• The Seasonally Adjusted Annual Rate for GDP in 2Q25 rose a strong 3.8% as AI-related spending, including infrastructure spending to support future AI demand, boosted US growth, while proposed tariffs had yet to meaningfully impact the economy.
• The unemployment rate rose to 4.3% in June and revisions by the BLS cut job growth for the 12 months ending in March by half.
• CPI Inflation has been coming down marginally in 1H25 but has stalled recently and rose 2.9% YoY in August, up from 2.7% YoY in July as the recent increase in tariffs is showing up in numbers. While the FED was on hold for 1H25, they lowered the overnight rate by 0.25% in September and indicated potentially two more cuts in 4Q25 with further cuts in 2026.
• The S&P 500 had another strong Quarter, increasing 7.8% for 3Q25. Technology (13.04%) and Communication Services (11.82%) led the sectors while REITs (1.73%) and Materials (2.63%) were the laggards.
• The 10-year Treasury bond yield decreased by 8 bps during the quarter to end at 4.15%, leading to a slight increase in bond prices. The Aggregate US Bond Index increased by 2.0% in 3Q25, and was up 6.0% YTD.
• The price of gold rose 15.12% in 3Q25 and was up 47.0% YTD.
• We favor investment grade intermediate term bonds. While long-maturity bonds offer higher price appreciation in a recession scenario, the yield difference versus intermediate bonds is too small for the elevated risks of future declines if the US does not reduce fiscal deficits.
• We recommend bond ladders of IG Intermediate bonds with attractive yields but we expect less price appreciation than in the past with almost all bond returns coming from the coupons going forward.
• Short term interest rates follow the FED rate. The FED cut rates by 25 bps in September and is guiding to 50 bps of cuts in 4Q25 and further cuts in 2026, indicating reductions to money market returns. With this in mind, we recommend investors toterm out cash positions not needed for liquidity purposes.
• Studies show that market timing typically produces inferior returns. We encourage diversification and a focus on working towards financial planning goals.

• Geopolitical unrest and the risks to global growth:US tariffs are on the rise as President Trump has announced numerous tariffs including agreements with several trading partners that include higher tariffs, but key agreements with China, Canada, India and Mexico are still outstanding.
  • Higher US and global tariffs will hurt US and global economic growth, but the effect will be mostly felt in 2026 as some of the ariffs have not been implemented yet.
  • Cold War 2.0 has started with Russia, China, Iran, and North Korea on one side, and with Russia increasingly aggressive towards their neighbors. This has led the West and its allies to increase defense budgets. While increased defense spending will boost economic growth, increased tension and trade wars will have a negative impact on global growth and the potential for disruptions given highly integrated global supply chains.
  • Trump 2.0 is very aggressive towards both allies and opponents with his rhetoric. This could make it harder to agree trade terms with adversaries and get cooperation from allies.
  • The political wind in Europe has changed as the continent realizes they have to pay for their own defense and historical ruling party coalitions are losing support among populations.
• Economic Growth, Unemployment, and FED Action:
  • The US economy surprised to the upside in 2Q25, boosted by spending on AI and AI infrastructure. Expectations for 2025 is real GDP growth of 1.7% followed by similar real GDP growth in 2026 and 1.9% real GDP growth in 2027.
  • The tariffs have made the job of the FED more challenging given its dual mandate of stable prices and employment. The market currently believes the FED will support the economy through multiple cuts in 4Q25 and in 2026.
  • The corporate sector remained strong as earnings continued to surprise to the upside in 1H25. The EPS for the S&P 500 is currently projected to grow 9.9% in 2025, and 11.4% in 2026, indicating further strength. This could prove to be a mirage if tariffs lead consumers and companies to dial back spending due to uncertainty about future prices.
• US Government Budget Deficits:
  • The US continues to run large budget deficits despite robust tax revenues. The fiscal 2024 deficit was ~$1.8 Trillion, or 6.2% of GDP, and the fiscal 2025 deficit is projected at $~1.9 Trillion, or also 6.2% of GDP. While the 2026 budget deficit is projected to decline to $1.7 Trillion, or 5.5% of GDP, the government is currently shut down as the Senate could not get the required 60 votes for a continuing resolution of recently approved spending.
• US Government Debt:
  • US Federal debt-to-GDP has risen to 125% versus 57% in 2000. The Congressional Budget Office (CBO) projects US Federal debt to rise by ~$20 trillion in the next decade even in the most positive scenario to ~$57 trillion.
  • Continued large budget deficits will make this worse and eventually force harsher changes when the music stops.
  • The Federal government is expected to pay ~$952 billion in net interest for fiscal 2025, and this is projected to rise to $1 trillion for fiscal 2026. This compares to fiscal 2025 defense spending of ~$895 billion.
  • As the interest on the Federal debt will consume a higher, and higher percentage of the government’s budget, it will crowd out other spending, making it harder to make changes the longer we wait.
• Emerging Market Growth and China
  • Prior to Covid, China was an economic growth machine as the country invested massively in infrastructure and housing. This also drove demand growth in raw materials from other countries such as Brazil and Indonesia.
  • Recently, China’s economic growth has slowed as its population has peaked, requiring less infrastructure spending. Furthermore, poor top-down economic policies from the communist party created a real estate bubble and an overhang of bad debt from large real estate developers. As a result, new construction has declined substantially and China’s “miracle growth” has slowed.
  • Wages in China have become less competitive, and China has become very assertive to its neighbors in the South China Sea. Combined with tariff threats, it has led companies to move or establish new production away from China to diversify risks. India has been a big beneficiary as the country’s economic growth has surpassed China. Mexico has also benefited from near-shoring to the US.
• Higher demand for key raw materials used in the energy transition will benefit select EM economies such as Brazil, Chile, and Indonesia that have these resources, but Brazil is facing its own economic challenges.

Economic Growth, Corporate Earnings, and Financial Markets:

• Putting it all together, we are cautiously optimistic but worry tariffs could lead to slower economic growth both in the US and globally. Equity valuations are elevated expecting AI growth to drive higher future earnings, but are sensitiveto growth projections and discount rates. If the FED is successful in lowering rates, taming inflation, and keepingeconomic growth robust, it will be positive for equity markets.
• We favor intermediate IG corporate bonds due to a combination of strong balance sheets and attractive yields.
• We recommend long-term investors to stay invested despite darker clouds such as a potential tariff war as 2025 performance YTD has been a strong reminder markets can still outperform despite tariff announcements and geopolitical unrest including a brief war between Israel and Iran.

These are the opinions of Ascend Wealth Planning, LLC and not necessarily those of Cambridge, are for informational purposes only, and should not be construed or acted upon as individualized investment advice. Investing in securities involves risk of loss. Further, depending on the different types of investments there may be varying degrees of risk Clients and prospective clients should be prepared to bear investment loss including loss of original principal. Fixed income investments are subject to various risks including changes in interest rates, credit quality, inflation risk, market valuations, prepayments, corporate events, tax ramifications and other factors. Diversification and asset allocation strategies do not assure profit or protect against loss. Indices mentioned are unmanaged and cannot be invested into directly. Past performance is not a guarantee of future results. Registered Representatives offering securities through Cambridge Investment Research, Inc., a broker-dealer, member FINRA/SIPC and Investment Advisor Representatives offering advisory services through Cambridge Investment Research Advisors, Inc., a Registered Investment Advisor. Cambridge and Ascend Wealth Planning, LLC are not affiliated.