As 2025 draws to a close, the economic landscape embodies the spirit of finishing strong amid unprecedented complexity and change. U.S. employers added 64,000 jobs in November, surpassing expectations despite October’s steep decline. However, the unemployment rate crept to 4.6% and a broader measure of labor market slack reached its highest point since August 2021.
Corporate America delivered a stunning finish to 2025: Q3 earnings growth soared to 13.6%, well above initial estimates of 7.9% and reinforcing the durability of profit margins even as the Federal Reserve executed its third and final rate cut of 2025.
The Fed’s December meeting proved contentious, with three dissenting votes reflecting sharply divided views within the FOMC—one member favored deeper cuts while two preferred holding steady. This disagreement signals a tough road ahead for further rate reductions in 2026. Markets have demonstrated remarkable resilience in the face of monetary policy uncertainty and a new Fed chair in 2026.
The divergence between sectors tells a compelling story: manufacturing remains mired in contraction, services remain strong, consumers continue to spend, and equity markets have continued to hit record highs. The last days of the year have included China’s unexpected factory contraction, modest expansion in the eurozone, Oracle’s aggressive debt-fueled AI buildout, and the Fed’s surprising announcement of $40 billion monthly Treasury purchases to stabilize overnight funding markets. Geopolitical tensions, regulatory shifts, and economic crosscurrents will carry forward to 2026.
How Concerned Should We Be About Labor Markets?
The U.S. labor market shed 105,000 jobs in October, but U.S. employers added more jobs than expected in November, as job growth totaled 64,000 in November. However, the unemployment rate rose to 4.6%, which was higher than anticipated. A more encompassing measure that includes discouraged workers and those holding part-time jobs for economic reasons swelled to 8.7%, it’s highest level since August 2021. The October slump came from a steep fall in government employment as deferred layoffs instituted earlier this year took effect. Government payrolls declined 162,000 for the month and fell an additional 6,000 in November. Average hourly earnings rose just 0.1% month-over-month (M/M) or 3.5% year-over-year (Y/Y), the smallest annual gain since May 2021. At first glance, the loss of government jobs and an increase in the labor participation rate are drivers of the higher-than-expected unemployment rate.
Consumers Continue to Lead the Way While Manufacturing Struggles
U.S. retail sales were flat in October versus the prior month, following a revised 0.1% increase in September. Spending clearly moderated after surging over the summer where sales jumped 0.6% in July and August and 1.0% in June. Sales at clothing and accessories stores rose 0.9%, while business at furniture and home furnishing stores increased 2.3%, likely due to rising prices because of tariff costs. Restaurants saw a 0.4% sales dip. The important core retail sales figure, which correlates to consumer spending in the GDP report, jumped 0.8% M/M in October.
The U.S. manufacturing sector further contracted in November based on the ISM Manufacturing PMI reading of 48.2 that fell from 48.7 in October (readings below 50 indicate contraction). New orders and employment dragged down the manufacturing sector while production surged back into expansion territory. Service sector activity expanded in November with the ISM Services PMI increasing from 52.4 in October to 52.6 in November. New orders slumped, but all other key metrics strengthened. Consistent with global trends, manufacturing remains in a recession while consumer spending and services are still healthy and supportive of economic growth.
Source: U.S. Bureau of Labor Statistics
Fed Cuts Again, but Tempers Future Expectations as Q3 Earnings Destroy Estimates!
The Fed cut rates again at its December meeting but signaled to investors that there is no guarantee that it will cut rates further in the near future. The central bank cut its benchmark federal funds rate by another quarter of a percentage point, bringing it to a range of 3.50%–3.75%. This cut marks the third reduction this year and means the Fed Funds rate has now declined by a total of 1.75 percentage points since it peaked in 2023–2024. This was the fourth FOMC decision in a row that faced at least one formal dissent from a committee member. There were three dissents from this decision, with one member who wanted to cut rates by a greater amount and two who preferred to hold rates steady. The Fed also raised its median gross domestic product forecasts for 2026 by 0.5%, to 2.3%, while keeping its unemployment projection unchanged at 4.4% and with inflation moving lower by 0.2% to 2.4%. The Fed Fund Futures are pricing in two to three rate cuts in 2026, although we believe action will be data dependent.
One major surprise was the announcement of reserve management purchases starting almost immediately at a pace of $40 billion per month. The Fed indicated that purchases would stay at this elevated pace for the next few months to build reserves ahead of the April tax date when the Treasury general account will rise sharply and drain reserves from the banking system. The Fed will be a major buyer of T-bills in the coming months.
The Q3 earnings season ended well ahead of expectations with Y/Y growth of 13.6% versus the initial estimate of 7.9%. Earnings are forecast to grow 8.1% in Q4, 12.1% for the full calendar year 2025, and 14.5% in 2026. Earnings will be crucial for supporting already elevated U.S. equity valuations. The analyst community expects $309 of earnings for the S&P 500 in 2026 which equates to a 22x forward EPS multiple. We continue to believe our growth-oriented market supports a higher relative multiple compared to EAFE and EM equities. A theme for 2026 is broadening earnings growth beyond the Magnificent Seven.
Source: FactSet, as of 12/12/25
Eurozone GDP Beats Weak Expectations, as Services Remain Strong
Eurozone flash PMI data showed that the economic bloc likely ended 2025 on a high note. The HCOB Flash Composite PMI fell from 52.8 in November to 51.9 in December with services in expansion territory and manufacturing in contraction. New order growth softened amid a sharper reduction in new export business, but companies took on extra staff for the third consecutive month. The eurozone’s largest economy, Germany, saw a slower rise in output during December, and output in France flatlined. The rest of the eurozone again posted solid growth of business activity, although the pace of expansion eased from November. The service sector has helped stabilize the vulnerable eurozone economy but any uptick in economic growth will need to come from the manufacturing sector.
Eurozone GDP growth for Q3 of 2025 was revised slightly higher to 0.3%, up from the preliminary estimate of 0.2%. The upgrade was driven by a rebound in fixed investment, which rose 0.9% compared with a 1.7% decline in Q2, and stronger government spending, up 0.7% versus 0.4% in Q2. Inventory changes contributed to Q3 GDP growth while net exports subtracted 0.2%. Spain and France led the expansion in Q3, but German growth remained stagnant.
Remove the Noise & China is an Economic Mess
China’s factory activity unexpectedly contracted in November, according to the RatingDog China General Manufacturing PMI that showed soft domestic demand continued to cast a pall over the world’s second-largest economy. The headline reading of 49.9 in November was down from 50.6 in October. The official China manufacturing PMI showed China’s factory activity shrank for an eighth month in November, coming in at 49.2, a slight improvement from 49.0 in the prior month. New orders were weak in November but there was a notable pickup in new export orders. Perhaps of greater importance was contraction in the official non-manufacturing PMI which comprises construction and services; this was the first decline in this metric since December 2022. The headline reading declined to 49.5 in November, signaling weak domestic demand and softness in real estate. The latest economic data suggested China’s growth is likely to decelerate further to below 4.5% in Q4 from the 4.8% expansion in Q3.
All Eyes on Oracle’s Growing Debt Load
Oracle is perhaps the poster child of the AI hyper-scaler buildout taking place globally. Many tech companies have been issuing debt to pay for the huge amount of capital expenditures (capex) expected over the next few years. Goldman Sachs forecasts $394B of hyper-scaler capex in 2025, growing to $619B in 2027. The companies at the forefront of this growth include Oracle, Microsoft, Meta, Amazon, and Alphabet. Oracle has seen tremendous growth over the past few years, but it has also issued significant debt to finance its AI buildout. Since the company issued its 30-year bond in September, spreads have blown out to near below investment grade levels. Several experts believe Oracle’s debt will grow from $100B this year to $300B in 2028, and accelerating earnings will be necessary to keep pace with this higher debt load.
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