Market ‘walking a tightrope’ as AI fuels gains

Stocks hit new highs in the third quarter and artificial intelligence is fueling much of those market gains. But what lies ahead for the rest of the year? Morningstar analysts gave their views during a recent webinar.

The market “is walking a tightrope” said Dave Sekera, Morningstar chief U.S. market strategist. Monetary easing and the boom in AI-related stocks are offsetting negative macroeconomic headwinds and inflationary pressure, he said, but the impact of tariffs and ongoing trade negotiations on the market is still unknown.

Market was strong in Q3

Q3 was a strong quarter for the market, he said, with Morningstar’s U.S. Market Index rising 8.09% for the time period.

AI “has become the single biggest driver on the demand side of the economy,” said Preston Caldwell, Morningstar senior U.S. economist.

Meanwhile, tariffs are still weighing on gross domestic product growth and pushing inflation upward, he said. Morningstar predicts GDP growth to trough in 2025-26 but rebound after that as the impact of tariffs decreases. In addition, Morningstar predicts inflation to peak at an annual average of 3.05% in 2026, dropping to 2% in 2029.

The economy is still seeing the effects of high interest rates, particularly in the slowing of the housing market, Caldwell said. “Continued healthy economic growth depends on lower interest rates,” he said.

Tariff rates could remain high

Tariff rates will likely remain high for years, Morningstar predicts. The current stated average tariff rate is about 16.3% and Morningstar predicts that rate will rise to 17.3% by year-end. Tariffs will continue to drive consumer prices higher as companies sell off most of their pre-tariff inventory and will pass more costs to consumers as companies bring in new shipments from outside the U.S.

AI is fueling investment in technology while non-tech investment is declining, Morningstar reported. Tech investment was up 9.4% year over year in the first half of 2025 but non-tech business investment was down 2.2% over the same period.

Morningstar also reported a large downtrend in job growth. Employment growth is at 0.5% year over year in the first half of 2025, down from 1.2% growth in 2024 and 2.2% growth in 2023.

GDP contracted in the first quarter of the year and rebounded in Q2, but overall growth is still trending downward, Caldwell said, with a 2% year-over-year growth rate in the first half of 2025. So far, the decline in growth is not so much about tariffs, he said, but related to federal job cuts, slower spending on state and federal levels, and a renewed slowdown in residential investment and commercial real estate.

“Overall, it doesn’t look like a tariff story so far but once we see more pass-through of tariff prices, we will see tariffs start to drag more on real activity,” he said.

 

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