Q3 2025 Macroeconomic Outlook: Navigating Rate Uncertainty

Executive Summary¶

As we enter the third quarter of 2025, the global macroeconomic landscape is defined by a single overarching theme: rate uncertainty. The Federal Reserve's decision to hold the federal funds rate at the 5.25 %--5.50 % target range through June has left markets pricing roughly 62 basis points of cumulative easing by year-end, according to CME FedWatch data as of September 30, 2025. Yet the path to those cuts remains far from linear.

Key Takeaways¶

• U.S. real GDP grew at an annualized 2.1 % in Q2 2025, moderating from 2.8 % in Q1, signaling a controlled deceleration rather than a hard landing.
• Core PCE inflation printed 2.6 % year-over-year in August, still above the Fed's 2 % symmetric target but trending lower on a three-month annualized basis (2.3 %).
• The unemployment rate edged up to 4.1 %, with non-farm payrolls averaging 148 k/month over the trailing quarter---consistent with labor-market rebalancing, not contraction.
• The 10-year U.S. Treasury yield closed Q3 at 4.18 %, roughly 30 bps below its October 2024 peak of 4.48 %, while the 2s10s curve remains inverted at -18 bps.

U.S. Growth Trajectory¶

The Bureau of Economic Analysis advance estimate for Q2 2025 GDP came in at 2.1 %, driven primarily by consumer spending (+1.8 pp contribution) and a modest inventory rebuild (+0.4 pp). Residential fixed investment subtracted 0.2 pp as the housing market continues to grapple with 30-year mortgage rates hovering near 6.75 %.

The ISM Manufacturing PMI slipped to 48.7 in September (from 49.2 in June), marking 22 of the past 24 months in contractionary territory. Conversely, the ISM Services PMI held at 53.4, underscoring the bifurcated nature of the U.S. economy.

Inflation Dynamics¶

Headline CPI decelerated to 2.9 % y/y in August, assisted by a 12 % decline in WTI crude from its April 2025 peak of $84/bbl. Core CPI, however, printed a stubbornly firm 3.1 % y/y, with shelter costs (+4.8 % y/y) continuing to exert upward pressure. The Cleveland Fed's trimmed-mean CPI---a noise-reducing measure---stood at 3.0 %, suggesting underlying inflation has plateaued rather than accelerated.

The Apex Economics team models a base-case scenario in which core PCE reaches 2.4 % by Q4 2025, conditional on:

1. Continued normalization in shelter inflation (lag effect from real-time rent indices such as Zillow Observed Rent Index, which has been flat y/y).
2. Stable unit labor costs, currently running at +2.7 % y/y.
3. No exogenous commodity shock.

Federal Reserve Policy Path¶

The FOMC's June 2025 Summary of Economic Projections (SEP) penciled in one 25 bp cut before year-end, with the median dot at 5.125 %. Markets, however, are pricing roughly 2.5 cuts (62 bps) by December, creating a tension that will likely resolve via one of two scenarios:

Scenario A --- Gradual Easing (55 % probability): The Fed initiates a 25 bp cut in September, followed by a second 25 bp cut in December, bringing the target range to 4.75 %--5.00 %. This aligns with a soft-landing narrative.

Scenario B --- Extended Pause (35 % probability): Sticky services inflation compels the FOMC to hold through November, delivering a single 25 bp cut in December. Risk assets reprice modestly lower.

Scenario C --- Emergency Cut (10 % probability): A credit event or rapid labor-market deterioration forces a 50 bp inter-meeting cut. Treasuries rally sharply; equities whipsaw.

Cross-Asset Implications¶

Equities¶

The S&P 500 returned +4.2 % in Q3 on a total-return basis, but breadth remains narrow: the equal-weighted index (RSP) gained only +1.1 %, while the cap-weighted index benefited from mega-cap tech earnings beats (NVDA +18 %, MSFT +9 %). The forward P/E of the S&P 500 stands at 21.3x, roughly 1.5 standard deviations above the 25-year average of 16.8x.

We recommend a modest underweight in U.S. large-cap growth and a corresponding overweight in international developed equities (MSCI EAFE forward P/E: 13.9x) and U.S. mid-cap value (Russell Midcap Value forward P/E: 14.2x).

Fixed Income¶

The Bloomberg U.S. Aggregate returned +1.8 % in Q3 as yields drifted lower. Investment-grade credit spreads (OAS) tightened 8 bps to 92 bps, while high-yield spreads compressed to 335 bps---approaching cycle tights. We favor extending duration to 6.5 years (from a benchmark-neutral 6.1) and tilting toward A-rated corporates, where the carry-per-unit-of-spread-risk ratio is most attractive.

Alternatives¶

Private credit continues to offer compelling risk-adjusted returns (see our companion piece, Private Credit in a Rising Rate Environment). Floating-rate senior secured loans yield SOFR + 475 bps on average, with default rates contained at 2.1 % (S&P LSTA). We maintain a 12 % strategic allocation to private credit within the Apex Alternatives sleeve.

Risk Considerations¶

• Geopolitical tail risk: Escalation in the Taiwan Strait, Middle East energy disruption, or Russia-Ukraine escalation could spike volatility (VIX above 30) and trigger a flight to quality.
• Fiscal sustainability: The Congressional Budget Office projects the U.S. deficit at 6.2 % of GDP in FY 2025. A failed Treasury auction or rating downgrade could disrupt the long end of the curve.
• AI-driven productivity mispricing: If generative-AI capex fails to translate into measurable productivity gains by mid-2026, mega-cap tech multiples could compress 15--20 %.

Outlook & Recommendations¶

Our base case remains a soft landing with sub-trend growth of 1.5--2.0 % in H2 2025. Portfolios should be positioned for:

1. Duration extension in fixed income to capture yield ahead of rate cuts.
2. Geographic diversification into EAFE and select EM exposure (see Southeast Asian Infrastructure).
3. Quality tilt in equities---companies with ROE > 20 %, net-debt-to-EBITDA < 2x, and positive free-cash-flow margins.
4. Alternatives allocation of 10--15 % to private credit, infrastructure, and real assets as inflation hedges.

This material is provided for informational purposes only and does not constitute investment advice or an offer to buy or sell any security. Past performance is not indicative of future results. All forecasts are subject to change without notice. Apex Financial Partners is a registered investment adviser. Please refer to our ADV Part 2A for additional disclosures.