Q4 2025 Economic & Investment Outlook: Navigating a "Two-Speed" Economy
By Brian Seay, CFA | Capital Stewards
As we close out 2025, there are a lot of questions on the minds of investors. Usually, after the significant market gains we experienced over the summer, investors feel optimistic. However, despite portfolio growth, I am hearing genuine concerns from clients in Huntsville and across the country.
I believe those concerns are warranted because we are currently living in a world with two different economies running simultaneously. One economy is bordering on a recession, while the other is "partying like it’s 1999." As a fee-only fiduciary financial advisor in Huntsville, AL, my goal is to help you separate your feelings about the economy from the facts in your portfolio. In this Q4 2025 outlook, we will look at whether we are in a market bubble, the impact of tariffs on inflation, and how to position your portfolio for 2026.
2025 Year-to-Date: A Strong Year for Diverse Portfolios
Before we dive into the risks, let’s look at the data. It has been a strong year for investment markets, but the winners might surprise you. While U.S. big tech gets the media attention, a diversified approach has been the true winner.
Gold: The top asset class for the year, up over 45%.
International Stocks: Outperforming the U.S. generally, with some emerging markets (like China) up over 40%.
S&P 500: Up roughly 14%.
Bonds: Even "boring" bonds have returned more than 6% so far this year.
This data reinforces why we advise clients at Capital Stewards to look beyond just U.S. tech stocks. A broad mix of assets has provided excellent performance with much lower levels of concentration risk and volatility.
The "Tale of Two Economies"
If the markets are up, why is Consumer Sentiment (measured by the University of Michigan) as low as it was during the Great Recession?
The answer lies in the concentration of growth.
Real GDP is positive, but 100% of that increase has come from the AI boom—sectors directly or indirectly linked to building out AI data centers. This accounts for only about 8% of the total economy. The remaining 92% of the economy is flat.
We see this same concentration in household spending. The top 10% of households are increasing spending, driven by rising asset values. However, the vast majority of American households are not buying more; they are simply paying higher prices for the same goods.
The Labor Market and Inflation
The labor market is softening. While we aren't seeing mass layoffs, hiring has stalled.
Job Creation: Non-farm payroll additions are averaging 29,000 over the past three months. To keep up with population growth, we generally need 70,000 to 100,000.
Hours Worked: Companies are cutting hours rather than staff, bringing average hours worked down to near-recession levels.
The "Stagflation Lite" Environment
Inflation remains a sticky issue. Core PCE (the Fed's preferred gauge) is running at about 2.9%. Tariffs have contributed significantly to this, altering import/export activity and keeping prices elevated.
We expect inflation to hover in the low 3% range through the first half of 2026 before moderating. This combination of slowing growth (stagnation) and sticky prices (inflation) creates a "Stagflation Lite" environment.
Are We in a Stock Market Bubble?
With the S&P 500 trading at 22x next year’s earnings (above the 10-year average of 18x), are we in a bubble?
Despite high valuations, I do not believe we are in a bubble yet.
Real Earnings: Unlike the dot-com bubble of the late 90s, today's high-flying tech companies are generating massive cash flow. NVIDIA and Meta have seen net income nearly double or triple in recent years.
Comparisons: The 2000 tech bubble peaked at 25x earnings. To reach that level today, the S&P would need to rise another 8% to roughly 7,300.
That said, U.S. stocks are not "cheap." This is why we have been tilting toward international markets and value sectors where valuations are more attractive.
Investment Strategy for 2026: Diversification is Key
Given tepid economic growth outside of AI and high stock valuations, investors should increase exposure to assets outside of the S&P 500.
1) Bonds:
With yields starting the year north of 4.5%, bonds are finally pulling their weight. Corporate and government bonds are providing total returns (yield + price appreciation) that beat cash. Holding too much cash in money markets may now be a drag on your long-term performance.
2) Gold:
Gold is a classic hedge for the "Stagflation Lite" environment.
If the economy slows: Gold tends to perform well as a safe haven.
If inflation rises: Gold acts as a store of value. With Central Banks continuing to buy gold to diversify away from the U.S. Dollar, the structural support for gold remains strong.
3) Real Estate & Infrastructure:
Real assets can help drive returns regardless of how the stock market performs. In an environment of high uncertainty, owning tangible assets provides a safety net that paper assets sometimes cannot.
Summary: What Should Investors Do?
We have gone round trip this year: from fearing a recession, to seeing growth, and now back to a slowing economy.
If you are concerned about the impact of a potential bubble or recession on your financial future, that is a sign you need to review your situation. You should feel comfortable with your portfolio regardless of the environment—good or bad.
At Capital Stewards, we help families in Huntsville and across the U.S. build resilient, fee-only financial plans. If you are looking for a fiduciary partner to help you navigate 2026, we are here to help.