Markets and Economy Fears of a credit crisis, AI bubble overshadow positive indicators
News of defaults and stress from certain US regional banks sparked fears of a credit crisis, but they appear to be isolated events.
October 20, 2025
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Portfolio Playbook: Still quality-focused
Global economic indicators are modestly improving amidst a weak economic backdrop. In October, we remain focused on higher-quality stocks and bonds. Optimize your portfolios with our monthly outlook and allocation guidance.
We continue to focus on higher-quality stocks and bonds.
Our macro framework has accurately predicted that the business cycle would remain intact, though economic activity would slow.1 That seems to be the prevailing environment. Global financial markets have been reluctant to fully price in a low-growth environment. But US Treasuries have rallied, large-cap stocks have outperformed small-caps, and quality has outperformed value, which aligns with the growth headwinds we’ve identified.2 Also, cyclical sectors have delivered only modest earnings growth.3
As we assess the next stage for the economy, our preferred risk appetite indicator remains positive but lacks clear momentum. Meanwhile, our global leading economic indicator is rising toward its long-term trend. Policy easing in the US could support a reacceleration in activity, even as labor demand remains weak. The upshot is that we remain in a contraction regime and are watching for further signs of renewed momentum. So we maintain exposure to higher-quality stocks and bonds, consistent with a cautious stance amid ongoing uncertainty.
Business cycle
- Recession doesn’t appear imminent
- Broad-based economic statistics not collapsing
- Credit spreads still contained
Risk profile
- Risk appetite is positive but directionless
- Leading economic indicators are rising towards trend
Policy implications
- Federal Reserve likely to look beyond tariff price shocks
- Further rate cuts are expected
Business cycle
- “Soft landing” for economy
- Resilient growth
- Contained inflation
Risk profile
- Above-trend global economic rate
- Improved policy backdrop
- Risk-on sentiment
Policy implications
- Contained inflation
- Easing Fed policy
Business cycle
- Deteriorating sentiment
- Rising trade and monetary policy uncertainty
- Reaccelerating inflation
- Prolonged recession
Risk profile
- Deteriorating leading economic indicators
- Flight to quality
Policy implications
- Tightening Fed policy
Asset allocations to consider:
In October, we remain overweight in defensive sectors.
A challenge for tactical investors is preparing for the expected and anticipating the unexpected. The tactical asset allocation (TAA) framework from the Invesco Solutions team is designed to enhance a long-term strategic asset allocation (SAA) by making portfolio tilts based on near-term market views.
The tactical, dynamic factor rotation shown below is also utilized in the Invesco Russell 1000® Dynamic Multifactor ETF (OMFL).
Additional resources
Explore further research and analysis from our market and investment experts.
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The US government shut down, while governments in Europe and Japan plan to increase spending, which may help support stocks.
October 6, 2025
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