid-phase sectors like Information Technology and Communication Services, which have benefited from strong earnings growth and AI momentum.

Valuations, however, are stretched. The S&P 500 trades near the 97th percentile historically, and sector dispersion is unusually low, suggesting investor complacency may be setting in. As tariff impacts continue to unfold, we expect greater divergence across sectors, making selectivity increasingly important.

We continue to favor sectors with durable secular growth drivers:

• Technology: Supported by robust AI-related capex and strong earnings growth expectations through 2026.
• Utilities: Benefiting from rising electricity demand tied to AI data centers, EV adoption, and industrial reshoring. The sector offers strong earnings visibility and defensive characteristics in a late-cycle environment.
• Health Care: Offering defensive growth and trading at a significant valuation discount despite solid fundamentals.

Global Outlook

International markets remain mixed. Asia, particularly EM Asia, is showing signs of improvement, supported by stimulative monetary policy and a rebound in high-tech manufacturing. Europe, on the other hand, continues to struggle with manufacturing weakness, political uncertainty, and elevated valuations.

We maintain an overweight to U.S. equities in portfolios, where earnings growth and sector composition remain more favorable.

Final Thoughts

As we move through the remainder of 2025, we continue to monitor the balance between near-term risks and longer-term opportunities. Market resilience has been impressive, but we believe selectivity and diversification remain key. We’ll be watching closely for signs of consumer behavior shifts, labor market changes, and how businesses respond to evolving trade dynamics.

Additional Resource

For a more in-depth look at markets from Raymond James’ Investment Strategy Committee, we encourage you to read the October edition of Investment Strategy Quarterly.

The opinions expressed are those of Christopher Vidler and Eric Van Der Hyde as of the date stated and are subject to change. There is no guarantee that the forecasts made will come to pass. This material does not constitute investment advice and is not intended as an endorsement of any specific investment or security. Information and opinions are derived from proprietary and non-proprietary sources. Opinions are not necessarily those of Raymond James.
Please remember that all investments carry some level of risk, including the potential loss of principal invested. Diversification and strategic asset allocation do not assure profit or protect against loss.
The S&P 500 is an unmanaged index of 500 widely held stocks that is generally considered representative of the U.S. stock market. Keep in mind that individuals cannot invest directly in any index, and index performance does not include transaction costs or other fees, which will affect actual investment performance. Individual investor's results will vary.
The products and services of technology and AI companies may be subject to severe competition and rapid obsolescence, and their stocks may be subject to greater price fluctuations. International investing involves special risks, including currency fluctuations, differing financial accounting standards, and possible political and economic volatility. Investing in emerging markets can be riskier than investing in well-established foreign markets. Past performance may not be indicative of future results. The information has been obtained from sources considered to be reliable, but we do not guarantee that the foregoing material is accurate or complete.