Consumer Spending Surge Sets Stage for Year-End Market Rally

All those marked-down smart home gadgets and Ralph Lauren socks under Christmas trees this year have already been regifted. To Uncle Sam. 

Commerce Department data released just before the holiday showed that US gross domestic product rose at an unexpectedly robust 4.3% in the third quarter, with the American consumer to thank for it. That might be enough to power one final miniature stock market rally to end 2025.

A Goldilocks Ending for 2025

Tuesday’s reading, the best since the third quarter of 2023, was 0.5 percentage point higher than the previous quarter and an emphatic full percentage point above most economists’ forecasts. “If the economy keeps producing at this level, then there isn’t as much need to worry about a slowing economy, and concerns may actually flip back to the price-stability constraint,” said Chris Zaccarelli, Northlight Asset Management’s chief investment officer.

Indeed, inflation picked up in the quarter, along with GDP. The 2.9% annualized reading was up from 2.6% in the second quarter, both of which are well above the Federal Reserve’s 2% target. The strong GDP growth could lead the Fed to hold interest rates steady and focus on taming prices. 

The hero once again is the almighty consumer, whose consumption accounts for roughly 70% of the economy. Consumer spending rose at a 3.5% annualized pace in the third quarter, up a whole point from the second quarter and the highest since the last three months of 2024. Eric Teal, chief investment officer for Comerica Wealth Management, sees mostly upside:

• “The economy is demonstrating a Goldilocks scenario with above-potential US economic growth, and declining but elevated inflation and a less robust labor market,” he said, after the data was released Tuesday, adding that the “Fed will likely maintain a dovish bias.” Bank of America and Goldman Sachs both forecast two rate cuts next year.
• However, in cutting rates further, there is an increased risk in pushing long-term bond yields higher and undermining the dollar, he added.

I Promise, Honey, Just One Last Trade: “The data may be overlooked because … many people are done trading for the year, but the GDP number was exceptional,” said Zaccarelli. He noted that stock-trading volume, as is typical, will almost certainly be down in the waning days of 2025, but some might want to get in on the GDP enthusiasm: “There will likely be light trading volume, but the path of least resistance is higher until the end of the year.”