2025 Q4 Investment Outlook
Our Investment Process
At Client First Capital, our investment approach centers on three critical variables: growth, inflation, and policy. By tracking the rate of change between growth and inflation, we position portfolios to target the best possible risk-adjusted returns. Below, we break down each factor and how it informs our current positioning.
Growth
The economy continues to expand, though at a slower, more normalized pace compared with the strong rebound of 2023 and 2024, when U.S. equities delivered back-to-back gains of +25%—a rare occurrence. Growth in 2025 is moderating toward 1–2%, with hiring still positive, but it is clearly decelerating. Consumers remain active, though more measured in spending.
The technology and AI sectors remain the primary drivers of corporate profits, while internationally, Japan is benefitting from efficiency gains and capital returns, and emerging markets are seeing tailwinds from younger demographics and digital adoption. Overall, growth remains intact but increasingly reliant on a handful of structural themes—any stumble in those areas could weigh on momentum.
Inflation
Price pressures have eased meaningfully since the 2022 peak, but inflation has started to reaccelerate, as we have been discussing since the beginning of this year. Several factors may keep inflation sticky and even push it higher, including elevated fiscal spending, new tariffs, tighter immigration policies, and surging demand for energy and commodities. While inflation is no longer spiraling, these structural forces suggest a path closer to “persistent” than “resolved.”
Policy
The Federal Reserve faces a delicate balance between inflation and weakening labor. While progress has been made, policymakers and markets expect inflationary pressures to rise again in the near term. This dynamic reduces the likelihood of aggressive rate cuts.
Importantly, we see the Fed’s 2% target evolving into a more flexible ~3% tolerance, with the central bank maintaining restrictive policy longer than many expect. Over time, structural shifts—AI-driven productivity, political turnover at the Fed, and high government debt—may push policy toward more unconventional tools such as balance sheet expansion or yield curve control. The direction is clear: more flexible, more interventionist, and less tied to rigid inflation targets.
CFC One Portfolio Insights
We are transitioning from Quadrant 3 (slowing growth, rising inflation) to Quadrant 2 (rising growth, rising inflation).
Back-testing highlights Utilities, Industrials, Energy, and Technology as beneficiaries. We currently hold overweight positions in Energy and Technology.
Market structure suggests further upside potential. Dealer positioning and hedging activity are contributing to “forced buying” dynamics, which can fuel rallies even when investors are cautious.
Our View of the Current Environment
Valuations remain stretched, with the S&P 500 up nearly 13% year-to-date and trading just at record highs. Technology continues to lead, but equity valuations now surpass levels seen during the dot-com bubble. With the Fed considering rate cuts and Treasury increasing liquidity, this combination of rich valuations and abundant capital could extend the rally—possibly into bubble territory as investors start chasing returns.
History reminds us that bubbles can last far longer than expected. However, we remain disciplined. Our process drives allocation. Today, we are positioned neutrally on risk, maintaining about 25% in risk-off assets within the CFC model, while selectively adding exposure to sectors that tend to benefit in Quadrant 2.
We offer complimentary portfolio reviews for non-clients interested in understanding how we are positioning portfolios to help investors reach their financial goals. We analyze key risks, assess economic impacts on investments, and contrast portfolio strategies with current market data. If you would like to schedule a review, please contact us.
