Economic issues that could be lurking for markets
Review the latest Weekly Headings by CIO Larry Adam.
Key Takeaways
- After weak economic growth in 4Q25, we envision a pickup in 2026
- 3Q25 Results thus far point to a fourth straight quarter of 10%+ EPS growth
- The government shutdown’s economic impact has been limited but may worsen
Ghosts, Goblins, and Gremlins—Oh My! This year has delivered plenty of spooky surprises that could have rattled the economy and financial markets. From sweeping tariff announcements and wild swings in stocks and bonds to worries about a global slowdown and questions around Fed independence, investors have had no shortage of reasons to feel spooked. Fortunately, most of these fears turned out to be more bark than bite. The tariff shock that threatened to end the bull market was quickly shrugged off, with the S&P 500 surging almost 37% from its April 8 lows. Treasury yields, after a few scary wobbles, have dropped significantly year-to-date. But don’t let the calm fool you—there are still a few shadows lurking that could give markets a fright. So, in the spirit of Halloween, let’s take a tour through today’s economic landscape and shine a light on some of the tricky issues that might be hiding in the dark.
- Will Stagflation ‘Haunt’ Again? | Since tariffs were announced, investors have been bracing for higher prices and slower growth. While growth has cooled and inflation pressures have ticked up as tariff costs filter through, a repeat of 1970s-style stagflation looks unlikely. Fed rate cuts combined with a hefty dose of fiscal stimulus from the One Big Beautiful Bill should help revive growth and boost employment in 2026 after a brief slowdown in the fourth quarter. Meanwhile, inflation expectations remain well-anchored, and tariff-driven price increases are expected to be temporary. Even with the unemployment rate edging up to 4.3%, it’s still historically low.
- Is The Fed’s Independence Likely To ‘Vanish? | Challenges to the Fed’s independence have lingered, but markets have largely brushed them aside. Attention now turns to whom President Trump will pick as the next Fed Chair. The five finalists—Waller, Hassett, Bowman, Warsh (current or former Fed Governors), and BlackRock’s Rick Rieder—are all credible candidates expected to uphold the Fed’s independence. Institutional safeguards like staggered terms, the appointment process, and long-standing traditions provide further protection against political pressure. A recent Supreme Court ruling reinforces this by setting a high bar for removing Fed members.
- Is The S&P 500’s Valuation Over The ‘Moon’? | There’s no denying the S&P 500 is trading at lofty levels, with valuations sitting in the 99th percentile on a next-twelve-month basis compared to the past 20 years. With valuations this high only 1% of the time historically, there’s little room for further multiple expansion. For the market to keep climbing, earnings will need to take the lead. So far, the 3Q25 season is off to a strong start—the S&P 500 is on track for its fourth straight quarter of double-digit earnings growth. Plus, roughly 82% of companies are beating EPS estimates, well above the five-year average, which, if sustained, would mark the best quarter since 2Q21.
- How Long Can AI Capex Remain ‘Enchanting’? | AI-related capital spending is surging. Aggregate capex for the four big hyperscalers— Meta, Amazon, Microsoft, and Alphabet—has jumped from $149 billion in 2023 to roughly $430 billion in 2026, nearly tripling over the last few years. While growth may moderate, spending should remain strong. This was reinforced by this week’s mega-cap earnings reports, which confirmed the AI boom is alive and well as demand continues to outpace supply—particularly reflected in upbeat cloud revenue guidance. The data center buildout is also driving additional investment in power infrastructure.
- Is the Government Shutdown Brewing a ‘Scary’ Surprise for Investors? | The prolonged government shutdown is beginning to raise concerns about its economic impact—especially with no clear end in sight. Historically, shutdowns haven’t had a major effect on growth or financial markets, but this one—now 31 days and the second-longest on record—adds another layer of uncertainty the longer it lasts. While furloughed workers will receive back pay, paused activity means some losses may not be fully recovered. Flight delays are already mounting, and SNAP benefits are at risk, potentially deepening the slowdown already evident in the fourth quarter. The biggest market- related casualty: data collection and reporting, making the Fed’s decision-making even more difficult in the weeks ahead.
- Are Cracks In The Credit Markets Foreshadowing ‘Doom’? | Recent cracks in the credit markets have drawn plenty of headlines. Turbulence in private debt, a few high-profile bankruptcies, and reports of fraud at select smaller financial institutions hint at risks lurking beneath the surface. So far, these issues appear idiosyncratic—not signs of broader, systemic problems like those that triggered the Great Financial Crisis. Beyond a few brief wobbles, investment-grade and high-yield spreads remain near multi-decade lows, showing little stress. Still, these incidents are a timely reminder not to get complacent.
- Are US Treasury Buyers ‘Spooked’ By Debt Concerns? | The nation’s worsening fiscal outlook has been well telegraphed, but this year’s rising debt-servicing costs and ballooning debt—now at $38 trillion—have amplified concerns. Despite headlines warning investors might shy away from US debt, there’s no sign of that happening. In fact, foreign holdings of Treasuries just hit a record $9.2 trillion. And while China has been selling, domestic buyers and foreign investors are more than making up the difference as bid-to cover ratios are elevated.
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