Q4 2025 Market View – The Economy Keeps Rolling

Introduction 

As we start a new calendar quarter, we are reflecting on recent market developments and the status of the economy heading into year-end. The economy keeps rolling on with economic data holding up and new market drivers emerging, helping to drive our investment decision-making and portfolio construction for clients. In this edition of our quarterly newsletter, we cover the following:

• Q3 in Review: Strong Summer Months
• The Federal Reserve: Rate Cuts are Ramping Up
• The AI Revolution: Selectivity is Key
• The US Consumer and Economy: Standing Firm
• Cryptocurrencies: Gaining Traction
• Year-End Planning Considerations: Steps to Help Finish the Year Strong

Q3 in Review: Strong Summer Months

Anyone who sold in May and went away this Summer would have missed significant upside as the market continued to recover from April lows. The S&P 500 and Nasdaq notched a number of new record highs throughout the 3^rd quarter, and the Russell 2000 hit its first record since 2021. As we expected in our Q3 newsletter, the market mostly returned to “regular programming” as Wall Street shifted its focus to macroeconomic drivers, such as corporate earnings, economic data, and Federal Reserve actions, rather than the myopic attention to tariffs and trade deals that characterized the first half of the year.

We believe investors will continue to focus on company-specific factors, with an emphasis on earnings strength and cash flow as we head into year-end. This setup lends itself well to stock selection and our investment management style. Being selective among equities has had benefits year-to-date, and we believe this dynamic will continue into 2026.

Rate Cuts are Here

At the September 17^th Federal Open Market Committee (FOMC) meeting, the Federal Reserve decided to cut interest rates for the first time in a year. The Fed moved its interest rate target down 0.25% to a new target range of 4.0%-4.25%. The market has been anticipating interest rate cuts for quite some time, and now that they’re here, we’ll discuss why the Fed made this move, what our expectations are for future rate cuts, and (most importantly) what this means for us as investors.

For an in-depth discussion of this topic, see our latest Rate Cut Podcast on YouTube.

Why Cut Rates Now?

The Federal Reserve is now paying closer attention to the employment side of its mandate. As a reminder, the Fed’s mandate is to help 1) maintain price stability (inflation) and 2) promote maximum employment. Inflation remains above the Fed’s 2% inflation target, but the job market has started to show some weakness. Rather than risk broader job losses, the Fed aims to support job creation by reducing interest rates. Lower interest rates reduce debt burdens for companies, allowing more dollars to flow to growth-oriented initiatives and hiring, and fewer dollars to flow to paying debt interest.

While the Fed is responding to higher uncertainty in the job market, the employment situation isn’t yet raising red flags for us. It appears that rather than laying off employees, companies are simply pausing hiring, creating modest unemployment, but not yet sending recession signals. Between tariffs, regulatory changes, and the influence of Artificial Intelligence, employers are contending with numerous new variables this year, so a slowdown in hiring makes some sense.

Where are We Headed?

At the recent Fed meeting, the FOMC also released its Summary of Economic Projections, indicating forward interest rate guidance. The committee was fairly split, but consensus shows an additional 0.5% of rate cuts this year. Expectations are widespread for 2026, but further rate cuts are likely to happen early in the year. The Fed will remain data-dependent when it comes to balancing inflation and unemployment, but it is likely the market sees 0.5%-1.0% of additional rate cuts in the next six months.

What Does This Mean for Us as Investors?

Money Markets – Most immediately, lower rates translate to lower cash yields in money market funds and savings accounts. Over the past few years, cash wasn’t a terrible place to park capital, with money market rates yielding over 4%. With the Fed’s most recent rate cut, these interest rates have mostly fallen below 4% and will continue to decline in lockstep with further rate cuts. Lower cash yields will likely push many investors into equities and bonds in search of higher returns.

Lower Borrowing Rates – Lower Fed rates are likely to bring broader borrowing rates down. Lines of credit for businesses and consumers are typically floating-rate loans, so these interest payments will fall immediately. Fixed-rate borrowing is also likely to offer lower interest rates at initiation, making vehicles like mortgages and term loans more attractive. Businesses that rely on debt to fund operations will have more cash to allocate to growth initiatives. Consumers are also likely to have more buying power for discretionary purchases and investments.

Investment Ideas – As mentioned, companies with higher debt burdens will be relieved by lower interest rates. This is more typical of small and mid-sized companies (SMid Caps). We believe this equity rally, which has recently been more concentrated in larger companies, will broaden out to SMid companies in the coming months. Interest rate-sensitive sectors, such as investment banking, housing, real estate, mergers & acquisitions, industrials, and materials, stand to benefit. Additionally, non-yielding assets become more attractive as interest rates decline. Gold, cryptocurrencies, and certain commodities are likely to benefit. We believe it is still very important to be selective in these sectors and among SMid caps, so we believe active investment management and selective stock picking will be important in this new environment.  

The AI Revolution: A Capex Explosion but a Profitability Question

A Capex Explosion

Artificial Intelligence (AI) remains the hottest industry in the marketplace for good reason – global capital expenditures for AI infrastructure are forecast to reach approximately $1.5 trillion in 2025 and to exceed $2 trillion in 2026. This buildout is massive, with implications for several sectors. As the year has progressed, data center capital expenditure (capex) budgets have continued to balloon, demonstrating that we are still in the early stages of the AI revolution.

Data center spending has significantly boosted revenues for chip designers, semiconductor fabs, power generation companies, and energy producers. We continue to focus our AI investment on companies in these industries, as they benefit from the massive capex expansion in the marketplace. Power generation, in particular, is expected to experience a significant increase in demand from AI activities. As a result, we are very bullish on this space and view its recurring revenue as resilient compared to other AI-adjacent industries. Revenue and profit are more immediate from the current capex buildout in the power generation space, so we feel confident in allocating capital here.

When it comes to AI software, we remain very selective in our exposure, as many companies are still spending far more on data center capacity than they are generating from AI software and applications. Software companies are beginning to benefit from AI revenues, but a strong return on investment (ROI) is yet to be seen for many.

A Profitability Question

As the industry continues to evolve, AI has attracted numerous critics, many of whom are likening this expansion to the late 1990s dot-com bubble. For the most part, we don’t believe these comments are grounded in fundamentals, but we are wary of the unprofitable businesses in the space. Companies, such as OpenAI (ChatGPT), are spending enormous amounts of money on data center infrastructure without yet generating enough revenue (let alone profit) to offset their expenditures. OpenAI is a private company, so financial figures aren’t regularly reported; however, estimates indicate that the company will generate $13 billion in revenue this year. Meanwhile, the company has recently signed a deal with Oracle to invest $300 billion in data center capacity over the next five years. Additionally, Sam Altman, CEO of OpenAI, has discussed plans for over $1 trillion in investment to support OpenAI’s initiatives. It doesn’t take a PhD in mathematics to see that $13 Bn in revenue is far from supporting $300 Bn in spending, let alone $1 trillion. To fund this kind of expansion, OpenAI will need to raise a substantial amount of money from equity and debt investors. Although revenues are expected to ramp up over the coming years, the payback period for this type of investment is long. This situation isn’t exclusive to OpenAI; therefore, we are wary of investing in companies that have yet to see an ROI in their respective segment of the AI industry. As mentioned, we prefer to invest in companies that are currently generating profits rather than backing companies under significant financial stress without a clear path to profitability. This is why we believe it is critical to be selective in any sector, and particularly when it comes to artificial intelligence.

Consumer Resilience

As goes the US Consumer, so goes the US Economy. Without consumer spending, business earnings dry up, as do tax receipts. This is why the US consumer is closely monitored when concerns arise about the broader economy. To take a look at the state of the consumer, we’ll briefly cover some of the most relevant data points available. The US consumer has remained resilient, despite inflation or tariffs:

• The labor market remains balanced, in a “low-hiring, low-firing” environment.
  • A market in equilibrium is a good thing; however, low hiring rates have led to rising unemployment among recent college graduates, and it doesn’t provide a backstop if there is an uptick in layoffs.
  • Initial Jobless Claims have remained steady for the last couple of years and have trended lower over the short term.
  • Continuing Jobless Claims have normalized post-Covid, but remain low relative to the 2010s.
  • Job Openings have fallen back down to pre-Covid levels, but not below.
    
• Debt levels have increased since pre-Covid, however, real wage growth has outpaced this increase so that debt service payments make up a lower percentage of disposable personal income than they did when rates were near zero.
  
• Q2 GDP was revised up to a robust 3.8% annualized growth, with a large portion of that driven by consumer spending. With consumer debt levels still “normal”, this is seen as healthy and reflective of a strong consumer.
  
• Despite broad resilience, consumers are increasingly “trading down” with stores such as Walmart capturing more market share from traditionally higher-end shoppers.

One of the most significant sources of uncertainty in employment data this year has been the Bureau of Labor Statistics’ (BLS) ability to report timely, accurate data. Revisions to estimates have been abnormally high over the past year, with outsized adjustments coming well after initial reports. For example, in September, the BLS revised 2024 employment numbers down by over 900k jobs.

Despite this data-linked uncertainty, we would consider the consumer and broader economy to remain in “just fine” territory. The Federal Reserve has refocused some of its attention on the labor market, but in our view, employment hasn’t deteriorated to the point of concern.

In an economy heavily focused on AI development—covering data centers, chips, electricity, and software—consumers play a crucial role in funding these investments’ returns. As noted, AI applications are exploring profitability strategies, and it is promising that US consumers remain well-positioned to support this expansion.

Another Important Quarter for Cryptocurrencies

Putting aside, for a moment, the divergence in last quarter’s returns between Bitcoin (+1.8%) and Ether (the token that runs the Ethereum blockchain, +60%), it was an important quarter for both cryptocurrencies in Washington.

As we covered in our previous newsletter, the GENIUS Act was passed, which provided a framework for stablecoin legislation. Congress built upon that framework in Q3, when the House passed the CLARITY Act. The CLARITY Act, also known as the “Digital Asset Market Clarity Act,” provides just that: regulatory clarity to crypto platforms. While the bill must now pass the Senate, it will ultimately establish guardrails for firms operating in this space. Finally, the question of regulation is being resolved, as the CFTC is the proposed agency in charge, with the SEC left in charge of only “investment contract assets”, such as crypto ETFs. We’ve discussed the importance of this decision in the past, but being classified as a commodity allows crypto holders and platforms to operate with much lighter regulatory oversight than if they were categorized under the SEC as securities.

The bill won’t likely be finalized until the first half of 2026, as the Senate will be focused on the looming possibility of a government shutdown, and has a round of debate/edits to the bill itself. We believe the CLARITY Act will pass, in one form or another, because crypto has finally found a middle ground with voters and legislators, receiving bipartisan support.

We recently published a podcast discussing the US federal and state initiatives to establish “crypto reserves”. While the federal plan received the most attention, it still only serves as a stockpile of crypto assets acquired by the government through normal operations, such as those seized from criminal organizations. The federal government remains unlikely to purchase Bitcoin or Ether directly. Perhaps more interestingly, state reserves have popped up in New Hampshire, Texas, and Arizona. Because Texas and New Hampshire both run budget surpluses, they could actively purchase crypto assets in the open market, rather than passively accumulating them as the federal government does.

Revisiting the divergence in cryptocurrencies, Ether recently surpassed Bitcoin in year-to-date returns. Ether surpassed Bitcoin in Q3 due to legislation surrounding stablecoins, most of which transact on the Ethereum blockchain.

The rise of stablecoins and tokenized assets enhances Ethereum’s value proposition. Ethereum enables the majority of public blockchain-based financial transactions, and as of September 28th, nearly $5 billion worth of US Treasuries have been “tokenized” or digitized on the blockchain. Tokenization enables broader access to US Government debt, particularly for individuals who lack access to US capital markets.

Value of tokenized US Treasury Securities on the Ethereum Blockchain

In our view, cryptocurrencies (particularly Bitcoin and Ethereum) are best regarded as alternative assets. The past couple of years have seen heightened interest in Gold and Silver as alternative assets, and we view cryptocurrencies as part of the same investment universe. We continue to believe that holding a modest position in cryptocurrencies like Bitcoin and Ether will provide value as diversifiers and return generators as the industry continues to mature. 

Heading into Year-End: Financial Planning Considerations

As we head into year-end, it is worth mentioning a few financial planning considerations to help close out the year strong and prepare for a good start to 2026. A few notable considerations are:

• If you have not completed your required minimum distributions (RMDs) for your IRA accounts yet this year, work with your advisor to ensure this is completed
• Be sure to complete any philanthropic giving and maintain records for tax write-offs for the 2025 tax year
• If you are still contributing to tax-advantaged accounts: 2025 limits are $23,500 for 401(k)s (plus $7,500 catch-up for those 50+) and $7,000 for traditional and Roth IRAs (plus $1,000 catch-up for those 50+)
• If you anticipate being in a lower tax bracket for 2025 and have traditional IRA assets, discuss a potential Roth conversion with your advisor
• Evaluate your volatility tolerance and have a conversation with your advisor if you would like to make any changes to your investment profile
• Evaluate your cash flow projections and budget for anticipated expenses in the coming year
• Have a conversation with your advisor if you anticipate any major purchases or have additional funds that you expect to invest in the next year

Conclusion

As we head into year-end, we remain confident in the current state of the economy and the trajectory of corporate earnings, which should continue to support markets. The Federal Reserve and rate cuts are a hot-button topic, but regardless of the timing of further monetary easing, rate cuts will remain an ongoing driver for Wall Street in the coming quarters. Easier monetary policy will make debt more affordable and enable companies to drive earnings growth. AI continues to be a megatrend we are fond of, but it is important to be selective when allocating investment dollars in this space. As we head toward 2026, we feel confident about our positioning and will continue to adjust as necessary in response to evolving macroeconomic developments. Planning will also be top-of-mind heading into year-end, and if you have any specific considerations, do not hesitate to reach out to your advisor or a member of our team. From all of us at Beck Capital, we wish you and your family the best as we close out 2025!

Disclosures

This material represents an assessment of the market and economic environment at a specific point in time and is not intended to be a forecast of future events, or a guarantee of future results. Forward-looking statements are subject to certain risks and uncertainties. Actual results, performance, or achievements may differ materially from those expressed or implied. Information is based on data gathered from what we believe are reliable sources. It is not guaranteed as to accuracy, does not purport to be complete and is not intended to be used as a primary basis for investment decisions. It should also not be construed as advice meeting the particular investment needs of any investor. Past performance does not guarantee future results.

Indices are unmanaged and investors cannot invest directly in an index. Unless otherwise noted, performance of indices do not account for any fees, commissions or other expenses that would be incurred.  Returns do not include reinvested dividends.

The Standard & Poor’s 500 (S&P 500) is an unmanaged group of securities considered to be representative of the stock market in general.  It is a market value weighted index with each stock’s weight in the index proportionate to its market value.

The Nasdaq Composite Index is a market-capitalization weighted index of the more than 3,000 common equities listed on the Nasdaq stock exchange. The types of securities in the index include American depositary receipts, common stocks, real estate investment trusts (REITs) and tracking stocks. The index includes all Nasdaq listed stocks that are not derivatives, preferred shares, funds, exchange-traded funds (ETFs) or debentures.

The Russell 2000 Index is an unmanaged index that measures the performance of the small-cap segment of the U.S. equity universe.

Small capitalization securities involve greater issuer risk than larger capitalization securities, and the markets for such securities may be more volatile and less liquid.  Specifically, small capitalization companies may be subject to more volatile market movements than securities of larger, more established companies, both because the securities typically are traded in lower volume and because the issuers typically are more subject to changes in earnings and prospects.

Cryptocurrency is a digital representation of value that functions as a medium of exchange, a unit of account, or a store of value, but it does not have legal tender status. Cryptocurrencies are sometimes exchanged for U.S. dollars or other currencies around the world, but they are not generally backed or supported by any government or central bank. Their value is completely derived by market forces of supply and demand, and they are more volatile than traditional currencies. Cryptocurrencies are not covered by either FDIC or SIPC insurance. Legislative and regulatory changes or actions at the state, federal, or international level may adversely affect the use, transfer, exchange, and value of cryptocurrency.

Purchasing cryptocurrencies comes with a number of risks, including volatile market price swings or flash crashes, market manipulation, and cybersecurity risks. In addition, cryptocurrency markets and exchanges are not regulated with the same controls or customer protections available in equity, option, futures, or foreign exchange investing.