Outlook The Bureau of Economic Analysis (BEA) recently released its 4th quarter 2025 "Second Estimate", revising Real GDP growth down from an initial estimate of +1.4% to just +0.7%. This headline figure is a "real, annualized" rate, meaning it is adjusted for inflation (Real) and represents how much the economy would grow if this three-month pace continued for a full year (Annualized).1 While a 0.7% drop is significant, it is helpful to attribute factors that caused this revision. The biggest factor that caused this downward adjustment came from a decline in government spending, which accounts for approximately 18% of the economy. The 43-day federal government shutdown hit much harder than suspected, stripping 0.5% points off the growth rate alone. Whereas the consumer side of the economy remained resilient. Beyond the government drag, the revision was rounded out by a -0.3% adjustment in private investment, specifically in construction and software. Further, a +0.1% upward revision in consumer spending (which accounts for approximately 68% of the size of the economy) gave a mild boost to the revision. Essentially, without the political friction of the shutdown, the "ex-government" GDP revision would have been quite mild. Consumer demand remains a stable anchor for the markets, leaving us on the optimistic side of the outlook ledger. . . . U.S. financial markets experienced significant volatility during the week as geopolitical tensions, sharp movements in energy prices, and evolving monetary policy expectations shaped investor behavior. While major indices attempted mid-week recoveries on the back of resilient economic data and strong corporate earnings, the market ultimately struggled to maintain momentum as oil prices surged and inflation concerns resurfaced. Geopolitical Tensions and Oil Market Volatility The dominant force affecting markets this week was the ongoing conflict involving Iran, which created heightened uncertainty across global energy and equity markets. Early in the week, crude oil prices surged, with Brent Crude briefly rising above $100 per barrel and approaching the $120 level, driven by concerns over supply constraints linked to instability at the Strait of Hormuz. Later in the week, prices retreated after U.S. President Trump signaled that the conflict could be nearing resolution.2 To support global supply, the International Energy Agency (IEA) announced a coordinated release of 400 million barrels from strategic petroleum reserves. The U.S. also authorized temporary purchases of sanctioned Russian oil as part of the broader effort to contain price pressures. Despite stabilization efforts, oil remained approximately 45% above pre-conflict levels, keeping pressure on inflation expectations. Oil Prices Surge on Supply Disruptions Even as geopolitical events dominated headlines, investors continued to watch inflation trends and expectations for the Federal Reserve’s policy path. Inflation readings released during the week suggested a gradual easing of underlying price pressures.3 However, the renewed spike in oil prices prompted concerns that energy-related inflation may remain elevated in the near term. As a result, Treasury yields increased, and investors reevaluated expectations for Federal Reserve policy. While markets still expect one or two rate cuts later in the year, the rise in energy prices is considered a temporary headwind that might delay the Fed’s easing cycle. Policymakers are generally expected to keep rates unchanged at the upcoming meeting. Despite heightened volatility, several underlying fundamentals remain supportive for long-term investors: - Global earnings growth continues to trend positively.
- Tax refunds are running ahead of last year’s levels, potentially strengthening U.S. consumer demand.
- Layoffs remain limited, and the global economy entered this period with notable momentum.
While the market may continue to react sharply to geopolitical developments and energy price movements, history suggests that such shocks tend to fade as conditions stabilize.
[1] GDP (Second Estimate), 4th Quarter and Year 2025 | U.S. Bureau of Economic Analysis (BEA) [2] Oil above $100 as as market shrugs off U.S. measures to reduce prices [3] Personal Income and Outlays, January 2026 | U.S. Bureau of Economic Analysis (BEA) | 
