Q3 2025 Market Outlook

MARKET OUTLOOK

The striking disconnect between Main Street and Wall Street continues, mimicking the extreme polarization in our politics and society. As tariffs started to bite in Q2 and Q3 this year and the U.S. economy started to show signs of PTSD (President Trump Stress Disorder), equity markets around the world put in new highs. The S&P 500 has reached 28 new all-time highs so far in 2025, while conversely the U.S. labor market is weakening, inflation remains stubbornly elevated, economic uncertainty is flashing worry signals, and the leading economic index has contracted steadily dating back to mid-2022. Add to all this: rising U.S. national debt and government shutdown, the Federal Reserve’s sacred independence is under attack, and the global world order of mutually beneficial trade agreements and cooperation has been shattered by the current U.S. administration, creating global economic havoc. Yet, equities are hitting new highs. What in the world is going on?

There are several contributing factors to explain the inconsistency between weakening economic data with strong equity performance. For each of these, there are also reasons to believe the good times might not last. First, earnings in the U.S. and elsewhere remain buoyant, however, these earnings are concentrated in fewer and fewer companies, so with growing signs of spreading economic weakness, the earnings of these highflyers are increasingly vulnerable. Second, the market is jubilant due to tariff rates being dialed back from what was originally threatened. This, however, is maximum irrational exuberance. It’s analogous to expecting your house to be destroyed in a storm and then being thrilled it only tore your roof off. Finally, the prospect for lower interest rates, particularly in the U.S. is contributing to positive sentiment and fueling animal spirits to propel equities higher. One can argue this point too is irrational because lower interest rates reflect weakening economic conditions, and it’s quite possible the Federal Reserve’s policy committee is behind the curve in this current easing cycle and has not done enough to stop weakening business conditions.

Looking out to the rest of 2025 and into next year, market volatility is likely to increase. Although much of the uncertainty has subsided with respect to global tariffs, the average import tax rate the U.S. is now imposing has nonetheless more than tripled this year. Furthermore, as the U.S. economy cools, American employers are more likely to shed labor in this cycle. This contrasts with the labor hoarding that occurred during the last slowdown, as employers had fresh memories of labor shortages during the surge in economic activity following the pandemic. Currently, there is a growing pool of idle workers so employers are increasingly more inclined to reduce headcounts with the knowledge positions will be relatively easy to fill when conditions begin to improve. In the interim, however, unemployment is likely to accelerate higher, which will weigh on sentiment and consumption. The rest of the world will certainly be impacted by a slowing U.S. economy while simultaneously dealing with this trade war. However, global opportunities exist, and we continue to research these to protect and enhance clients’ portfolios. For example, Germany’s revamp of fiscal rules known as the “debt brake” is already leading to regional investment and economic stimulus. Likewise, Europe’s infrastructure spending is stimulating the region’s economies. Japan’s exit from decades of deflation is attracting capital inflows and is also an area of interest for our research team. On the fixed-income side, we are currently researching options to diversify our bond holdings outside of the U.S.  All this to say, given the current environment of extreme disconnect and dichotomies, it’s more important than ever to maintain an objective investment strategy. Zevin Asset Management’s investment team continues to combine a macroeconomic top-down lens with rigorous bottom-up analysis to insulate clients’ portfolios from downside risk.

Impact Update

This quarter we engaged The Home Depot on data privacy and immigration enforcement risks, co-filed a resolution at Microsoft, along with 59 other investors, challenging more clarity on the efficacy of their human rights due diligence processes, defended climate policy at the EPA, supported fair employment reforms, and opposed the rollback of power plant standards. See more here: https://www.zevin.com/news-views/q3-2025-impact-update.

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