Macroeconomic Signals: Optimism vs. Caution in 2025 Markets
As we hit mid-October 2025, the global economy is sending mixed messages through various asset classes. Bond and stock markets are painting a picture of stability and growth, while gold is flashing warning signs about deeper risks. What are the macroeconomic trends at play and what do they mean for investors?
Bonds and Stocks: Betting on Low Inflation and Steady Growth
The bond market, particularly US Treasuries, is signaling confidence in a tame long-term inflation. The 10-year US Treasury Bond yield sits a little north of 4.0%, while the 10-year US Treasury Inflation-Protected Bond (TIPS) yield is about 1.7%. This implies the collective market thinks the average inflation rate over the next 10 years will be 2.3%, which is pretty close to the Federal Reserve’s 2% inflation target.
Chart 1: The 10-year Breakeven Inflation Rate over the past 10 years
The Vanguard Group’s popular ETF offering, VTI, benchmarked to the CRSP US Total Market Index, had a pretty massive drawdown this April from fears largely related to the unknown impact of US tariffs. Now, the US stock market is showing signs that investors are elated and thriving on optimism for continued growth in corporate earnings and the AI race; including the gigantic infrastructure buildout of hyperscale datacenters and the energy sources needed to run them. VTI reached a new high on Wednesday with 15.6% total return YTD before tumbling a few percent today on renewed fears of a bumpy economic road ahead between China and the US. So, even in the face of an unknown level of economic decoupling with China and some historically high P/E valuations, the collective mindset of US stock market investors sees a promising path forward for growth and profitability.
Chart 2: VTI total return YTD
Gold's Contrarian View: Mounting Economic Risks
Here’s where it gets tricky for an investor: what is to be done with your investments if you aren’t quite so optimistic about long-term inflation and economic growth? Rising inflation could force the Federal Reserve to raise interest rates, making your bond holdings decrease in price, and sky-high stock market valuations could come back down to earth for a multitude of reasons.
So, what options exist for folks who want to hedge the bet being put on by the bond and stock markets? It’s prudent to think about such things. And, your personal financial situation must be considered.
Well, gold has long been a favorite among people worried about risks, both shallow and deep, and it gained even more popularity following the Great Financial Crisis of 2007-2009. This popular asset is once again making headlines in every major financial news source, as the spot price of gold is hitting new record highs. Gold is up 50% YTD, and has more than doubled over the past two years. In fact, gold has produced an 11.1% compound annual growth rate (CAGR) over the past 20 years.
Chart 3: Gold spot price, total cumulative return over the past 20 years
This rally opposes the bond and stock narrative, highlighting concerns over ballooning government spending and the AI euphoria. Compounding this are worldwide interest rate cuts by central banks. The Fed's September 2025 quarter-point reduction, with more potentially on the horizon, signals a pivot to easing that could stoke hidden inflationary risks or currency debasement.
While gold is not a beautiful cash flowing business with factories filled with workers producing a valuable product, it has done very well for a rock! The yellow metal investors are smiling about their diversification decision; so far!
Seeking Signs of Sound Economic Stewardship
These divergent signals underscore a critical need: we're all looking for evidence of prudent economic management. Will policymakers rein in debt, navigate trade tensions wisely, and will C-Suite executives ensure emerging technology can deliver sustainable returns? In this bifurcated market, vigilance is key. Balancing the optimism of bonds and stocks against gold's caution could define the path ahead.
