Edward Jones Quarterly Market Outlook: Fourth Quarter 2025
Concerns have been building around the health of the U.S. economy as the labor market slows. However, we are seeing signs
of resilience in the latest data, and activity should rebound through 2026, helped by lower interest rates, tax cuts and a fading
drag from trade policy.
Mixed signals
The U.S. economy continues to adjust to this year’s large changes in immigration, trade and fiscal policy.
Against this backdrop, growth rates have slowed, with GDP at a 1.6% pace over the first half of 2025,
down from 2.8% last year.1 This slowdown has caused concerns that the economy could be vulnerable
to a downturn, especially with hiring having slowed. However, we see few signs in the latest activity data
that the economy is set to stall, with consumer spending reaccelerating into the third quarter.1 Still,
growth over the next few quarters is likely to remain bumpy as firms and households continue to adapt
to higher tariff rates and navigate the recent government shutdown.
Creeping inflation pressures
The impact of tariffs can be seen in U.S. inflation data, with rising goods prices helping push measures
of core price growth back above 3% year over year.1 However, this acceleration has been milder than
feared, seemingly helped by firms reworking supply chains to limit tariff exposure, drawing down
inventories of goods imported before tariff increases and absorbing some costs into their margins
to avoid large price hikes. Some of these workarounds are likely temporary, and we should see a greater
pass-through of tariffs into consumer price inflation over the coming months. However, this drip feed
of price hikes will limit the impact on inflation rates, especially with slowing in other important aspects
of the Consumer Price Index basket, such as shelter.1
Fed shows its hand
The Fed waited through much of 2025 as it evaluated how policy changes would affect the U.S.
economy.2 However, it cut interest rates by 0.25% in September in response to weaker labor market
dynamics.3 This pivot, even with inflation well above its 2% target,1 suggests the Fed is prepared to support
the economy if it believes downside risks are rising. Consistent with this proactive mindset, we expect one
to two more interest rate cuts both this year and next, which would effectively eliminate the drag of high
interest rates on the economy. This shift in monetary policy settings, alongside a potential boost from
tax cuts and a fading drag from this year’s tariff increases, should contribute to a reacceleration in growth
through 2026.
