How Inflation, AI, and Budget Battles Will Shape the Stock Market in Q4

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Oct 3, 2025

Sarah Hansen, Senior Markets Reporter at Morningstar, delves into the stock market's rally fueled by the AI boom and its implications. She highlights the Fed's recent interest rate cuts and the balance between inflation and a weakening job market. Key risks, such as high tech valuations and the market's selective attention to potential economic headwinds, are discussed. Hansen also explores AI spending trends and the emerging IPO landscape, while advising investors to brace for volatility and maintain long-term discipline amid uncertainty.

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INSIGHT

Durable Q3 Rally And Falling Yields

Stocks showed durable rally in Q3, climbing ~8% after April lows led by tech and other sectors.
Bond yields fell ahead of the Fed's first rate cut, easing prior volatility in fixed income.

INSIGHT

Valuation And Concentration Risks

High valuations and concentration in mega-cap AI stocks raise the market's vulnerability to shocks.
Stocks are largely ignoring risks like elevated inflation and a weakening labor market for now.

INSIGHT

AI Spending Fuels Infrastructure Demand

AI spending focuses on cloud, data centers, storage, and semiconductor CapEx driving demand for infrastructure.
Morningstar expects total AI dollars invested to keep growing even if percentage growth slows.

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Investors’ exuberance is fueling this year’s stock rally, but will key economic risks dampen the market’s mood? The current bull run has lifted stocks from their springtime lows to higher levels in autumn. The artificial intelligence boom is one of the big factors driving it. Meanwhile, the Federal Reserve is dealing with the challenging situation of balancing the weakening job market and stubborn inflation. The Fed cut interest rates for the first time in 2025 in the third quarter, but the path forward from here is less certain. Morningstar Inc Senior Markets Reporter Sarah Hansen discusses seven key market factors you should watch in Q4 2025.

Nvidia’s investment of up to $100 billion in ChatGPT creator OpenAI could shatter records. The big bet is helping feed two simple narratives about the AI era, according to Dan Kemp, chief research and investment officer at Morningstar Investment Management Europe. First, there’s too much investment in the technology, and booms tend to lead to busts. Second, AI has changed the rules of investing and returns. Kemp cautions investors to remember that there are a wide range of possible outcomes than these easy stories.

On this episode:

You examine the highs and lows during each quarter and write about it. What do you think are the biggest takeaways from Q3?

Stocks are climbing higher despite a lot of risks. What signals is the market ignoring, and could it be at its own peril?

The AI boom is driving what’s going on in the market. Mega-cap tech companies are making huge investments. Where’s the money going, and how long is this level of spending expected to continue?

The hot IPO market has benefited from AI. Some of the most successful IPOs this year involved the industry. Can you describe this revival?

The first interest rate cut of 2025 is in the books. The Federal Reserve pointed to the softening job market as one reason for the move. What are strategists telling you as the markets await the Fed’s next move?

Inflation is still not tamed and hovering above the Fed’s 2% target. There are expectations that tariffs could raise prices for a while. What are the outlooks from Morningstar and other strategists?

As the Fed cuts rates, short-term yields will come down. What about the rest of the bond market? Where do people see the risks?

The federal funding fight is continuing in Washington, D.C. Let’s timestamp this moment. It’s Tuesday, Sept. 30. The US government would shut down on Oct. 1 if there’s not an agreement. How does uncertainty like this affect the markets, and what should investors think?

Earnings season is coming up in a couple weeks. What is your team watching for?

What’s the takeaway for investors as we enter Q4?

We talked on last week’s Investing Insights about inflation. The Federal Reserve’s preferred tracker showed inflation slightly ticked up in August as forecasters expected. It also revealed consumer spending rose. What do you think that’s signaling about the US economy?

In this week’s Markets Brief column, you highlighted Nvidia’s potentially record-breaking investment. The chipmaker announced it would invest up to $100 billion in OpenAI. How should investors think about this deal?

New economic data is due out this week. What are you tracking for next week’s Markets Brief?

Read about topics from this episode.

13 Charts on Q3’s Tech-Driven Stock Rally

Will the AI Boom in Semiconductor Stocks Continue?

What Investors Need to Know About the Steepening Yield Curve

The Fed’s ‘Difficult Situation’: Reading Between the Lines of the September Dot Plot

Forecasts for August PCE Report Shows Some Cooling, but Tariff Impacts Persist

What Investors Need to Know About a US Government Shutdown

Markets Brief: Nvidia’s AI Spending Spree Raises Boom and Bust Fears

What to watch from Morningstar.
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