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Monthly Economic and Investment Outlook

October 2025 Economic and Investment Outlook

United States

stock market bull statue
  • Federal Reserve (Fed) Takes Action in September: Facing the pressure of a softening labor market, the Fed decided to cut its Fed Funds Target Rate Range -0.25% to 4.00% to 4.25%. As part of the September meeting, updates were also made to the Fed’s “dot plots” which showed the median expectation for rate cuts has moved up since they were last published in June with policymakers now anticipating two more 0.25% cuts in 2025 and one 0.25% cut in 2026.

    • US Inflation Measures

  • Fed’s Preferred Inflation Gauge was as Expected: Personal Consumption Expenditures (PCE) for August, the Fed’s preferred measure of inflation, was in line with expectations at +0.3% month over month (m/m) and 2.7% year over year (y/y). Core PCE (ex-food and energy), was also spot on expectations at +0.2% m/m and 2.9% y/y. Although these numbers are still above the Fed’s long-term target of +2% they show only limited tariff related increases thus far. Of course, the higher prices didn’t deter U.S. consumers in August as consumer spending rose +0.4% m/m beating expectations of +0.2% m/m. Most of the additional spending can be attributed to the back-to-school categories. Unfortunately, the spending did come at the expense of personal savings as the savings rate dropped to 4.6% (the lowest this year).
  • Employment: There were no shortage of news headlines regarding the nonfarm payroll report for August, which came in much lower than expected with 22,000 jobs added — a stark difference from the consensus expectations of 75,000 added. There was also a significant revision to the June report which took that final number to -13,000, the first monthly decline since 2020. At the same time, the unemployment rate moved up to 4.3% which is the highest rate since 2021. This was the fourth consecutive monthly jobs report below +100,000, demonstrating the “softening” the Fed has been noting. Of course, the U.S. job openings and unemployment levels in the U.S. remain above and consistent with pre-pandemic levels.
  • The Quarter Starts with a Shutdown: The fourth quarter is starting with the additional complexity brought by a government shutdown. It is difficult to predict what the outcome or impact of the shutdown will look like, but using history as our guide, we will say that shutdowns are more frequent than people may realize. There have been 20 shutdowns since 1976 with an average duration of eight days, with outliers in 1995 (21 days) and 2019 (34 days). Markets are currently expecting this one to last only a short period of time.

    • US Total Government Debt Outstanding

Global

  • Global Central Bank Divergence Continues: Many of the developed economies around the world face similar challenges with inflation and growth, but unlike in years past, central banks are not as unified in their decision making. The Bank of Canada, for example, chose to reduce their benchmark rate by 25 bps (like the Fed) down to 2.50%, citing a weakening labor market. The Bank of England (BOE) on the other hand chose not to cut their rate, keeping it at 4% and noting they were more concerned about near-term inflation. The Bank of Japan (BOJ) also held rates steady at 0.50% for the fifth meeting in a row. What was interesting to us was the fact that both the BOE and BOJ decisions were not unanimous with both coming in at 7 to 2 split votes. Not only does this emphasize the disconnect in global monetary policy, but it also shows the domestic challenges each central bank faces with their economies.

    • Global Government 10-Year Yields

  • Speaking of Inflation: Inflation in the Eurozone is showing signs of an inflationary uptick, but it is not universally high. For example, France and Italy stayed below the European Central Bank’s target of 2% coming in at 1.1% y/y and 1.8% y/y, respectively. Germany, on the other hand, showed consumer prices jumping +2.4% y/y in September. Outside of the Eurozone, China’s economy is in a disinflationary phase with their consumer prices declining -0.4% in August.
  • Growth in the Eurozone: Eurozone Purchasing Manager Composite Index (Services and Manufacturing) came in at 51.2, its fastest pace of expansion in more than 16 months. However, when looking at the details, manufacturing is back into contraction territory (below 50) across the 20 Eurozone nations. Services across the bloc are benefiting from a solid labor market, rising wages and fiscal spending. Elsewhere, the U.K. and Japan remain in expansionary territory (above 50) while Canada’s economy is currently contracting.

    • Global Government 10-Year Yields

  • U.S. Tariffs Will Have a Global Impact Going Forward: The World Trade Organization (WTO) predicts merchandise trade volumes will increase +2.4% this year but only +0.5% in 2026 due to the U.S. tariff implementations. The report noted “possible signs of weakness in trade and manufacturing output have been observed in developed economies including reduced business and consumer confidence and slower growth in employment and incomes.”
  • On the AI front, the WTO report highlighted the fact that of the 100 AI-related product lines the organization tracks, like semiconductors, processors, finished computers, cloud servers, etc., trade in those categories increased 20% y/y and represented nearly half of the overall global trade growth in the 1st half of 2025.

Fixed Income

  • Interest Rate Expectations: The Fed Funds market is still pricing in two cuts to the Fed Funds rate, one occurring at the end of October and the other at the beginning of December (in line with the “dot plots”). This resulted in some broad-based buying in the bond market during September (buying in bonds = lower yields).
  • Anticipated Fed Action: The government shutdown is likely to delay critical government data like monthly nonfarm payrolls, consumer prices and retail sales which will force the Fed to rely on alternative data including private data to make decisions. The Fed will be looking for additional data points showing weakness in the labor market. The mix of strong retail sales, above-target inflation and slower employment growth with more unemployed paints an ambiguous picture.
  • Short-term inflation: In addition to the “dot plots”, the Fed also raised its median short-term inflation expectations for the year ahead from 3.2% to 3.4% and the five-year expectations to 3.0% from 2.9%. Despite this, Powell’s remarks following the FOMC meeting were the most dovish since 2021.

    • 10 Year U.S. Treasury Yield

  • Longer Rates: Longer-term interest rates continue to be range bound between 4.0% and 4.25%. At the same time, we expect the yield curve to steepen so that the spread between 2-year Treasuries and 10-year Treasuries moves back to its historical “normal” of 100bps.

    • US 2Yr Treasury vs. US 30Yr Treasury
    Source: Bloomberg

Tactical Fixed Income Allocation

  • We are neutral duration to the fixed income strategy’s respective benchmark as the Fed remains on a drawn-out easing path. At the same time, U.S. fiscal deficits and debt are high. At the margin international debt is becoming relatively more attractive and central banks may look to diversify their holdings in the future.
  • We favor short-term investment grade corporates versus the respective benchmark to capture additional income with minimal incremental risk.
  • We favor an allocation to short-term Treasury Inflation Protected Securities (TIPS) due to the risk of sticky inflation (in short-term) exacerbated by inflationary policies.

Equity Market

  • Equity Review: Cutting interest rates into positive earnings revisions is quite rare for the Fed and historically has been a boon for equities. The market is also being propelled higher by enthusiasm for the AI growth story. Companies that have committed to deals with OpenAI and Nvidia have seen their stock prices surge recently.
  • Earnings Review: Q3 earnings season kicks of in earnest the week of October 12th and expectations are for 8.8% y/y earnings growth at the index level. Analysts are penciling in earnings growth of 7-11% for the Hyperscalers, with the exception of Nvidia which is expected to announce year-over-year growth of 52%.
  • Risks Being Ignored: Optimism over AI and expected interest rate cuts by the Federal Reserve continue to push the market higher. Investors are paying limited attention to valuations that leave little room for setbacks or worries about the U.S. government shutdown. Total call option volume, which is a way for investors to bet on higher prices is by far the largest on record and reflects the market’s exuberance.

    • Call Options Largest on Record
    Total call volume over the last 20 sessions
    Source: Bloomberg

  • Electricity Demand: AI and data center demand are two of the primary drivers behind the risking demand for electricity and increasing prices. This earnings season it will be interesting to listen to what utilities companies are saying or doing in response to rising costs from consumers.

    • Global Elecricity Consumption
    Source: Strategas Research

Tactical Equity Allocation

  • We favor U.S. Large Cap stocks with an emphasis on equities with quality, strong cash flow characteristics and lower volatility. A focus on companies that are more insulated from tariff shocks and have strong pricing power.
  • We are neutral International Developed stocks with respect to our benchmark with no exposure to Emerging Markets. We remain concerned about tariff policy as it impacts on Emerging Markets.
  • We favor exposure to gold serves as a hedge in a geopolitically tense global environment and is supported by strong central bank buying.
Notices & Disclosures

Products and services offered through F.N.B. Wealth Management are not FDIC insured; and are not insured by any Federal Government Agency, are not deposits or obligations of or guaranteed by First National Bank of Pennsylvania or its affiliates and may go down in value.

This report is provided for informational purposes only. The report includes forward-looking statements and reflects the current opinions of the authors, which are subject to change without notice, as are the information and assumptions upon which they are based. Changes in market conditions, changes to applicable laws, and various other events may render the contents no longer reflective of our positions.

Information in this report is obtained from sources F.N.B. Wealth Management (FNBWM) believes to be reliable, but we cannot guarantee the accuracy, timeliness, or completeness of information obtained from third party sources. Charts and statistics included throughout then report are for illustrative purposes only and do not represent any portfolio FNBWM manages. Indices are not available for direct investment, and index performance does not reflect the expenses or management fees associated with investing in securities. Investing involves risk and past performance is not a guarantee of future results, and there can be no assurance that any action taken based upon the information referenced in this report will be profitable, equal any historical performance, or be suitable for your portfolio or individual situation.

Tactical Fixed Income and Tactical Equity Allocations in this report reflect FNBWM’s broad positioning for each asset class and are provided for informational purposes only. The inclusion of these allocations does not constitute an offer to buy or sell, nor a recommendation to buy or sell, any security or financial instrument or take any particular action. Neither these allocations nor any other information presented within this report constitute personalized investment advice, and the report’s authors do not account for the financial situation or specific needs of any individual in preparing the report. You are encouraged consult with your investment advisor regarding its applicability to your individual situation.

F.N.B. Wealth Management refers to F.N.B. Investment Advisors, Inc. and First National Trust Company, which are subsidiaries of First National Bank of Pennsylvania (FNBPA) and F.N.B. Corporation (FNB). Accounts and services offered through F.N.B. Wealth Management are not FDIC insured or insured by any Federal Government Agency and are not deposits or obligations of or otherwise guaranteed by FNBPA or any FNB affiliate and may lose value.

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