Stocks are trying to cope with the implications of a stronger economy, but also higher interest rates. A strong economy is good for everyone, while higher interest rates are challenging for companies with high net debt, as well as companies with products that are typically financed, such as homebuilding and autos. While 4% long interest rates are not daunting by longer historical levels, rates 1% or lower would be noticeably stimulative, particularly in real estate, in addition to easing the financing burden of the record-setting government debt.
The 3Q25 came in at 4.3% the highest since 3Q23, well above the 3.3% forecast and up from 2Q25’s 3.8%. Interest rates reacted swiftly. The US 2-year jumped over 5 bps to 3.55%, the 10-year +2 bps to 4.20% (later correcting to 4.18%).
The economic strength is trumping concerns, with big tech strong, led by +1.8% semiconductors +0.5% and the Magnificent 7 +0.7%, while the is down 0.6% (though still leading the other major indexes with +5.5% for the trailing month) and the even-weighted down 0.3%. (though still beating the market-weighted S&P for the trailing month by over 1%). Importantly, the VIX has dropped to 13.6, the lowest level of the year.
On the commodity front, precious metals are strong once again, with breaking through $4,500 and silver trading above $70, though both pulled back after the GDP report. Energy prices are slightly negative, though energy stocks are higher (but down on the trailing month). Crypto pulled back, with down to $88K.
Overall, the GDP data is encouraging and portends a good start to 2026. While US consumer sentiment has fallen to challenging levels, investors are bullish, and investment inflows are strong. Risk appetite is rising, and projections for the 2026 S&P range between 7,100 to 8,100.