Key Wealth Investment Brief

“The Gentle Cut: Easing Without Euphoria”

Key Takeaways

• The federal funds rate target range is now 3.75% to 4.00%
• Two Committee members dissented (Miran/Schmid)
• Quantitative tightening will end on December 1
• The statement tone was softened
• Inflation is still in the crosshairs
• Market Focus: tone and trajectory

A Divided Step Toward Easing

The Federal Reserve’s Federal Open Market Committee (FOMC) delivered a carefully measured 0.25% rate cut, lowering the target range for the federal funds rate to 3.75% – 4.00%. The decision, widely anticipated yet delicately phrased, marked the Fed’s continued transition from restraint to moderation.

While dissent has surfaced in recent meetings, this one revealed its sharpest contrast yet. Two officials dissented – Stephen Miran, who sought a deeper 0.50% reduction, and Jeffrey Schmid of the Kansas City Fed, who preferred to hold rates steady – anchored opposing ends of the debate. Between those poles, Chair Jerome Powell presided over an uneasy consensus, steering policy into less restrictive territory while insisting that the inflation fight is not over.

Shifts in the Statement

The October statement began with a more confident assessment of the economy: “Available indicators suggest that economic activity has been expanding at a moderate pace.” That replaces language in previous statements which had emphasized growth that “moderated.” On the labor market front, the Fed noted: “Job gains have slowed this year, and the unemployment rate has edged up but remained low through August; more recent indicators are consistent with these developments.” Inflation also drew a nuanced change: “Inflation has moved up since earlier in the year and remains somewhat elevated.”

Most markedly, the Committee stated: “The Committee decided to conclude the reduction of its aggregate securities holdings on December 1.” These edits reflect a Fed shifting from active tightening to maintenance mode – still restrictive, still cautious, but signaling that the tightening chapter is nearing its end. 

Powell’s Press Conference: A Calibrated Confidence

Chair Jerome Powell maintained his signature equilibrium throughout the press conference, characterizing the cut as a “step toward better balance.” He emphasized progress on inflation without lapsing into triumph, repeating that the Committee “cannot declare price stability fully restored.”

When asked about the two dissents, Powell described them as evidence of “healthy debate within a strong consensus.” Miran’s preference for a larger reduction and Schmid’s caution against any cut, he said, both stemmed from a shared commitment to the dual mandate.

On the balance sheet decision, Powell framed the move as operational, not directional – meant to ensure ample reserves and smooth market functioning, rather than acting as fresh stimulus. He cautioned that any further rate adjustment remains data-dependent and is not assured.

Market Reaction

Markets initially welcomed the FOMC’s decision, but optimism faded as Chair Powell’s press conference struck a more measured tone. U.S. Treasury yields initially fell sharply at the front end, reflecting expectations for continued easing, while longer maturities held in the mid-4.00% range. The move underscored a market growing more confident that the easing cycle has resumed, but equally aware that the Fed intends to proceed cautiously.

The S&P 500 slipped after Powell cautioned that “policy decisions will remain data-dependent,” a reminder that further rate cuts are not guaranteed. The dollar firmed modestly as risk sentiment cooled, though futures markets still imply approximately 0.75% of additional easing through mid-2026. Credit spreads widened slightly into the close, reflecting a more sober read of Powell’s tone.

The day’s price action captured the essence of this meeting – easing without exuberance. Investors recognized that the Fed continues to pivot, but Powell’s restraint reminded markets that the path forward will be deliberate, not directional. The message was clear: policy loosening, but discipline still defines it.

Implications Going Forward

For investors, the “gentle” cut underscores the start of a new phase rather than a full cycle turn. The Fed’s cautious tone suggests that policy will remain restrictive for longer, even as rates edge lower. That balance carries distinct implications across asset classes.

In short-duration portfolios, reinvestment yields will gradually decline as maturing securities roll down the curve, but liquidity and credit profiles should remain stable as quantitative tightening ends. Floating-rate instruments will likely experience slower income accrual, offset by improved price resilience. Stable Net Asset Value (NAV) funds may see modest mark-to-market gains as yield drift lower, though managers will need to stay disciplined on weighted average maturity to avoid extension risk.

In credit and spread products, Powell’s emphasis on data-dependence supports a steady demand for high-quality issuers, particularly short and intermediate maturities. Risk appetite should remain selective rather than broad-based. Meanwhile, U.S. Treasury and agency paper may outperform if growth softens further, or inflation continues to moderate.

More broadly, the October meeting reaffirms that the Fed’s pivot is about calibration, not capitulation. Investors should position for gradual normalization, where easing unfolds in steps, not strides. In this environment, liquidity discipline and duration flexibility remain the most reliable alpha. 

Key Takeaways

Economic growth remains resilient despite the government shutdown.

The Atlanta Federal Reserve’s GDPNow real GDP estimate for Q3:2025 is almost 4.0%, a solid number. The Blue Chip consensus estimate for economic growth has also been moving higher in recent weeks.

The labor market appears to be softening at the margin, but economic growth is holding up. Perhaps artificial intelligence (AI) and/or automation is supporting economic growth at the expense of labor? Immigration might also be influencing the labor market, namely the supply of available workers. The Federal Reserve is likely considering these dynamics during their discussions regarding interest rate policy.

The Federal Reserve (Fed) is highly likely to cut interest rates two more times this year. Next year’s outlook for interest rates is more uncertain. Inflation remains sticky but is not spiraling higher.

September’s Consumer Price Index (CPI) was released last week despite the government shutdown, mainly because programs like Social Security require an updated CPI for proper indexing. CPI inflation remains relatively stable, but still above the Fed’s 2.0% inflation target. Year-over-year Core CPI inflation, which strips out food and energy, was 3.0% in September, approximately in line with the past few months of data.

Shelter inflation, a large component of the Core CPI, has been softening in recent months, perhaps in part due to slowing immigration. Conversely, Goods inflation has been rising in recent months, possibly due to tariffs.

With inflation seemingly stable and the labor market cooling, the Fed is highly likely to continue cutting interest rates this year, including at this week’s meeting (Wednesday, October 29) where a 25 basis point (0.25%) cut is almost a certainty. The current fed funds rate is the target range of 4.00% to 4.25%.

Bottom line – how to invest now.

A resilient economy, slowly cooling inflation, and an accommodative Fed has led to a very good year for markets. Underneath the surface, high-quality stocks have been significantly underperforming low-quality stocks. High-quality companies generally have stronger balance sheets, more consistent earnings, and higher returns on capital than their low-quality peers.

Over long periods, high-quality stocks tend to outperform low-quality stocks, according to data from Kaliash Capital Research. Key Wealth favors quality companies within many of our recommended equity strategies. Investors should be patient and should not chase low-quality stocks.

Investors should think and act long-term; most investors can’t, won’t or don’t. Diversification is paramount. Investors should consider non-traditional strategies to increase diversification where appropriate. 

Equity Takeaways:

Stocks were higher in early Monday trading. The S&P 500 rose approximately 0.9%, to 6850, while the tech-heavy Nasdaq rose approximately 1.4%. Small caps rose approximately 0.6%. International shares were generally higher.

Stocks broke to new all-time highs on last week’s moderate CPI inflation print. We are entering one of the strongest seasonal periods of the year with significant tailwinds, including strong earnings and an accommodative Fed.

Earnings for Q3:2025 have been better than expected according to FactSet, with approximately 30% of companies having reported. The forward earnings estimate for the S&P 500 continues to increase, providing a positive long-term backdrop for stocks.

One cautionary item: the S&P 500 momentum index has begun to weaken compared to the broader index. Momentum stocks have been leading the market higher since mid-2023. New leadership sectors may emerge, which will give us clues on the underlying health of the market.

Gold declined approximately 10% last week after a parabolic move higher. Further near-term downside is possible; but from a long-term perspective, gold remains in a strong uptrend. Gold could pull back as far as $3,500 per ounce and still remain in a long-term uptrend. We expect continued near-term volatility in gold but continue to recommend the precious metal as part of a diversified real asset allocation.

Fixed-Income Takeaways:

The Federal Reserve is highly expected to cut the fed funds rate by 25 basis points (0.25%) on Wednesday, October 29. The current fed funds rate is the target range of 4.00% to 4.25%; and if the Fed does cut, the new target range would be 3.75% to 4.00%. 

Treasury yields were relatively stable last week as investors prepared for this week’s Fed meeting. In early Monday trading, yields were rising 2-4 basis points across the curve. Overall, 2-year Treasuries were yielding 3.51%, 5-year Treasuries 3.64%, 10-year Treasuries 4.03%, and 30-year Treasuries 4.60%.

Bond market participants feel that the Fed is most concerned about supporting the weakening labor market. If the Fed prioritizes the labor market over controlling inflation, the Fed will likely continue cutting interest rates well into 2026. Market participants expect the fed funds rate to eventually settle between 2.75% and 3.00% once the current rate-cutting cycle is complete, according to data from Bloomberg.

Credit spreads tightened last week, led by shorter-duration high quality issues. Supply is expected to drop heading into this week’s Fed meeting. Lack of supply could push spreads even tighter.

Key Takeaways

The government shutdown is delaying key economic data releases. As a result, sentiment is having an outsized impact on market performance. Alternate economic data shows conflicting signals but does not suggest a major slowdown or recession.

Thanksgiving travel could be a catalyst for ending the government shutdown; but in the meantime, the shutdown seems likely to continue.

Alternate economic data compiled by Apollo, such as Bloomberg daily data for debit card transactions, OpenTable restaurant bookings, ADP job growth, and the Federal Reserve’s Weekly Economic Index, suggest a stable but slowing economy. Initial jobless claims remain muted, suggesting the pace of layoffs remains low. However, other data reveals a sluggish environment for new jobs. This could be driven by supply issues or demand issues, and it will be important to assess this dynamic once official jobs data are released.

Bank funding markets are showing stress, but nothing disorderly. Private credit exposure is in focus.

Lending/repurchase rates (“Repo rates”), such as the Secured Overnight Financing Rate (SOFR) and the General-Collateral Funding Rate (GFR), have been spiking of late, indicating tightening liquidity conditions in the financial system as banks and other financial intermediaries have sought liquidity. The tightening of liquidity could have implications for the size of the Federal Reserve’s balance sheet, which has steadily but gradually been shrinking. If liquidity conditions remain tight, the Fed would likely need to stop the contraction of its balance sheet.

Publicly traded Business Development Companies (BDCs) and publicly traded asset managers have seen their stocks perform very poorly year-to-date (YTD). To a lesser extent, regional banks have also seen weakness. Investors seem worried about exposure to private credit at these entities.

Despite a few recent high-profile bankruptcies (Tricolor and First Brands), private credit fundamentals remain stable, according to data from iCapital. We do not believe the recent events pose a systematic risk.

Private credit loss rates have historically been lower than traditional high-yield bonds. Private credit also gives lenders more flexibility and control over the underlying collateral, which has generally resulted in lower loss rates through the credit cycle.

Bottom line – how to invest now.

Banks are well capitalized, balance sheet issues are improving, and credit metrics are favorable. We don’t believe the recent volatility is a systematic event. Still, private credit volumes have risen dramatically, likely facilitated by less-robust underwriting.

Investors should remain Neutral to Risk, rebalance as necessary, be surgical when putting fresh capital to work, emphasize quality, and diversify, diversify, diversify.

Equity Takeaways:

Stocks rose in early Monday trading. The S&P 500 rose approximately 0.7%, to 6710. The tech-heavy Nasdaq rose approximately 1.0%, while small caps rose approximately 1.2%. International shares were generally higher.

The recent choppiness in the S&P 500 index is not surprising to us. The S&P 500 is in the process of testing its 50-day moving average to digest recent gains. A break below the 50-day moving average (6563 on the S&P 500 as of October 17, 2025) would be notable.

Corporate earnings continue to make new highs and analysts’ forward estimates continue to rise. As long as earnings growth continues, the intermediate- to long-term outlook for the stock market will remain favorable.

Regional bank stocks have been underperforming the broader banking index since the market trough in April 2025. Late last week, regional banks showed further weakness, exacerbating a trend that began months ago. The sector was bouncing back somewhat in early Monday trading, with the regional bank index rising more than 1.0%.

Gold has risen more than 20% in the last month in a parabolic move. After such strong price action, a sharp correction would not surprise us, but the long-term outlook remains favorable. We continue to believe that gold merits a place in portfolios as part of a diversified real asset allocation.

Fixed Income Takeaways:

Treasury yields fell 2-5 basis points across the curve last week as investors sought safety amidst volatility in the banking sector. Yields also tend to move lower during government shutdowns, as investors become worried about the shutdown’s effect on economic growth.

Treasury yields were stable in early Monday trading. Overall, 2-year Treasuries were yielding 3.47%, 5-year Treasuries 3.59%, 10-year Treasuries 4.00%, and 30-year Treasuries 4.58%.

The MOVE index is a measure of bond market volatility. Despite the recent government shutdown, the MOVE index has remained subdued in recent months. The path of least resistance for yields remains lower.

Investment-grade (IG) corporate bond spreads tightened slightly last week, stabilizing after a bit of widening in early October. High-yield (HY) spreads were also tighter last week. Both IG and HY credit default swaps continue to price a benign, ultra-complacent credit environment.

Key Takeaways

Late last week, China announced new rare earth (RE) export controls; not just direct rare earth exports, but also materials like industrial diamonds, battery components, equipment for processing rare earths, and, perhaps most aggressively, any foreign-made product that contains Chinese RE.

President Trump responded on Friday, October 10, 2025, with a threat of incremental tariffs on China of 100% effective November 1, “or sooner”. Global markets sold off sharply as a result.

Over the weekend (October 11-12, 2025), both China and the US seemed to walk back their initial belligerence, but underlying tensions remain. China did not remove export controls entirely; and while an “off-ramp” may exist and signs of a truce may be building, a “grand bargain” is seemingly off the table.

Rare earth minerals have a variety of applications in certain technologies, including magnets, batteries, lasers, x-rays, military, nuclear, etc. These minerals are broadly used in the healthcare and semiconductor sectors.

The US government shutdown continues.

Government shutdowns typically have minimal long-term lasting market impact; however, short-term volatility is not out of the question. Volatility can be exacerbated by other market-moving events (shutdowns don’t occur in a vacuum).

For example, during the last government shutdown in late 2018 to early 2019, the S&P 500 gained 10% from the day the shutdown started to the day it ended. Along the way, however, the S&P 500 also had an intra-period decline of nearly 20% and credit spreads widened considerably. The Federal Reserve (Fed) was tightening policy (raising interest rates) into the shutdown, exacerbating the volatility.

The 2025 shutdown is happening during a time of Fed loosening policy (lowering interest rates) and volatility in both the stock and bond markets has been limited since the shutdown began October 1 (other than this past Friday’s volatility due to the China/US situation regarding rare earth exports). 

Bottom line – key takeaways and how to invest now.

Tariffs are back, but they never really went away. Quick reminder: tariffs are “man-made” and can be removed as quickly as they are applied. Even if removed, some effects will linger, such as elevated uncertainty and waning credibility.

Amid such uncertainty, corporations and consumers have proven adaptable and resilient to date. That said, the economic outlook is still hazy as the impact of tariffs may still be felt.

Meanwhile, labor trends continue to cool but not collapse, as growth is being buoyed by artificial intelligence (AI). At the same time, earnings are growing while the Fed is cutting rates, a positive backdrop for risk assets.

Stock market valuations are stretched, and although they may not be at extremes, expensive valuations could exacerbate volatility during market pullbacks. Markets also remain concentrated, an additional source of risk that argues for increased diversification.

We continue to believe that investors should remain “Neutral to Risk” and remain fully diversified – by asset class, geography, sector and security.

Equity Takeaways:

Stocks rebounded in early Monday trading after last Friday’s sharp selloff. The S&P 500 rose approximately 1.3%, to 6640, while the tech-heavy Nasdaq rose approximately 1.8%. Small caps and international stocks also rallied.

Last Friday (October 10) was a “risk off” day. Large caps outperformed small caps, value stocks outperformed growth stocks, and defensive sectors outperformed the broad market. Gold and bonds both rallied, while oil was sharply lower. Crypto markets suffered extreme volatility.

Entering last Friday, volatility had been very subdued for several months. A pause to refresh recent gains with some “backing and filling” would be healthy price action in our view.

Prior to last week’s selloff, the CBOE put/call ratio dropped below 0.65, indicating high investor complacency. These types of indicators do not always indicate major corrections, but a pause in the rally could do some good to reset sentiment.

The 12-month forward earnings estimate for the S&P 500 continues to power higher and remains a strong fundamental driver for the market. Earnings higher = stocks higher over the intermediate- to long-term.

The Magnificent Seven large US technology companies have better balance sheets and are more profitable than the internet leaders of the late 1990s, according to data from Goldman Sachs. The same study concluded that the Magnificent Seven are cheaper in terms of price/earnings (P/E) ratios compared to the internet leaders of the late 1990s and represent a far larger weight in the market indexes.

Gold has had a great run in 2025 on the back of a strong 2024. The recent rally has brought the total return of gold essentially in line with the total return of the S&P 500 over the past five years. While gold may pull back over the short-term, we still believe gold will have important macro tailwinds over the long-term and can provide real asset diversification to portfolios.

Fixed-Income Takeaways:

Treasury yields moved lower across the curve last week as investors migrated towards safe assets. Last week, 10-year yields fell approximately 12 basis points, while 2-year yields fell approximately 8 basis points.

The bond market is closed today (Monday) for the holiday. Overall, 2-year Treasury yields closed last week at 3.52%, 5-year Treasuries 3.65%, 10-year Treasuries 4.06%, and 30-year Treasuries at 4.63%.

Significant rate cuts are priced into the forward yield curve. Market participants continue to expect the fed funds rate to approach 3.00% by the end of 2026. The current fed funds rate is the target range of 4.00% to 4.25%.

As the Fed cuts interest rates, the yield on government money-market funds will drop in lockstep. Corporate bond yields have remained stable in recent weeks and are attractive compared to money-market fund yields. We discuss this dynamic further in the linked article from late last year.

Credit spreads widened last week in conjunction with Friday’s equity selloff. On an absolute basis, credit spreads remain low, and we will closely monitor spreads this week for further signs of stress. New issuance dipped last week amidst the volatility.

Bank earnings season begins this week. Traditionally, banks are large issuers of debt immediately after earnings, so we expect new issue activity to pick up this week.

Key Takeaways

Historically, government shutdowns have had minimal lasting impact – this is our base case. The economy is holding up, although the labor market continues to cool.

As the shutdown meanders into the second week, both sides seem “dug in”, but things could change quickly. Betting markets such as Kalshi are suggesting that we may be in store for a lengthy shutdown. Importantly, the current shutdown is not a debt ceiling issue.

Given the significant amount of change experienced year-to-date (YTD), we should expect the unexpected; a spike in volatility is not out of the question. The last government shutdown occurred in late 2018, a period of significant volatility in both the stock and bond markets, but volatility had already increased before the shutdown occurred.

With parts of the government actually shut down, such as the Bureau of Labor Statistics, alternate data offer some economic clues. For now, employment trends are softening, inflation is firming, and consumer confidence is oscillating, although consumers are still consuming.

Alternate data sources include the ADP non-farm payroll report, Challenger, Gray & Christmas announced total job cuts, the University of Michigan’s survey data, and the Institute for Supply Management’s economic survey data.

Valuations on US risk assets are high, and risk aversion is low. Markets remain concentrated. Exposure to artificial Intelligence (AI) – within the economy, the markets and investors’ portfolios – is very high; some are saying “bubble”.

The forward price/earnings (P/E) ratio of the S&P 500 is almost 23x, a level approaching the last peak seen in 2020-2021. The late 1990s saw this metric approach 26x. Put another way, the forward P/E on the S&P 500 is in the 96th percentile of valuation versus history (the 100th percentile being most expensive), according to data from Bloomberg through September 30, 2025.

International stocks are trading at more reasonable valuations, even after rallying sharply YTD. Developed international stocks are trading with a forward P/E in the 66th percentile of valuation versus history, and emerging markets are in the 74th percentile, also according to Bloomberg data through September 30, 2025.

Recent comments from business leaders such as Amazon founder Jeff Bezos have used the term “bubble” to describe the current AI boom but have also focused on the technology’s long-term benefits to society. Such comments seem consistent with our view that AI may be both be over-hyped in the short-run and under-estimated in the long-run.

Bottom line – how to invest now.

Risk aversion is low (investors are optimistic), but sentiment can change swiftly and with little notice.

Government shutdowns are typically non-events for the economy in the long-run but commonly cause volatility to jump in the short-run. How will this shutdown differ from those in the past?

Economic strength is persisting, aided by declining imports, while being boosted by consumer spending and AI spending. Consequently, AI is now embedded into the economy, for better or for worse.

At the same time, certain AI-companies are embedded into each other, another parallel with 1998-1999. This could provide a unique backdrop for active management.

Earnings growth in Q3 is poised to moderate relative to Q2 and sector dispersions are large, further creating an attractive environment for active managers.

With aversion to risk low, valuations are high as another valuation metric approaches another all-time high – the cyclically-adjusted price/earnings ratio (CAPE), developed by Robert Shiller. This, by itself, will not likely cause a correction, but it will likely result in lower prospective returns.

We continue to believe that investors should remain “Neutral to Risk” and remain fully diversified – by asset class, geography, sector and security.

Equity Takeaways:

Stocks were generally higher in early Monday trading. The S&P 500 rose approximately 0.1%, to 6723. The tech-heavy Nasdaq rose approximately 0.6%, while small caps fell approximately 0.1%. International shares were generally higher.

The S&P 500 set another all-time high last week, cresting 6700. Earnings season for the third quarter kicks off next week, with large banks at the beginning of the reporting cycle.

As we’ve noted in the past, earnings growth drives stock prices over the intermediate- to long-term. If earnings continue to surprise to the upside relative to expectations, the stock market can continue to rally despite high valuations.

The P/E multiple on the S&P 500 remains elevated at almost 23x forward earnings. Additional valuation metrics, such as price-to-sales, price-to-book, and price-to-cash-flow, also remain well above historical averages.

The tech-heavy Nasdaq continues to lead the market higher, driven by the AI trade. Within the S&P 500, the top performing sectors YTD have been technology and communications services.

Earnings growth for Q3:2025 for the S&P 500 is expected to moderate to 7.9% from the 12.1% growth we saw in Q2:2025, according to FactSet. In the second quarter, actual earnings surpassed initial estimates by a wide margin, so it will be interesting to see if that dynamic continues in the third quarter.

Fixed-Income Takeaways:

Intermediate Treasury yields dipped 5-7 basis points last week as the fixed income markets have settled into a range. Corporate credit spreads continued to narrow to historically tight levels amidst very low volatility.

In early Monday trading, Treasury yields rose slightly across the curve. Overall, 2-year Treasuries were yielding 3.59%, 5-year Treasuries 3.73%, 10-year Treasuries 4.15%, and 30-year Treasuries 4.74%.

Municipal bonds had a strong rally in September, especially amidst longer-dated bonds. Long-dated municipals had lagged taxable bonds for much of 2025, so the recent rally was a catchup rally of sorts.

On a relative basis, municipals were cheap to Treasuries in April through most of the summer. The recent rally in municipals has brought them back towards fair value versus Treasuries in terms of taxable-equivalent yield.