U.S. equities continued to push to new all-time highs this past week and closed out another strong calendar quarter. The Dow Jones and S&P 500 gained 5.7% and 8.1% in the third quarter, adding to strong year-to-date gains, while the tech-heavy Nasdaq and small cap Russell 2000 surged even higher with returns of 11.4% and 12.4%, respectively. The market rally was fueled in part by a rebound in rate cut expectations, a resilient tone from AI-related capital spending, and sector-specific relief rallies—most notably in health care, where pharmaceutical and managed care stocks surged following reports that the administration would walk back the harshest elements of proposed drug tariffs and “most favored nation” pricing rules. Despite the positive tone, the advance came amid unusually quiet news flow from Washington, where the partial government shutdown delayed the release of several key data points, including the September jobs report.

The current shutdown, while politically charged, is an appropriations shutdown—not a debt ceiling standoff—meaning essential federal services continue to operate and there is no near-term risk of default. Nevertheless, the economic implications are meaningful to the extent that it cuts off the flow of government data needed to assess real-time economic conditions. The Bureau of Labor Statistics, Census Bureau, and Bureau of Economic Analysis have all suspended normal operations, leaving investors reliant on private sources of information and anecdotal updates. While shutdowns have historically had limited long-term market impact, many analysts noted that this one could last longer than usual given entrenched political dynamics. Notably, this marks just the second time in modern history that a shutdown has been initiated by a congressional minority leader, with the prior instance in 1990 resolved in just two days. The White House is reportedly exploring alternative funding paths, but any resolution appears unlikely before next week.

With federal data releases on hold, markets instead turned their attention to private indicators for insight into the state of the economy. The ADP report showed a loss of 32,000 private-sector jobs in September—marking the weakest reading since March 2023—while August was revised from a modest gain to a slight loss. The decline was concentrated among small businesses, which tend to be more sensitive to high borrowing costs and short-term interest rates. Meanwhile, the ISM Manufacturing Index edged up slightly but remained below the key 50 threshold that separates contraction from expansion, and the Services Index slipped to 50.0, the lowest level since the spring.

Amid this mixed backdrop, the Fed continued to strike a cautious tone. Several FOMC members acknowledged the challenges of navigating policy without access to timely government data. Chicago Fed President Austan Goolsbee said the shutdown would make it even harder to interpret the economy’s trajectory, while others—including Boston’s Susan Collins and Vice Chair Philip Jefferson—emphasized that future rate moves would remain data-dependent. Still, market pricing now reflects a roughly 83% chance of two additional rate cuts before year-end, according to CME Fedwatch, up from 67% just a week ago. Fed speakers offered little pushback, perhaps recognizing that softness in the labor market may be more entrenched than initially assumed.

On the corporate front, investor attention was drawn to the continued surge in AI infrastructure spending. Meta signed a $14 billion deal with CoreWeave to expand its computing power, reinforcing confidence that hyperscale capex remains a durable theme. That momentum continued into this week as OpenAI announced a major partnership with AMD for AI chips and servers that could consume up to 6 gigawatts of power (with each gigawatt estimated to cost up to $50 billion of capex to bring online per OpenAI executives). This follows a series of other massive AI compute agreements that OpenAI has signed with other organizations like Nvidia and Oracle. While the scale of these investments highlights strong long-term demand, it has also added to debate over whether parts of the AI and semiconductor space are becoming overheated.

Looking ahead, investor focus will remain centered on developments out of Washington, with little scheduled economic data in the absence of a resolution to the shutdown. The University of Michigan’s preliminary consumer sentiment index for October may offer some insight into household psychology at a time when real-time indicators remain sparse. Markets will also keep a close eye on commentary from Fed officials, who are slated to give several public remarks throughout the week. Otherwise, attention is beginning to shift toward third-quarter earnings season, which unofficially kicks off next Friday with results from several large banks. Until then, the path of least resistance for markets may depend less on economic fundamentals and more on whether Washington can quickly find a way to reopen the federal data spigot.

2025 The Long View | First Merchants Bank