Economy Show Signs of Cooling as Markets Are Poised for Broadening Growth

Matthew Rubin Chief Investment Officer

 

1. Earnings forecasts released last week suggest that profit growth in 2026 may broaden across all sectors, supporting diversification beyond technology-led market leadership.
2. Last week’s labor data pointed to a gradual cooling in employment conditions, with layoffs contained and wage growth still supporting consumer spending.
3. Inflation readings released last week showed slower price growth, reinforcing signs that inflation pressures may be easing and setting the stage for potential rate cuts in 2026.

 

1. Earnings Growth Poised to Broaden in 2026

U.S. equity markets are on track to cap another strong year, with the S&P 500 on track for its third straight annual gain exceeding 15%, including dividends.¹ Market leadership in 2025 remained concentrated, as technology and communication services again outperformed, each rising more than 20% for the year.¹ These sectors also delivered significant earnings growth, with profits increasing at a pace above 15%.¹

Looking ahead, recent forecasts point to continued strength in these areas through 2026, with technology and communication services expected to post another year of double-digit earnings growth.² What stands out, however, is a shift toward more balanced profit expansion. All 11 sectors in the S&P 500 are now projected to generate positive earnings growth next year.² Several value-oriented sectors, including industrials and materials, are expected to post profit growth above 14%.²

This wider earnings base suggests market leadership could extend beyond mega-cap technology stocks. A more even distribution of growth supports the case for diversification across sectors. Within this framework, an overweight tilt toward consumer discretionary, industrials, and health care appears attractive, balanced by underweights in utilities and consumer staples, with neutral exposure elsewhere.

2. Jobless Claims Show a Cooling but Stable Labor Market

Labor market data released last week offered a mixed picture. Initial jobless claims fell to 224,000, an improvement from the prior reading but still above expectations for a steeper drop.³ Continuing claims, which track the number of people receiving benefits, edged up to 1.9 million but came in below forecasts.³ Together, these figures suggest that layoffs remain contained even as labor conditions gradually soften.

Broader indicators point to a similar trend. The unemployment rate has increased in recent months, reaching 4.6%, signaling the job market is cooling from earlier levels.³ At the same time, labor demand has not disappeared. Job openings increased to 7.7 million in October, only slightly below the number of unemployed workers.³ This balance indicates that employers remain cautious but are still seeking to hire.

Wage growth has also remained resilient. Recent data show pay increases continuing to exceed inflation, supporting positive real wage gains. This backdrop should help sustain consumer spending and provide ongoing support to overall economic activity, even as the labor market adjusts at a measured pace.

3. CPI Data Points to Gradual Cooling

Inflation data released last week came in cooler than expected. Headline consumer price inflation slowed to a 2.7% annual pace in November, below expectations that it would remain near 3.0%.⁴ Core inflation, which excludes food and energy, eased further to 2.6% year over year, also below forecasts.⁴ A key contributor to this moderation was shelter inflation, which declined to 3.0% after running closer to 3.6% through September.⁴

These figures suggest that price pressures may be easing more broadly. That said, the latest CPI report relied on surveys that were missing some information due to the recent government shutdown.² As a result, confirmation from other inflation measures will be important in the coming months. Even with this caveat, the overall direction of the data points toward a gradual cooling trend rather than a resurgence in inflation.²

If this pattern continues, it supports expectations that monetary policy could accommodate in 2026. Policymakers may still pause early in the year to evaluate additional data, but financial markets are already reflecting expectations for further rate cuts next year.

This is the final edition of the Cary Street Partners Weekly Market Brief for 2025. We will return in January with more news on the markets and economy.

For the period ending 12/19/25.
* Small-cap stocks are represented by the Russell 2000^® Index. International stocks are represented by the MSCI EAFE. Bonds are represented by the Bloomberg US Aggregate Bond Index. Oil is represented by WTI Oil (West Texas Intermediate Oil), a benchmark for light, sweet crude oil and a primary measure for pricing oil contracts and futures in the U.S.

Sources
¹ YCharts
² Reuters
³ U.S. Department of Labor
⁴ U.S. Bureau of Labor Statistics

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A Composite PMI is a single index that tracks economic activity by combining the performance of both the manufacturing and services sectors, providing a comprehensive overview of overall business conditions.
Nothing contained herein should be considered a solicitation to purchase or sell any specific securities or investment-related services. It should not be assumed that any of the securities transactions or holdings discussed were, or will prove to be, profitable.
The Consumer Price Index (CPI) measures the monthly change in prices paid by U.S. consumers. The Bureau of Labor Statistics (BLS) calculates the CPI as a weighted average of prices for a basket of goods and services representative of aggregate U.S. consumer spending. The CPI is a measure of inflation and deflation. The CPI report uses a different survey methodology, price samples, and index weights than the producer price index (PPI).
Additional Disclosures: International and Foreign Securities, Fixed Income Investments, the Consumer Price Index, the Producer Price Index.
Comparative Index Descriptions: The Standard & Poor’s (S&P) 500 Index, The Russell 200^® Index, The NASDAQ Composite Index, The MSCI EAFE Index, Dow Jones Industrial Average^® (Dow Jones or DJIA), The Bloomberg Barclays US Aggregate Bond Index (US Agg Bond), The CBOE Volatility Index (VIX). CSP2025061_40