Charles Schwab’s Cooper Howard on Q3 2025 GDP, Fed Policy, and 2026 Economic Outlook

This analysis is based on a December 29, 2025 YouTube discussion by Charles Schwab’s Cooper Howard [3], along with supporting market data and Fed policy insights. Howard’s core thesis— that the stronger-than-expected Q3 2025 GDP growth (4.3%, the strongest in two years [1]) would not “move the needle” on Fed rates—aligns with broader market and policy dynamics.

The GDP print was accompanied by a higher-than-expected GDP Price Index (+3.8% vs. +2.7% expected [1]), which reinforced inflation concerns among Fed officials. This explains the muted market reaction: the S&P 500 gained 0.19% on December 22 (GDP release day) but pulled back slightly in subsequent sessions [0], while the 10-year Treasury yield fluctuated modestly before ending at 4.11% on December 29 [0].

Fed policy in 2025 included three rate cuts, but divisions emerged at the December meeting, where Chicago Fed’s Austan Goolsbee and Kansas City Fed’s Jeff Schmid dissented, preferring to hold rates steady [2]. For 2026, Fed officials expect only one additional rate cut, signaling a “higher-for-longer” rate environment despite robust GDP growth [2].

1. Inflation Trumps Growth
   : The muted market response reflects investor prioritization of inflation risks over strong GDP. The elevated GDP Price Index (+3.8% [1]) likely offset optimism from growth, supporting the Fed’s cautious stance.
2. Fed Divisions Persist
   : Internal dissent among Fed officials suggests ongoing uncertainty about 2026 rate policy, which could fuel market volatility if divisions deepen.
3. S&P 500 Concentration Risk
   : The top 10 AI growth stocks account for 40% of the S&P 500’s market capitalization [2], meaning their earnings performance will be critical for broader market outcomes in 2026.

• Risks
  :
  • Inflation surprises could prompt the Fed to reverse rate cuts, pressuring equity and bond markets [2].
  • Policy uncertainty from Fed divisions or political pressure may lead to unexpected rate shifts [2].
  • Earnings misses by top S&P 500 AI stocks could trigger valuation corrections [2].
• Opportunities
  :
  • Financial services companies may benefit from sustained higher interest rates, supporting net interest margins [0].

• Q3 2025 GDP: 4.3% (vs. 3.2% expected [1]), with core GDP at 2.9% and GDP Price Index at 3.8% [1].
• Fed Policy: Three rate cuts in 2025; one additional cut expected in 2026, with ongoing dissent [2].
• Market Reactions: S&P 500 modestly up post-GDP, 10-year Treasury yield ~4.11% on December 29 [0].
• Affected Instruments: U.S. Treasury yields (10-year), S&P 500, interest rate-sensitive sectors (housing, utilities), and financials [0][2].
• Critical Factors to Monitor: Inflation metrics, FOMC minutes, and earnings from top S&P 500 AI stocks [2].