Q4 2025 Commentary and Investment Outlook
- SWSCM
- Jan 23
- 3 min read
The U.S. economy closed 2025 on a note of cautious optimism. Uncertainty regarding inflation, labor markets, and fiscal policy tempered expectations. The quarter was marked by a prolonged, 43-day government shutdown that spanned the entire month of October and the first 12 days of November, which delayed key data releases and injected volatility into markets. Despite these disruptions, the economy demonstrated resilience, supported by earlier fiscal stimulus and an eventual pivot toward monetary easing.
Federal Reserve Policy
The Federal Reserve continued its accommodative shift, delivering two additional rate cuts in Q4. By December, the federal funds target rate range stood at 3.50% – 3.75%, following a third consecutive 25 basis point reduction. The Fed’s tone remained cautious, citing cooling labor conditions and inflation trending towards target, while acknowledging risks tied to tariff-related price pressures. Policymakers signaled a slower pace of cuts in 2026, emphasizing data dependency amid lingering uncertainty.1
Economic Conditions
Headline inflation moderated through the quarter, with November CPI at 2.7% (year-over-year) and core CPI at 2.6% (year-over-year), though shelter and energy costs remained sticky.2 Core PCE hovered near 2.8%, reinforcing expectations for inflation to settle above the Fed’s 2% target in the near term.3 Labor markets softened further, with December payrolls adding just 50,000 jobs and unemployment rising to 4.4%, underscoring a low-hire, low-fire environment. Wage growth slowed but remained elevated at 3.8% year-over-year, sustaining household income but pressuring margins.4
GDP data reflected strong momentum into Q3 (+4.3% annualized). Consumer sentiment improved modestly from September lows, though spending patterns continued to diverge by income, further affecting the K-shaped economic recovery.5
Fixed Income Markets
Treasury yields declined steadily throughout December, with the 10-year finishing near 4.17% and the 2-year around 3.48%, due to easing policy and softer data. The yield curve remained modestly inverted but began to steepen as short rates fell faster than long rates. Mortgage rates followed suit, with the 30-year fixed rate dropping to 6.15%, the lowest of the year, offering some relief to the housing market.
Credit spreads held near cycle tights, with investment-grade OAS around 78 bps and BBB spreads near 100 bps at year-end.6 High-yield spreads widened briefly in November but retraced into December, supported by strong technicals and resilient corporate fundamentals. Total returns across major bond indices were positive for Q4.
Investment Outlook
Looking ahead, the interaction between monetary easing and inflation dynamics will shape market performance. While recession risks have receded, the economy remains vulnerable to tariff-related price shocks and labor market weakness. We expect yields to remain range-bound in early 2026, with potential volatility at the long end as inflation stabilizes above target and issuance pressures persist.
Portfolio Positioning:
Maintain a duration-neutral to modestly long stance relative to benchmarks, balancing carry with convexity.
Favor Treasuries and high-quality corporates, emphasizing liquidity and risk management.
Continue sector diversification to mitigate idiosyncratic risks, with selective exposure to investment-grade credit.
Monitor housing and consumer trends closely, as affordability constraints and sentiment shifts could influence spread sectors.
SWS Capital Management’s philosophy remains rooted in a value-oriented, active management approach that prioritizes liquidity, risk control, and disciplined security selection. Our strategies reflect a consistent framework, integrating interest rate forecasts with fundamental economic analysis to deliver long-term value.
As always, we appreciate your trust and partnership.
SWS Capital Management, LLC
Source: ICE Data Services, Bloomberg, Standard & Poor’s as of 12/31/2025
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.
