As we move through Q3 2025, the final weeks of Q2 delivered a flurry of headline-grabbing events: an expanded conflict in the Middle East with the US playing a direct role to thwart Iran; President Trump’s attempts to push the Federal Reserve toward cutting interest rates; and the passage of the hotly contested ‘Big Beautiful Bill’, which could balloon the Federal deficit by $2-$3 trillion – pushing it beyond $40 trillion – and potentially impact health care coverage for millions of Americans.
Yet, despite these challenges, the US economy remains remarkably strong and resilient. With all these moving parts, it’s important to take a step back and consider where the economy and markets might be headed.
Near-term speculation can be interesting and even of some entertainment value. Ultimately, however, economic and company-specific fundamentals prove the true value of an asset over time. Especially in equity and fixed income markets, a multi-year holding period is typically necessary to smooth out short-term volatility and realise returns from companies with strong earnings growth.
With that in mind, there is cautious optimism for the US economy and markets throughout 2025 and into 2026. Below are some of the near-term tailwinds that could continue to support market momentum.
Corporate earnings – the market’s north star
At its core, ignoring much of the macro noise, corporate earnings are the primary driver of stock prices. The recent ‘Big Beautiful Bill’ is now law. While it offers limited spending cuts, it includes significant tax reductions and incentives aimed at stimulating economic growth – factors that should bolster corporate earnings and, in turn, stock valuation.
Key provisions – such as eliminating taxes on overtime pay, tips, and social security income (to some extent), increasing state and local tax (SALT) deductions, and expanding childcare tax credits – are likely to support continued consumer spending. Making the 2017 tax cuts permanent will benefit both companies and individuals, with smaller companies expected to benefit disproportionately, given their limited ability to mitigate tax impacts through offshore strategies.
Interest rates – the Fed in the spotlight
The Federal Reserve has so far held steady on interest rates, treading carefully in response to potentially inflationary moves by the Trump administration. Tariffs remain a key consideration – particularly their impact on prices of imported goods, both as end consumables and foreign inputs to US assembled goods. The Fed’s concern is that rising costs could reheat inflation just as it shows signs of cooling.
Chair Powell has indicated that two 25-basis point rate cuts are likely by the end of the year, a scenario which should provide additional support for equity markets. Meanwhile, political speculation continues, with reports suggesting President Trump may seek to appoint a more dovish Fed Chair in 2026. This raises the prospect of further rate cuts – potentially boosting equity valuations, especially among smaller companies that typically have leaner balance sheets and greater reliance on borrowing to finance operations and growth.
US Employment – a pillar of consumer strength US unemployment remains low at 4%. Although hiring has begun to slow, companies are reluctant to lay off workers amid ongoing recruitment challenges. Employment at this level, helps sustain consumer spending – a primary driver of the US economy – and should help maintain healthy corporate earnings.
AI – the next industrial revolution
Perhaps the most exciting driver for the remainder of the decade and beyond is the rapid evolution of artificial intelligence. AI is not only transforming technology companies developing these tools but revolutionising companies across all sectors by reducing costs, driving innovation, enhancing customer experience, and improving profitability.
The life sciences sector stands to benefit significantly. Accelerated development of treatments and cures of diseases, along with improved quality of life, will be a significant driver of growth of companies in health care and biotech, which currently represent about one third of the index.
Staying focused on fundamentals over headlines
Most investors focus on equity and fixed income investing rather than short term trading. Traders are more focused on price opportunities driven by news headlines – whether tariffs, changes at the Federal Reserve or legislative developments.
The underlying strength of company fundamentals, such as consistent earnings generated by well-managed, innovative businesses, remains paramount. While short-term market volatility can be unnerving or even painful to watch, history shows that over time, as long as capital markets operate within a free market economy, equity investing continues to be rewarding.
