As we approach the final months of 2025, investors have enjoyed another strong year of market performance. Even with the significant volatility experienced surrounding “Liberation Day” and President Trump’s sweeping tariff announcements, equities have performed admirably in 2025 – highlighted by the S&P 500’s nearly 15% YTD return. Since the market bottom on April 8th, the S&P has rallied over 35% through the end of Q3 as strong earnings, Artificial Intelligence, and rate cuts drove markets higher.
S&P 500 YTD Total Return
Source: YCharts
The S&P 500 has advanced over 95% in under 3 years since the end of the bear market in 2022. A core element of this recovery has been the surprising resilience of the US economy in the face of significantly higher borrowing costs. For a brief few weeks in March & April, the market began to once again fear the risk of a recession – this time driven by tariff policy rolled out by the Trump administration. First quarter GDP turned negative, the first negative quarter of GDP since early 2022, but equities recovered quickly as President Trump took a more measured approach to implementing tariffs over Q2 and Q3. GDP rebounded, and companies largely beat earnings expectations that had moved lower in the face of trade disruption. However, even after walking back some of the harshest threats, the effective tariff rate remains well above the levels experienced in the post-World War II Era.
Effective US Tariff Rate
Source: The Budget Lab, Yale University
Despite the high level of tariffs being charged on imported goods relative to what was experienced over the past few decades, the US economy continues to remain highly resilient. After the -0.6% drop in GDP in Q1, GDP grew by 3.8% in Q2 as net trade deficits narrowed following front-running of proposed tariffs in Q1. Through early October, the Atlanta Fed’s real-time measure of GDP data looked strong for Q3 as well.
Contributors to US Real GDP Growth
Quarter-over-quarter, seasonally adjusted annualized rate
Source: J.P. Morgan
While the level of economic growth in the US remained resilient (outside of the trade impacted first quarter), the composition of growth has evolved considerably in the post-COVID environment. Benefiting from record levels of stimulus and wealth effects, US consumption was the primary driver of growth for the years immediately following COVID. However, the renaissance and ensuing investment into Artificial Intelligence has grown to be nearly as big a contributor to growth as consumption as large tech companies & the federal government finance the development of data centers powering these AI models. This spending story has played a large part in offsetting some of the impact from tariff related increases on prices that we have begun to see.
US Real GDP Growth Contribution from Tech Capex
Source: Bridgewater Associates, J.P. Morgan
The datacenter buildout has been significant, offsetting slowing growth in the broader economy. In particular, the labor market began to soften after the post-COVID hiring boom. After averaging over 250,000 jobs added per month from 2022 through 2024, the average monthly job growth has slowed to under 75,000 per month in 2025.
US Monthly Nonfarm Payroll Jobs Added
Source: Bureau of Labor Statistics
While jobs added to the economy slowed considerably, the headline unemployment rate in the US has remained near all-time lows and at a healthy level of 4.3%. This dynamic of low job gains and consistent levels of unemployment has been described as a “No Hire, No Fire” environment where businesses have slowed hiring in the face of macroeconomic uncertainty, but actual layoffs or terminations remain low as earnings data suggests stability in the labor market. Another potential contributor to steady levels of unemployment has been the Trump administration’s crackdown on immigration. The focus on closing the southern border and deportations has led to a shrinking total labor force, offsetting some of the softness on the demand side of the market.
US Unemployment Rate
Source: Bureau of Labor Statistics
This softness in labor markets at a time of broadly strong economic growth has created a challenging dynamic for the Federal Reserve (in addition to the consistent political pressure from the White House being exerted on Chairman Powell and the Board of Governors at large). At the September FOMC meeting, the Fed voted to cut interest rates by 25 basis points – the first change in interest rate policy since Q4 of 2024. With the labor market softening, the Fed felt comfortable bringing policy closer to neutral, although rates remain significantly higher than pre-COVID levels. Current market expectations are for additional 25 basis point cuts in each of the October and December meetings, followed by another two to three cuts in 2026. Interest rates along the yield curve have rallied off the back of renewed expectations for rate cuts, with the 10-year treasury yield tightening from a high of 4.8% earlier in the year, to under 4.2% to end the quarter.
Federal Funds Rate & 10 Year Treasury Yield
Source: YCharts
While President Trump and many investors would be grateful for a continuation of interest rate cuts, the troubling trend of reaccelerating inflation may make this a difficult proposition for the Fed. After bottoming under 2.5% in the first half of 2025, inflation has begun to turn higher once again on a year-over-year basis. Service costs have remained sticky while shelter has continued its very gradual moderation process, but more recently, goods inflation has become more of a focus. After spending years in deflation, goods prices have begun to turn higher and contribute to rising inflation. Given that so many of the products we consume are manufactured abroad, the impact of tariffs on inflation within this sector has received outsized attention. Risks are elevated on both sides of the Fed’s mandate, making upcoming data releases influential to the go-forward trajectory of interest rate cuts (a factor further complicated by the current government shutdown in which data releases are limited).
Headline & Core US CPI
Contributors to headline CPI inflation
Contribution to year-over-year % change in CPI, non-seasonally adjusted
Source: Bureau of Labor Statistics, J.P. Morgan
In our view, this confluence of factors – strong spending on data center buildouts and easing interest rate policy from the Fed – contributed to a strong risk-on market environment. While large cap technology stocks have had a strong run over the past 3 years and continue to lead (at the time of this writing), broad swaths of the equity market, including international equities, small caps, and value stocks, have also seen strong performance of late. As we have seen in previous market cycles, the prospect of interest rate cuts and the fabled “soft landing” drove performance in the more cyclical areas of the economy, which may also benefit tremendously from rate cuts.
2025 YTD Market Performance
Source: YCharts
With the strength experienced across markets this year, equities have generally seen valuations grow more expensive across the board. As of the end of the 3rd Quarter, the S&P 500 traded at nearly a 23x forward price-to-earnings ratio – one of the most expensive valuations experienced outside of the Dot-com tech bubble of the late ’90s. While valuation does not serve as a timing tool in the short-to-intermediate term, and economic tailwinds from rate cuts and the continued AI spend could provide further fuel for earnings growth, we remain cognizant that there is risk at this level of prices. Periods like today emphasize the importance of long-term hold periods for equities and the value of diversification into styles and regions that provide cheaper exposure to complement US based technology companies.
Source: John Hancock Investment Management, FactSet
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