Key Highlights
Markets are embracing a soft-landing narrative as central banks pivot toward easing, even as labor markets loosen and growth signals become more uneven beneath the surface.
The Federal Reserve’s rate cuts have supported risk assets, with cooling inflation and rising unemployment giving policymakers room to ease without immediately signaling recession.
U.S. equity leadership remains narrow, as mega-cap stocks continue to dominate while small caps and cyclicals lag, reflecting late-cycle investor preferences.
Global conditions are diverging, with Europe stabilizing faster than expected, Japan navigating a historic policy shift, and emerging markets following increasingly distinct paths.
Cross-market signals point to caution, as record gold prices, a weaker dollar, and improving defensive performance contrast with equity-market optimism.
Central Banks Pivot as Markets Celebrate
As 2025 moves through its final stretch, markets are grappling with a familiar paradox. Asset prices continue to climb, buoyed by easing monetary policy and cooling inflation, even as underlying economic signals grow more uneven. Central banks have begun to pivot, investors are leaning into the soft-landing narrative, and risk assets are behaving as though the cycle’s most difficult phase is already behind us. Beneath the surface, however, labor markets are loosening, growth is diverging across regions, and risk appetite is becoming more selective.
In the United States, the Federal Reserve has now delivered three consecutive 25-basis-point rate cuts, bringing the federal funds target range to 3.50%–3.75%.¹ Recent inflation data has given policymakers room to maneuver. Core consumer prices have slowed to roughly 2.6% year over year, the lowest pace in four years, while the unemployment rate has risen to 4.6%, its highest level since early 2021.² Together, these trends suggest that restrictive policy is finally gaining traction.
Markets have responded enthusiastically. The S&P 500 has pushed to fresh record highs, extending a powerful rally fueled by falling yields and resilient growth data. Third-quarter GDP surprised to the upside, expanding at a 4.3% annualized pace and reinforcing the view that policy easing does not necessarily imply an imminent recession.³ Volatility has eased, financial conditions have loosened, and risk assets have broadly benefited.
A Narrow U.S. Rally
Equity leadership, however, remains concentrated. Large-cap stocks continue to dominate performance, while smaller companies lag meaningfully behind. The Russell 2000 has posted only modest gains, underscoring investors’ ongoing preference for scale, balance-sheet strength, and earnings visibility.⁴ Periodic bursts of small-cap outperformance have appeared when expectations for rate cuts intensified, but those rotations have faded quickly.
Sector performance reflects a late-cycle tension. Growth stocks have reasserted leadership in recent weeks, but defensive areas have quietly gained traction. Healthcare, utilities, and consumer staples have outperformed during bouts of market uncertainty, suggesting that investors are hedging even as indexes grind higher. Credit spreads have tightened modestly, though enthusiasm for lower-quality risk remains measured rather than exuberant.
For now, U.S. markets appear to be pricing a near-ideal scenario: inflation continues to cool, growth remains intact, and the Fed eases policy without sacrificing credibility. History suggests that such equilibrium tends to be temporary.
Europe Finds Its Footing
Europe enters the final stretch of the year in better shape than many anticipated. After flirting with stagnation earlier in 2025, economic activity has stabilized. Purchasing-manager surveys have moved back into expansion territory, inflation is hovering near the European Central Bank’s 2% target, and policymakers have signaled that the tightening phase is firmly in the rearview mirror.⁵
