U.S. Economy Flexes Muscle With GDP Spike

Transcript

Hello everyone. This is market weekend review for the week of September 26, 2025. My name is Brian Lynn. I'm a senior investment strategist and head of Canadian strategy here at Russell Investments. Today, we'll be discussing three major topics. First, the ongoing resilience in the US economy. Next, no negative interest rates just yet in Switzerland. And finally, we'll wrap up with a discussion of the risk of a government shutdown next week. So let's begin. This week we got more economic data. We got the third set of GDP numbers for the second quarter in the US and those data points suggested as the US economy grew at a pace of 3.8% annualized in the second quarter. Now to put that number into perspective in general economists estimate that trend GDP growth is around 2%. So for GDP to have expanded at nearly double the pace of trend in the second quarter that suggests that the US economy is still in a very resilient situation. Meanwhile, when we look at other economic data points like initial jobless claims, those are still at relatively low levels and also suggest that the US economy is doing well. Now, as we think about what might happen to the US economy over the next 12 months, we do expect that the US economy might see a little bit of a cooling, but that cooling will likely be towards a soft landing rather than towards a recession. Outside of the US, we think it might be a little bit of a different story where economic risks might be a little bit higher than in the US. So for example in Canada, we do think that the risk of the Canadian economy potentially dipping into contractionary territory in the third quarter like it had been in the second quarter is still quite elevated. However, when we look at the equity valuations outside of the US, whether it's Canadian equities, whether it's European equities, we do believe that equity valuations outside of the US are more compelling than US equity valuations. And that's one of the reasons why we've been relatively neutral in terms of our asset allocation across different geographies. In fact, even with the strong performance of non US stocks relative to US stocks in the third quarter, we still believe that there's a valuation discount between non- US stocks as compared to US stocks. Second, let's talk about Switzerland. The Swiss National Bank held their latest monetary policy meeting this week. they decide to leave interest rates at 0%. So in other words, no negative interest rates for Switzerland just yet. We know that Switzerland does face some ongoing economic headwinds, particularly as they are confronted with this 39% tariff against their exports to the US. Ultimately, the Swiss National Bank has said they do have a high bar for taking interest rates into negative territory, but they'll continue to be data dependent and adjust interest rates as needed to be able to maintain their mandated goals in terms of the economic environment. Finally, I want to wrap up by talking about the potential risk for a government shutdown next week. According to betting markets, as of September 25th, 2025, markets expect a roughly 3/4 chance for a government shutdown to take place starting October 1st, next week. Now, the historical experience suggests that government shutdowns are usually short-lived with the longest government shutdown so far being only 35 days in length. And historically speaking, markets tend to look through these government shutdowns. Although there's always the risk that with equity the with equity valuations being on the high side for the US, we could see a little bit of return to market volatility if we do get a government shutdown. But once again believe that investors would benefit from staying disciplined, focusing in on the long-term and sticking close to their strategic asset allocation instead of focusing too much on some of the short-term market volatility and market movements. That's all for us this week. We'll see you next time on Market Week Review. >> Hi, I'm Sophie Antaly, head of portfolio and business consulting at Russell Investments. If you liked what you just saw and heard, consider subscribing to our YouTube channel or check us out on LinkedIn. Thanks for tuning in.

Key Takeaways

Second-quarter GDP revised higher
Switzerland stands pat on rates
Markets may shrug off shutdown

On this week’s edition of Market Week in Review, Senior Investment Strategist and Head of Canadian Strategy, BeiChen Lin, assessed the health of the U.S. economy. He also explained why the Swiss National Bank held the line on monetary policy and discussed the potential market impacts of a U.S. government shutdown.

Doubling Up

Lin began by noting the U.S. economy expanded at a faster pace last quarter than previously estimated. GDP (gross domestic product) growth in the April-to-June period was revised from 3.3% to 3.8%, he said, driven by a sharp rise in consumer spending.

“To put this into perspective, most economists believe the trend—or long-term—growth rate is around 2%. For GDP to increase at nearly double this pace really underscores the resilience of the American economy,” Lin stated. He added that other measures of economic health, including initial jobless claims, also remain at relatively low levels.

Still, Lin expects the U.S. economy to cool off over the next 12 months, although he sees a recession as unlikely. The story is different to the north, however, with the Canadian economy already struggling. “Economic growth in Canada actually shrank during the second quarter, and may do so again this quarter,” Lin explained.

However, he stressed that stock valuations outside the U.S.—even in places like Canada—still look more compelling than those in the U.S. This is despite the recent outperformance of non-U.S. stocks compared to U.S. stocks, Lin noted.

Zero Negativity

Switching to monetary policy, Lin said the Swiss National Bank (SNB) decided to leave interest rates unchanged at 0% this week. While Switzerland is facing some economic headwinds—particularly due to the 39% tariff on exports to the U.S.—bank officials have stressed the bar for lowering rates into negative territory is high.

“Clearly, the SNB doesn’t believe this threshold has been met yet. I do expect the central bank to remain data-dependent, however, which means rates may be adjusted if the Swiss economy sours further,” Lin said.

Funding Fumble

Pivoting back to the U.S., Lin discussed the possibility of a government shutdown next week. He noted betting markets see a 75% chance of this happening on Oct. 1 due to a lapse in funding.

Fortunately, U.S. government closures are usually short-lived, with the longest one lasting 35 days, Lin said. Because of this, they’re typically not a big deal for investors, he remarked.

“Historically, markets tend to look through shutdowns, although with today’s stock valuations so high, a pickup in volatility is possible if one occurs. Even then, however, I think investors would be better served by focusing on the long term instead of short-term market movements,” Lin concluded.

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