Market Perspective - Fall 2025

Guide to the markets

Sifting through financial information online is becoming quite onerous with so many opinions out there, so we've consolidated what we believe to be informative and insightful into one Market Commentary.

Over the next year, the U.S. economy (the largest economy in the world and – still – our most significant trading partner) appears poised for a staggered path over the next year: a modest acceleration in the short term followed by renewed deceleration. Headwinds such as tariff uncertainty, reduced fiscal outlays, and a sharp decline in immigration are already weighing on momentum, though the full brunt may not hit until late 2025.

A temporary boost is expected in early 2026, driven by stimulus in the form of sizable income tax refunds under the recently passed One Big Beautiful Bill Act (OBBBA). However, that lift is likely to fade by mid-year, as structural drags — including weaker global trade dynamics and diminished labor force growth — reassert themselves.

Despite the expected slowdown in payroll growth, the U.S. labor market may not see a significant rise in unemployment. This is largely due to a collapse in immigration, which constrains labor supply. With net immigration potentially falling below 250,000 annually — a fraction of pre-pandemic norms — the labor force is essentially flatlining. As a result, the unemployment rate is projected to stabilize around 4.5%, even as hiring slows. Wage pressures may remain contained, as recession fears temper worker demands despite the tight labor backdrop.

Inflation, meanwhile, is set to reaccelerate into 2026 due to rising tariffs and a surge in consumer demand from tax refunds. Headline CPI could approach 3.7% by year-end, with the Fed’s preferred inflation gauge also exceeding target. Although the Federal Reserve has resumed cutting interest rates, its actions remain cautious. The central bank is walking a fine line — easing to support growth without appearing overly responsive to political pressures, especially given inflation's persistence above its 2% target. Once rates reach the 3–3.25% range, policymakers may pause until either inflation cools decisively or economic weakness deepens.

From an investment perspective, market imbalances remain a concern. Mega-cap U.S. equities, especially in tech and AI, continue to command premium valuations, with the top 10 S&P 500 firms comprising roughly 40% of the index’s market capitalization. Long-term investors may consider trimming these exposures in favor of international equities, which still trade at significant valuation discounts and may gain further from a weakening dollar.

Bond yields appear fair, suggesting a neutral stance, while exempt market or alternative assets — including private credit, real assets, and infrastructure — offer potential diversification and return enhancement. As we enter the final stretch of 2025, many portfolios are likely drifting towards an overweight in market risk; rebalancing and broadening exposures could be prudent given the macroeconomic crosswinds ahead.

From JP Morgan’s Dr. David Kelly, Chief Strategist at J.P. Morgan Asset Management:

This market commentary is intended to give you a brief update on our views on the economic and market outlook.

The economy should slow down, speed up and then slow down again over the next year.

The collective impact of tariffs and tariff uncertainty, federal government cutbacks, and declining immigration, appear to be slowing the U.S. economy, although most of the negative effects should be delayed until the fourth quarter. Looking past swings in imports and inventories, we expect real final sales of domestic product to rise from 1.9% annualized growth in the first half of the year to 2.5% in the third quarter, but then slide to less than 0.5% growth in the fourth.

However, passage of the One Big Beautiful Bill Act (OBBBA) should inject stimulus into the economy early in 2026 via very strong income tax refunds. This should boost economic activity in the first half of 2026. Thereafter, we expect growth to slow again in the second half of 2026 as the refund effect fades, and the effects of higher tariffs and lower immigration linger.

Lower immigration should limit the increase unemployment caused by a slow economy.

A slower-growing U.S. economy will mean slower job growth, with average monthly payroll gains potentially falling below 50,000 for the rest of 2025 before reaccelerating slightly in 2026. However, the impact of this slow job growth on the unemployment rate should be suppressed by a sharp decline in immigration. Illegal immigration has fallen almost to zero and deportations have increased. Data through May also suggested a decline in new immigrant visas issued. Data on both deportations and legal immigration are very spotty but overall, JP Morgan believes that net immigration could fall to less than 250,000 per year, down from an average of over 1,000,000 per year in the two decades before the pandemic. This implies a flat or declining labor force, limiting the increase in the unemployment rate to just 4.5% by the fourth quarter of this year and then holding at the level in early 2026. We expect that wage growth will remain steady as recession worries counteract tight labor markets in wage negotiations.

Inflation should rise over the next year due to tariffs and fiscal stimulus but fall later in 2026.

The impact of tariffs on inflation is beginning to be felt, with year-over-year CPI inflation rising to 2.9% in August. We believe that tariff impacts on inflation will increase in coming months as retailers apply mark ups to new inventories. By the fourth quarter, we expect inflation will have risen to 3.7%, year-over-year, according to the consumer price index and about 3.4% according to the personal consumption deflator which is the Fed’s preferred measure. This inflation could be sustained into early 2026 due to the effect of higher income tax refunds on consumer spending, with year-over-year inflation potentially peaking in the second quarter of 2026. However, as the economy slows again in the second half of 2026, inflation should gradually drift down towards the Fed’s 2% target.

The Fed may cut only once this year due to elevated inflation but could cut more in late 2026.

In September, the Federal Reserve resumed its easing cycle, cutting the federal funds rate by 0.25% to a range of 4.00% to 4.25%. We expect them to cut twice more in the fourth quarter of this year and deliver two further cuts in the first half of 2026. In doing so, they will continue to point to slowing employment growth and assert that monetary policy remains mildly restrictive since they regard the “neutral” rate of interest as being somewhere close to 3.0%.

However, in implementing this gradual easing they may well be seen as caving to political pressure since their own Summary of Economic Projections shows that, by the end of 2025, they expect the inflation rate to be further above their 2% target than the unemployment rate will be relative to their 4.2% long-run expectation. Once the federal funds rate has been cut to a range of 3.00%-3.25% we expect the Fed to go back on hold until the economy sees some further serious economic weakness or inflation dips below 2.0%, neither of which we anticipate before 2027.

Mega-cap U.S. equities still look expensive relative to the rest of the market.

One glaring anomaly, entering 2026, was the huge outperformance of the largest companies in the S&P 500, both in terms of earnings and equity market gains. Much of this reflects the dominant market position of U.S. tech firms and a surge of interest in and investment spending on artificial intelligence. That being said, in recent years, the stock market outperformance of these companies has generally outpaced their outperformance in earnings, leaving their valuations at high levels relative to the rest of the market.

Despite huge market volatility in the spring, this anomaly persists today with the top 10 companies in the S&P 500 representing roughly 40% of the market value of the entire index. For long-term investors, it may make sense to increase allocations to other areas of financial markets in case, economic, geopolitical or idiosyncratic forces turns a mega-cap U.S. equity boom into a bust.

Bond yields look close to fair value arguing for a neutral allocation.

A resumption of Fed easing and signs of a weaker labor market have allowed long-term interest rates to drift down in recent months, even as inflation has gradually increased. From here, however, we expect long-term rates to remain range-bound as the effects of a continued economic slowdown are counteracted by increased Treasury issuance in the wake of the passage of the OBBBA and tariffrelated inflation.

For investors, there is not a strong argument for making a bet either on duration or credit in bonds. Even if the economy weakens further, any rally in bonds should be limited by rising federal borrowing and stubborn inflation. Moreover, at least in the short run, we expect the economy to avoid recession, partially justifying today’s tight credit spreads. However, we do think that roughly normal bond allocations make sense in this environment – historically, today’s close-to-4.3% yield on the Bloomberg bond index has been associated with close to 4.3% annual returns over a 5-year period. Provided inflation fades late next year, these yields and potential returns seem reasonable.

The dollar should drift down due to slow U.S. growth and portfolio rebalancing.

The dollar has fallen sharply since the start of the year. This may, in part, reflect its high valuation going into the year and America’s chronic trade deficits. However, it could also be the result of questions among both U.S. and international investors about their concentration in U.S. assets and the policies of the new U.S. Administration.

A key driver of the dollar in the long run has been the higher interest rates offered on U.S. debt compared to other developed market economies. As the Federal Reserve cuts more aggressively than other central banks in the months ahead we believe this narrowing in interest rate spreads, combined with a still high trade deficit, should lead to a further dollar decline.

International equities still look cheap relative to the U.S. market.

So far in 2025, international stocks have sharply outperformed their U.S. counterparts, as local currency outperformance has been amplified by the impact of a falling dollar. Given this dramatic outperformance, many investors may be wondering if they have missed the boat in increasing international allocations. We don’t believe so - for three reasons: First, as we show in the chart, even after a 2025 rally, non-U.S. stocks still carry much lower valuations than their U.S. counterparts. Second, the dollar remains very over-valued given our trade fundamentals and we expect it to fall in the years to come, and, third, given the outperformance of U.S. stocks over the last decade, most U.S. investors are likely very underweight international stocks relative to an appropriate long-term asset allocation.

Alternative investments can provide total return, income and diversification.

The last few years have seen very strong stock market gains. However, that very outperformance could limit future returns. Moreover, the traditional role that bonds play in zagging when stocks zig has been challenged in recent years by higher inflation which negatively impacts bothstocks and bonds. In this environment, many investors are exploring alternative assets, such as private equity, private credit, infrastructure and real estate.

These assets are all quite different – some provide strong longrun returns, some generate strong current income and some act as good diversifiers to publiclytraded stocks and bonds. Many of them are quite illiquid and so should be thought of only as longterm investments and the performance of different assets within the alternatives space has varied considerably depending on the manager. Still, adding alternatives to a traditional stock-bond portfolio may make sense for many investors and we expect this area of financial markets to continue to grow in the years ahead.

Portfolio drift may have left many investors overweight the most expensive assets.

Finally, it is to consider not just economic fundamentals and valuations but how investors are positioned. The last five or six years, while filled with dramatic and difficult national and global events, have also, on balance, seen very strong investment gains. However, these gains have been by no means even, and, if investors have not been disciplined in rebalancing their portfolios, they have not just grown in recent years – they have grown more risky.

Indeed, as we show in the chart above, a portfolio which was 60% invested in stocks and 40% invested in bonds at the start of 2019 would today have over a 70% allocation to stocks, assuming that dividends were reinvested in stocks and coupons in bonds over the intervening years. This may not be at all appropriate, given gains in wealth but also uncertainties in the outlook. For many investors, as we enter the fourth quarter of 2025, it may make sense to gradually rebalance and add diversification to a portfolio, particularly if this can be done in a tax-efficient manner.

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Your portfolio

I try my absolute best to ensure my human outlook does not spill into your investment strategy.

“Far more money has been lost by investors trying to anticipate corrections, than lost in the corrections themselves.”

-Peter Lynch

As a strategic asset allocator (decisions made based on past outcomes) versus a tactical asset allocator (decisions made based on future outlook), my belief is that future short-term outcomes are not yet known, and that past outcomes are a matter of fact.

Based on this framework, we make systematic determinations for portfolio shifts every quarter. The end result of these determinations was to reduce your overall equity/stock holdings in January 2020, increase in April 2020, decrease in July 2021, increase in July 2022, reduce in July of 2023, and then again in April 2024, and then a further reduction of overall equity exposure in December 2024.

We did not make a portflio shift this quarter (September 2025).

A graphical representation of what I describe above, contrasted against the S&P 500 index (just one of several market factors) over the past 5 years, can be found below, whereby green dots represent slight shifts into equity, and red dots represent slight shifts out of equity.

From a historical perspective, you may find that this strategy has yielded results that had your portfolio overperform in 2020, underperform in 2021 (shifting out as stocks went up), overperform in 2022 (despite the down year) and 2023, meet, or slightly miss, expectations in 2024, and overperform so far in 2025.

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We continue to monitor any potential new holdings on an almost daily basis, and continue to evaluate your existing holdings to determine if the reasons we bought them in the first place remain true today.

I hope you find this both interesting and informative in keeping pace with the events of today’s financial world.

This publication contains the opinions of the writer. The information contained herein was obtained from sources believed to be reliable, but no representation or warranty, express or implied, is made by the writer, Designed Securities Ltd. or any other person as to its accuracy, completeness or correctness. This publication is not an offer to sell or a solicitation of an offer to buy any securities. The information in this publication is intended for informational purposes only and is not intended to constitute investment, financial, legal, tax or accounting advice. Many factors unknown to us may affect the applicability of any statement or comment made in this publication to your particular circumstances. Hence, you should not rely on the information in this publication for investment, financial, legal, tax or accounting advice. You should consult your financial advisor or other professionals before acting on any information in this communication.

Avesta Wealth is an investments trade name of Designed Securities Ltd (DSL). DSL is regulated by the Canadian Investment Regulatory Organization (www.ciro.ca) and Member of the Canadian Investor Protection Fund (www.cipf.ca ). Investment products are provided by Designed Securities Ltd. and include, but are not limited to, mutual funds, stocks, and bonds. Adam Schacter is registered to provide investment advice and solutions to clients residing in the provinces of British Columbia, Alberta, Manitoba, Ontario, Quebec, and Nova Scotia.