Solutions Economic and Market Watch

Hello, and welcome to the Economic & Market Watch podcast for the week of October 27, 2025. This is John Suter of CFC.

If you recall, I talked about tariffs last week, explaining why these added costs have not been showing up in the recent inflation data. (We have a link to that in the show notes, in case you missed it.)

Today, I'm going to tackle the S&P 500's mysteriously magnificent year — mysterious in that we have slower economic growth, high prices, higher interest rates, but the stock market continues to power on. In fact, the S&P 500 index was down 15% in early April, but has since rebounded to a 14% year-to-date return, which is mostly made up of earnings and dividends, all the while setting 28 record highs along the way.

From the onset of 2025, the U.S. economy has been faced with challenges. I wouldn't say weaknesses, because the economy is still growing, but we definitely have signs of concern that are rearing up stronger in the second half of the year. I would highlight the following:

Number one: A weaker labor market.

In a normal year, the economy needs to add roughly 1.2 million jobs to keep up with population growth. This year, the labor market has not breached that threshold (just over one million) with September's non-farm payroll number still to be released due to the government shutdown — which again adds additional complexity to the economic outlook. It's like driving blind.

This labor market is a "no hire, no fire" environment, where it's super tough gaining access, and really not a great time to be changing careers. What is even worse is that more than one in four workers without jobs have been unemployed for at least half a year.

In all, more than 1.9 million Americans had been unemployed "long term" in August. That means they have been out of work for twenty-seven weeks or more, a critical cliff when it comes to finding a job.

Number two: Higher interest rates — something us Americans have not been accustomed to.

For the past three years, interest rates have averaged higher than the previous fourteen years. The Federal Reserve fell behind the inflation ramp up and had to quickly raise the overnight federal funds rate 11 times, reaching a high of 5.5% by July 2023.

Higher interest rates stunt economic growth and weigh heavily on corporate profits. Unfortunately, with inflation remaining slightly elevated, the Federal Reserve has not been able to lower the overnight rate as quickly as investors had anticipated this year. Short-term and long-term interest rates have come down in 2025, but much slower than the market and the current administration would like.

Number three: Elevated inflation. Given the tariff situation, U.S. economic growth has started to slow, and the weakness in the labor market has pushed the unemployment rate up to 4.3%. This puts The US economy in a somewhat stagflation-like situation, where the Federal Reserve is powerless in terms of its monetary policy.

The good news is that inflation has stabilized, but remains above the Fed's target of 2% regardless of whether one is using the headline CPI at 2.9%, the core CPI (which excludes volatile food and energy) at 3.1% or the Fed's preferred measure, the Core Personal Consumption Expenditures Index (a slightly different computation than the headline CPI), at 2.9%. And yet, the S&P 500 index set 28 record highs this year in 2025, with time remaining to set more if proper market conditions persist.

How is that possible?

It's possible because U.S. companies continue to make remarkable earnings to defy policy uncertainty. With over 99% of the S&P 500 companies reporting, Q2 2025 was the third consecutive quarter of double-digit earnings growth, and earnings are what drive stock prices. Q4 2024 was 18.2%, Q1 2025 was 13.3%, and Q2 of 2025 was 12%.

U.S. companies continue to reinforce one of the most under-appreciated themes of 2025 — corporate resilience. I can't emphasize that enough. It's a theme that still persists and hopefully will continue into the immediate future. Notably, eight of 11 S&P 500 sectors reported year-over-year growth in earnings, while 10 of 11 sectors reported year-over-year growth in revenue. Furthermore, corporate margins and cash flow reached record highs in 2024 through 2025 as companies skillfully managed both opportunity and uncertainty in the post-COVID landscape.

Analysts continue to wonder if the S&P 500 is near — or in — bubble territory, but so far, companies have continued to prosper in a world of uncertainty, and so have our 401K fund returns. Let's hope it continues in the future. That's it for today. As always, we thank you for listening, and be sure to download the Economic & MarketWatch dashboard and intelligence brief.

We'll talk to you soon.