MONTHLY MARKET MUSINGS

October 2025

Three Quarters Down And One To Go

As expected, we saw the U.S. Federal Reserve (Fed) resume its rate cutting cycle in September. Markets are now pricing in more cuts this year as U.S. Fed policymakers noted that they have had concerns surrounding weakness in the U.S. job market and will steadily lower rates for the remainder of 2025 to ease this pressure.[1] Currently, the probability being priced in for an October cut is at nearly 93% while the market is also favouring a subsequent cut in December with a 71% probability.[2] That would take the year-end Fed Funds rate to a range of 3.50%-3.75%. The additional monetary easing in October should help to support equities throughout the fall and provide a stimulative effect on businesses. Looking at December, a rate cut may or may not happen, we believe that this decision will be data-dependent and unemployment numbers and inflation data throughout November and early December will be the determining factor for that. In Canada, we saw a comparable situation as the Bank of Canada also cut its overnight rate by 0.25% dropping it to 2.50%. Most economists feel that there is still another cut on the horizon as this most recent one is unlikely to have done enough to fix the weakness in the Canadian job market.[3] CIBC economics is forecasting one more cut between now and the end of 2025.

The rate cutting cycle is one of several reasons why we remain optimistic on the equity markets in the coming months and in 2026. Aside from the rate cuts, some of the other reasons we remain optimistic on U.S. equities is the fiscal stimulus from the U.S. government, the push for deregulation and the continued robust level of corporate spending that we are experiencing.

While the U.S. deficit is a continuous concern, more government spending is generally stimulative for the economy. Along with this, the expected tax cuts will provide consumers and businesses with more disposable income which increases business activity.

Deregulation will likely reduce the current capital requirements for the U.S. banks. This will give them greater balance sheet capacity by allowing them to reduce the ratio of capital to total assets and the capital that was previously tied up becomes available to the banks to invest or to lend out. This promotes economic growth. Additionally, less regulation will also help to spur more corporate activity in terms of M&A (mergers & acquisitions) which generally signals a healthy economy and improves growth prospects as it creates efficiencies, economies of scale, product and service improvements, etc.

Corporate spending is another reason to stay optimistic, specifically, when it comes to technology and AI (artificial intelligence) spending. While some have questioned whether the expenditures have gotten ahead of themselves, tech companies continue to see AI as the best place to invest their capital. Citigroup recently projected that 2026 AI spending by the large hyperscalers is now expected to be nearly $490 billion, an increase from the initial forecast of $420 billion. Citigroup has estimated that through 2029 that figure will total approximately $2.8 trillion, up from their initial number of $2.3 trillion. $1.4 trillion of that amount is expected to be spent in the U.S.[4] Many of the large tech hyperscalers have been building out systems and products in anticipation of the visible enterprise demand that is beginning to show signs of validation.[5]

Often, we are asked why we remain positive on U.S. equities. Our view is simple, over the long term, the combination of abundant corporate spending, a fiscal expansionary policy, deregulation, and continued monetary easing is a hard combination of bullish catalysts to ignore. This creates a risk-on market as equities will be in an optimal setting for further growth and continued strong corporate earnings. These are the main drivers of that view. Potential downside risks will continue to be present as they always are and the thesis can change if one of these factors became unsupportive of growth but as of now, the environment is conducive to further growth in equities.

JAY SMITH, CIM®, FCSI®

Senior Portfolio Manager & Senior Wealth Advisor    

jay.smith@cibc.ca

BRAD BROWN, MBA, CFA®
Portfolio Manager & Associate Investment Advisor

brad.brown@cibc.com