Weekly Economic Update: October 21, 2025

Presented by Nicholas Wealth Management

Trump softens on China

After President Trump’s Oct. 1 announcement that we would begin imposing tariffs on Chinese imports and the subsequent ugly sell-off on Oct. 9, markets came back last week but not quite to the levels we saw prior to the renewed Chinese tensions.¹ Trump and Treasury Secretary Bessent both calmed markets by softening the tone, with Trump in particular leaning on his “strong relationship” with China’s President Xi Jinping to assure us that everything would be alright.²

This latest installment of the China tariff soap opera could likely be an illustration of what we will see for at least the next three years. The markets seem to blow a gasket every time Trump threatens China. The volatility index (VIX) jumped from 15 in late September to 25 following Trump’s announcement.³

We might never get the kind of “deal” we want from China because it’s not in their favor. The Chinese will likely stalk, talk, make counter proposals and simply wait out this administration until a new one comes along. They may also look for business leaders in our country who are amenable to doing business on China’s terms so long as they profit well. A less hawkish administration may turn a blind eye, and everything could go back to the way it was.

For now, this latest tariff flare-up has subsided, but it likely won’t be the last time things turn tense. Markets, meanwhile, recouped a good bit of the losses and are within striking distance of new highs. Unfortunately, there seem to be a lot of impediments (next session), and the markets appear to be less optimistic heading into the end of the year rather than roaring ahead like they were.

And then there’s everything else

The U.S. government remains closed and heads into its fourth week.⁴ The current shutdown and lack of economic data is worrisome; industrious little gremlins in the financial markets need themes and ideas. If they aren’t getting official data from the government, they try to create their own data to run with.

Then there are earnings, which have been good so far and don’t depend on the government to provide information.⁵ That’s helped markets with some good news.

With no data from the government, what is the Federal Reserve doing during all of this? Shouldn’t Fed Chair Powell be out front and center reassuring us that the Fed stands ready to help the economy and maybe provide “official” guidance rather than letting others dictate the agenda in the markets?
Remember, the Fed makes money off volatility, and investors make money when markets go up over the long term. These two things are not symbiotic and are often contrary to one another. The market currently feels like it wants a reason to retrace.

Potential peace in Gaza, upcoming additional Fed rate cuts and a strong start to the earnings season should all be a significant wind at our backs as we close out an interesting yet profitable 2025.6 This government shutdown and China bickering is feeling like a self-inflicted wound we really do not need.
A solid close to the year usually imparts momentum that carries into the new year, and we know a positive January typically leads to a positive year overall. We need to get refocused on opening the government — and getting the data flowing would be a good place to start.

Coming this week

• A whole bunch of Fed officials are scheduled to make the speaking rounds this week.
• The government shutdown means data will continue to be scant. We’ll see leading indicators on Monday and MBA mortgage applications on Wednesday.
• Friday is the big inflation day with Consumer Price Index (CPI) and Core CPI scheduled for release. But the government shutdown could throw a wrench in the plans.
• So far, 12% of S&P 500 companies have reported third-quarter earnings.⁵Of those who have checked in, 86% reported positive earnings per share (EPS) and 84% have reported positive revenue. Earnings growth for the quarter is 8.5%, down from 11.8% in the second quarter and 13.4% in the first, so earnings growth continues to decline. If 8.5% is the actual growth rate for the quarter, it will mark the ninth consecutive quarter of earnings growth for the index.
• For the current quarter, two S&P 500 companies have issued negative EPS guidance, and eight companies have issued positive. The recent pattern of companies not giving guidance appears to be continuing. Valuation is still historically high for the S&P 500, with the forward 12-month price-to-earnings (P/E) ratio at 22.4 versus 22.1 last quarter. This P/E ratio is much higher than the five-year (19.9) and 10-year (18.6) averages. It’s getting expensive, folks — maybe that’s why the market is feeling kind of heavy.

Sources:

¹ Spencer Kimball. CNBC. Oct. 16, 2025. “China accuses U.S. of deliberately causing panic over rare earth controls, says it is open to talks.” https://www.cnbc.com/2025/10/16/china-trump-xi-rare-earth-tariff-trade-war.html. Accessed Oct. 19, 2025.

² Madison Colombo. Fox Business. Oct. 17, 2025. “Trump calls 157% China tariffs ‘not sustainable’ ahead of planned Xi meeting in South Korea.” https://www.foxbusiness.com/media/trump-calls-157-percent-china-tariffs-not-sustainable-ahead-planned-xi-meeting-south-korea. Accessed Oct. 19, 2025.

³ Yahoo! Finance. “CBOE Volatility Index (ˆVIX).” https://finance.yahoo.com/quote/%5EVIX/. Accessed Oct. 19, 2025.

⁴ Stefan Becket, Caitlin Yilek and Melissa Quinn. CBS News. Oct. 19, 2025. “Government shutdown becomes third-longest in history with no end in sight.” https://www.cbsnews.com/live-updates/government-shutdown-2025-latest-senate-day-17/. Accessed Oct. 19, 2025.

⁵ John Butters. FactSet. Oct. 17, 2025. “Earnings Insight.” https://advantage.factset.com/hubfs/Website/Resources%20Section/Research%20Desk/Earnings%20Insight/EarningsInsight_101725B.pdf. Accessed Oct. 19, 2025.

⁶ Mariel Ferragamo. Council on Foreign Relations. Oct. 15, 2025. “A Guide to the Gaza Peace Deal.” https://www.cfr.org/article/guide-trumps-twenty-point-gaza-peace-deal. Accessed Oct. 19, 2025.

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