Executive Summary

The S&P 500 continues to exhibit resilience in the face of mounting policy uncertainty. As the U.S. government shutdown extends into its second week, financial markets are increasingly confident that the Federal Reserve will proceed with additional rate cuts before the end of 2025.While the shutdown delays crucial economic data and clouds the macroeconomic outlook, investor sentiment remains supported by expectations of monetary easing, ongoing corporate earnings strength, and a robust performance in technology stocks. However, labour market softness and the risk of prolonged fiscal disruption could limit the pace of further market gains.

U.S. Economy is Strong but Shutdown Clouds Outlook

The U.S. economy entered the final quarter of 2025 amid contrasting signals. On one hand, GDP growth has remained steady, supported by consumer spending and a rebound in industrial activity. According to the Atlanta Fed’s GDPNow tracker, output expanded at an annualized rate of 3.8% in the third quarter, matching the pace of the previous quarter.

On the other hand, the ongoing government shutdown is beginning to cast a shadow over the near-term outlook. Treasury Secretary Scott Bessent warned last week that the impasse could “hit growth and hit working America,” with the Congressional Budget Office estimating daily compensation losses of roughly $400 million for 750,000 furloughed federal workers.

Historically, shutdowns have tended to produce only temporary disruptions, with GDP often rebounding once operations resume. However, the current episode may prove more damaging if President Donald Trump follows through with proposals to permanently eliminate some federal positions. Such a move could amplify existing labour market weakness and drag on consumption.

With Nonfarm Payrolls Suspended, Fed Poised for Another ‘Risk Management’ Cut

The shutdown has effectively strengthened expectations for further monetary easing. With official economic data releases, including the closely watched nonfarm payrolls report, suspended due to the closure, the Fed faces an information vacuum ahead of its October 28-29 policy meeting.

Markets are already pricing in a 100% probability of a rate cut this month and an 88% likelihood of another in December, according to CME Group’s FedWatch Tool. Given that September nonfarm payroll data is not available, the central bank will err on the side of caution and deliver another ‘risk management’ cut to mitigate the potential downside risks from an extended shutdown, particularly if government workers are laid off, as concerns about labour market fragility and data disruptions outweigh any lingering inflation pressures.

Private Payrolls Drop and Layoffs Surge as U.S. Labour Market Weakens

The U.S. labour market, which served as a cornerstone of post-pandemic recovery, is beginning to show visible cracks. According to the Bureau of Labor Statistics the latest nonfarm payrolls for August increased by just 22,000 vs. 75,000 expected, while the unemployment rate rose to 4.3%. The sputtering job creation in August adds to recent signs of deteriorating labour market.

With official labour data suspended by the government shutdown, the usual health checks on the U.S. economy have been disabled, leaving investors with private data for clues.

According to payrolls processing firm ADP, the private-sector payrolls fell by 32,000 in September vs, expectations for an increase of 45,000. This marks the largest monthly decline since March 2023, further showing that the labour market is weakening. Meanwhile, layoffs announced so far in 2025 have reached their highest level since the early months of the COVID-19 pandemic according to outplacement firm Challenger.

Betting markets now put the probability of a 10-29 day shutdown above 50%. However, should the shutdown persist, its cumulative impact could further dampen employment and consumption in the fourth quarter. Beyond direct furloughs, the suspension of federal contracts and delayed government payments could weigh on business sentiment and hiring decisions. Due to the shutdown, the absence of official figures could complicate Fed policy signals, a risk that has not yet dented risk appetite but could grow if the impasse drags on.

Source: TradingView

S&P 500 Hits New Record as Investors Bet on Fed Rate Cuts and Resilient Economy

The current data vacuum is helping suppress volatility for now. Markets continue to climb with confidence, even though last week ended without the release of the usual employment data. Reports from the Bureau of Labor Statistics (BLS) are typically seen as vital indicators of the economy’s direction, yet investors have taken optimistic view focusing on prospects of further rate cuts.

Meanwhile, the Carlyle Group estimated U.S. employers added just 17,000 jobs in September 2025, which is significantly below the 54,000 expected and is one of the weakest prints since 2020.

Warnings about a frothy stock market are multiplying, but investors keep charging higher, pushing the S&P 500 at yet another record of 6,754 on Tuesday. Market valuations remain elevated, with the S&P 500’s forward price-to-earnings ratio hovering around 23. While this multiple can be justified in a lower-rate environment, it leaves limited room for disappointment if corporate earnings or growth expectations weaken in the third quarter.

The resilience in equity markets has been driven by the central bank’s late-August pivot toward cuts and an economy that has proven more resilient than many expected. For now, this “tsunami of optimism”, has been outweighing concerns over shutdown risks and stretched valuations.

Gains in the S&P 500 have been driven by strong advances in the technology sector. We see continued sectoral rotation away from cyclical industries and toward higher-quality growth stocks. Investors are favouring companies with strong balance sheets and durable earnings capacity as a hedge against policy uncertainty.

Record ETF Inflows and Call Option Frenzy Shows Strong Market Momentum

Bank of America reported $152 billion of equity ETF inflows in just three weeks, the most on record. Tech led the charge with $9.3 billion in a week, while financials and materials also drew strong demand. Bonds saw $20 billion of inflows, though Treasuries bled $7.5 billion in the sixth-biggest outflow ever. Investors also added to gold, cryptos, and cash, reinforcing the sense of broad risk appetite.

Options activity tells the same story: Goldman’s desk highlights record call volumes, with more than 40 million traded daily across the last month. These record trading volumes are another sign of momentum and indicate strong market participation, even as sentiment gauges flag complacency.

S&P 500 Outlook Hinges on Q3 Earnings Season

The short-term direction of equity markets will depend heavily on two catalysts: the release of the Federal Open Market Committee (FOMC) minutes and the start of third-quarter earnings season. The minutes, due this week, should provide more clarity on the Fed’s internal debate over the timing and magnitude of further rate reductions.

While a rate cut in October and another in December are fully priced in, the broader question is how far into 2026 the Fed will continue easing. Persistent data delays could constrain confidence in the pace of cuts, while an earnings slowdown would support further easing.

From a valuation perspective, the equity market appears to be balancing optimism about future liquidity against uncertainty surrounding fiscal policy. If the shutdown is resolved in the coming weeks and the Fed delivers as expected, the combination of lower rates and stable earnings could support a continuation of the rally. Conversely, an extended shutdown or signs of deeper labour market deterioration could introduce a period of renewed volatility.

S&P 500 EPS growth is expected to slow in 3Q to about 6%, down from 11% in 2Q, as tariff costs erode margins. Customs duties rose to $93 billion in Q3 from $69 billion in Q2, creating a meaningful drag. The Magnificent Seven could see the sharpest deceleration, though that sets a low bar into earnings season. Big Tech commentary on AI demand and capex remains key to sustaining the rally.

Conclusion

The S&P 500’s current strength underscores the market’s faith in policy support and corporate resilience, but risks are far from trivial. The intersection of fiscal dysfunction and monetary uncertainty is creating an environment where sentiment, rather than data, drives short-term positioning.

Investors appear to be looking beyond the immediate disruptions, betting that the Fed’s rate cuts will stabilize growth and sustain earnings momentum. Yet, this optimism is contingent on the shutdown’s duration and the extent of labour market weakness that follows.

For now, the S&P 500 remains supported by liquidity and investor confidence. But with valuations stretched and data visibility fading, the final quarter of 2025 may test whether monetary policy alone can offset the drag of political paralysis.

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