Q3 2025 Commentary and Investment Outlook
- SWSCM
- Oct 27
- 3 min read
The U.S. economy continues to navigate a complex landscape shaped by evolving monetary policy, the early effects of sweeping fiscal legislation, and consumer uncertainty.
In September, the Federal Reserve initiated its first rate cut of the year, lowering the federal funds target range to 4.00% – 4.25%, citing growing risks to employment and a softening labor market. The move marked a shift from the Fed’s earlier stance of holding rates steady, and it signaled a more accommodative posture heading into year end. The Fed’s updated Summary of Economic Projections (SEP) suggested two additional rate cuts may follow in the fourth quarter.
The One Big Beautiful Bill Act, signed into law on July 4, began to influence economic activity in Q3. The legislation delivered front-loaded stimulus through tax cuts, expanded deductions, and incentives for domestic investment. Early indicators suggest a modest boost to GDP growth, with forecasters revising Q3 real GDP expectations upward to 1.3% from 0.9% in the prior quarter.
Despite easing headline inflation, University of Michigan Surveys of Consumer Sentiment Index declined sharply in September, falling to 55.1, its lowest level since May. Households continue to feel the pinch of elevated prices, particularly for food and housing, with perceived inflation far outpacing official measures. Lower-income families are disproportionately affected, with more reporting reduced spending. The divergence between high- and low-income households is widening, as wealthier consumers maintain spending levels while others pull back.
At the start of June, yields were higher across the curve amid tariff-related uncertainty and inflation concerns, but by September, yields had declined across most tenors. The 10-year Treasury yield, for example, fell from a high of 4.60% in early July to close the quarter at 4.25%, reflecting investor confidence in the Fed’s rate cut and easing inflation pressures. The yield curve steepened modestly, with short-term rates falling more than long-term rates, signaling caution about the long-term economic outlook.
Looking ahead, the relationship between fiscal stimulus, monetary easing, and consumer behavior will be critical. While recession risks have eased, the economy remains vulnerable to policy missteps and external shocks. Tariffs have not had a direct effect on consumer prices as businesses have been absorbing a greater percentage of the cost and have not passed the cost on to the consumer, however, this risk will continue to remain. Businesses and investors are apprehensively sanguine, buoyed by strong corporate earnings and resilient equity markets, but remain watchful of inflation persistence and further labor market weakness.
We expect yields for bonds to be range bound in the fourth quarter. As the Fed is expected to cut at least one more time before year end, the longer end of the yield curve may have to contend with data on inflation remaining higher than the stated 2% target. This may create volatility in bond yields, especially in the longer end of the curve. Inflation settling at a structurally higher level could limit expected rate cuts.
We continue to favor Treasuries and high-quality corporate bonds in all strategies, as well as maintaining a duration neutral approach to benchmarks. Sector specific risks and policy shifts could create volatility. Diversification across credit should limit these risks in the portfolios.
SWS Capital Management’s (SWSCM) philosophy is based on a value-oriented, active management style which emphasizes liquidity and risk management. Our strategies have a consistent investment philosophy. Security selection, sector allocation, and yield curve positioning are based upon our interest rate forecast as well as our fundamental economic outlook.
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Source: Bloomberg as of 09/30/2025
Disclosure
The information provided here is for general informational purposes only and should not be considered an individualized recommendation or personalized investment advice. The investment strategies mentioned here may not be suitable for everyone. Each investor needs to review an investment strategy for his or her own particular situation before making any investment decision. All expressions of opinion are subject to change without notice in reaction to shifting market conditions. Data contained herein from third-party providers is obtained from what are considered reliable sources. However, its accuracy, completeness or reliability cannot be guaranteed. Past performance is no guarantee of future results, and the opinions presented cannot be viewed as an indicator of future performance. Investing involves risk including loss of principal. Forecasts contained herein are for illustrative purposes only, may be based upon proprietary research and are developed through analysis of historical public data.
