Q4 Stock Market: Inflation, AI, and Budget
Source: morningstar.com
Market Influences in Q4 2025
Investor enthusiasm has been a major factor in this year's stock market upswing. However, significant economic concerns could potentially moderate the market's positive trend. This bull run has propelled stocks upward from their spring lows, reaching higher levels by autumn. The expansion of artificial intelligence is a primary factor driving this.
The Federal Reserve faces the difficult task of navigating a weakening job market alongside persistent inflation. The central bank lowered interest rates for the first time in 2025 during the third quarter, but the future direction remains unclear. Sarah Hansen, a senior markets reporter at Morningstar Inc., highlights seven key market elements to monitor in Q4 2025.
Key Risks and Valuations
Several risks influence the current outlook. High valuations have been a consistent concern for investors. When stocks possess fair or elevated values, as seen in numerous large tech stocks currently, their capacity to withstand unforeseen shocks diminishes, whether to the corporate outlook, the broader economy, or policy decisions. The counterargument suggests that these high-performing tech stocks deliver robust results, justifying their premium stock prices. Currently, it is difficult to definitively assess which perspective is accurate. It is possible that both hold some truth, or that an alternative scenario may unfold. Predicting the future is challenging.
Market Volatility
Expect market volatility during the closing months of 2025, as uncertainty surrounds stocks, policy, and the economy. Sarah Hansen notes that markets rarely experience uninterrupted growth. Currently, many strategists express optimism about the market's prospects, citing strong underlying factors. The sustainability of the powerful stock market surge amid increasing risk factors remains to be observed. Stocks increased by 8% in the third quarter, despite worries regarding high valuations, uncertain US trade policy, and a declining job market.
Bond yields decreased, and prices rose before the Federal Reserve's initial interest rate cut since 2024. Some strategists anticipate that elevated inflation and other risks might further steepen the yield curve.
Government Shutdowns
According to Dominic Pappalardo, chief multi-asset strategist for Morningstar Investment Management, markets commonly perceive government shutdowns as minor crises. These events usually trigger a risk-off response, causing increased volatility, a rally in US Treasury rates, and slight stock sell-offs. Since 1974, various shutdowns have occurred, lasting from a few hours to over a month, making them relatively common. Pappalardo advises investors to maintain discipline and ensure their diversified investment strategy aligns with their risk tolerance.
AI Investment
Nvidia's potential investment of up to $100 billion in OpenAI, the creator of ChatGPT, could break records. Dan Kemp, chief research and investment officer at Morningstar Investment Management Europe, believes this substantial investment supports two simple narratives regarding the AI era: first, that excessive investment exists in the technology, leading to potential booms and busts; and second, that AI has fundamentally altered investing and returns. Kemp advises investors to acknowledge the wide spectrum of possible outcomes beyond these simplistic narratives. Check out this week’s Markets Brief for more insight on AI's impact on data center demand. Next week’s Markets Brief will cover the US government shutdown and the market reaction.