Talk of a 2025 recession abated this summer, but economists noted a sense of instability among consumers, who were spending…
Talk of a 2025 recession abated this summer, but economists noted a sense of instability among consumers, who were spending less, and among businesses, which were hiring less. Now, with the Federal Reserve pivoting back to interest rate cuts, and with even lower rates expected on the horizon before 2026, talk of a recession is back on the front burner.
Case in point: A recent Goldman Sachs survey of U.S. insurance professionals, a group who should know a thing or two about financial risk, showed that a little over half (52%) of the specialists cited inflation as a major risk, and 48% saw a risk of slowdown and potential recession in 2025.
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Even with consumer confidence at a five-month low in October, as measured by the University of Michigan consumer sentiment survey, no one is guaranteeing a crash before the end of 2025 or even in 2026. But a significant correction could be in play, as high market valuations, potentially slower holiday spending and rising odds of an AI-fueled technology bubble could put stocks in jeopardy sooner rather than later.
“The economy and markets are quite polarized,” says Jean-Baptiste Wautier, financial and global economics policy leader at the London-based investment firm Wautier Family Office. “On one hand, the total U.S. public debt is less and less sustainable, having reached the previous all-time high in terms of debt and GDP that was last seen post-WWII. Public deficit is running way too high, and the risk of over-indebtedness has never been as high as it is now.”
Simultaneously, stock markets are beating record after record, driven mainly by the “Magnificent Seven” group of mega-cap stocks.
What does that mean for the general health of the market? Here’s a closer look at the issues that could lead to a big stock market downfall.
— A pivot by the Fed.
— Slowing job growth and lingering inflation.
— Taxes, trade and tariffs.
— Softer AI spending.
A Pivot by the Fed
Another sign that the economy and markets are slowing down is the Federal Reserve’s latest action on interest rates. In September, the Federal Open Market Committee (FOMC) cut its benchmark federal funds rate by a quarter of a percentage point, with more cuts likely ahead to safeguard the economy. The Fed is widely expected to announce a quarter-point rate cut on Oct. 29, at the end of its two-day policy meeting.
“The September FOMC statement nodded toward slowing job gains and a rising unemployment rate, but also noted that inflation has moved up and remains somewhat elevated,” said Scott Anderson, chief economist at BMO Capital Markets, in a Sept. 17 research note.
The Fed’s most recent “dot plot” projection showed most officials foresee two more quarter-point rate cuts this year. Anderson forecasts three more in 2026.
“The decision to cut the fed funds rate a quarter percentage point … and a median FOMC forecast of two more quarter-point rate cuts in October and December this year, rested almost entirely on the shifting balance of labor market and inflation risks and not on any major change in median economic, labor market or inflation outlook since June,” he wrote.
Slowing Job Growth and Lingering Inflation
The U.S. employment picture is murky, with only 22,000 jobs added in August, according to the Bureau of Labor Statistics. The release of the jobs report for September has been delayed until Nov. 4 due to the government shutdown. In the report for August, the BLS said that employment “has shown little change since April. Over-the-month employment increases in 2025 have slowed to about half the pace seen in 2024.”
Along with sluggish job numbers, inflation will be another major consideration in rate cut decisions this week and going forward. The consumer price index increased by 3% on an annual basis in September, which was a slower pace than expected but still a 0.1-percentage-point increase from August and well above the Fed’s 2% target.
“The weakening labor market will have a deleterious impact on inflation, so the Fed is willing to wait out sticky inflation,” said Jack McIntyre, portfolio manager at Philadelphia-based Brandywine Global, in a mid-September research note. “There was a significant dispersion in policy views by this Fed for 2026, which probably means more volatility in financial markets next year.”
Taxes, Trade and Tariffs
While the full, long-term impact of President Donald Trump’s economic policies is still uncertain, it’s difficult to ignore some of the short-term adverse effects the stock market has seen in 2025.
“The administration’s approach, particularly with its emphasis on tax cuts and tariffs, has created a sense of unpredictability,” Wautier says.
On one hand, Wautier says tax cuts are intended to stimulate business investment and put more money in consumers’ pockets, but they also risk increasing the national deficit, which could affect fiscal stability in the long term.
“On the other hand, the tariffs imposed on imported goods have created higher consumer prices and supply chain disruptions,” Wautier says. “This has contributed to inflationary pressures, which strain household budgets.”
From a business perspective, trade uncertainty makes it difficult for companies to plan for the future, invest confidently or secure supply chains, which ultimately harms economic stability. “The market’s response has reflected this volatility, with many investors taking a ‘wait-and-see’ approach,” Wautier says.
[Read: 7 Tariff-Resistant ETFs to Buy Now]
Softer AI Spending
The rapid rise of artificial intelligence in global business has been nothing short of remarkable, carrying the U.S. economy along with it. Yet evidence is accumulating that the bloom may be off the rose for AI, as companies appear less than enthralled with the technology’s impact, which could reduce AI spending and sideswipe the economy.
According to a recent IBM study, CEOs report that “only 25% of AI initiatives have delivered expected ROI over the last few years, and only 16% have scaled enterprise-wide.” Another study that raised eyebrows on Wall Street and in Silicon Valley was one from MIT Media Lab’s NANDA Initiative, which showed 95% of generative AI pilot projects haven’t produced any discernible financial savings or significant profits, despite an estimated $30 billion to $40 billion in corporate spending on AI.
Any adverse outcomes with AI will reverberate through C-suites across the globe, especially if that means reducing AI spending, which would further crimp economic growth.
A Silver Lining?
Some market experts acknowledge that stocks may be at risk, but they say there’s enough momentum and capacity to weather economic storms.
“I don’t foresee a U.S. equity market crash,” says Ben Deveran, a capital markets analyst based in New York. “If anything, continued repricing ‘rotation’ risk at the margins of extreme concentration is the only real macro concern, especially in the back end of 2025.”
Deveran points out the U.S. equity market has a market cap of $50 trillion, representing nearly half of global gross domestic product (at $105 trillion). “Plus, its structural overweight isn’t speculative; it reflects the U.S.’ role as the global epicenter of innovation and capital formation,” he says. “Given the exponential pace of advancement in AI and technology, that dominance isn’t changing anytime soon, so it’s hard not to be bullish on continued GDP growth in the U.S. economy and with U.S. equity margins across the board.”
Within that economic and market apparatus, investors continue to confuse sector rotation with systemic collapse in the U.S., Deveran adds. “When a single name like Nvidia accounts for over 8% of the U.S. market and 4% of world GDP, even a modest drawdown can trigger broad beta issues that negatively impact ETFs, which in turn affects the entire stock market and everyone’s portfolios, but that’s not a crash,” he says. “Instead, it’s a recalibration of narrative excess.”
In that scenario, the U.S. economic system remains fundamentally strong, powered by real productivity growth and innovation velocity. “This isn’t the industrial revolution, it’s faster, more dynamic and more capital-efficient,” Deveran adds. “There’ll be many more ‘rotations’ viewed as crashes, when in reality capital is just flowing at faster speeds than ever before in human history, leading to dramatic liquidity rotations.”
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Update 10/27/25: This story was published at an earlier date and has been updated with new information.