In each issue of Owner to Owner, we review aspects of the business environment on three fronts:

• Overall economy
• Credit markets
• Private equity (PE) and mergers and acquisitions (M&A) markets

The following article examines the state of the economy as we approach year-end, with improved expectations for economic growth and a reinstated rate-cutting cycle, caution among U.S. banks and trends of yield compression, and encouraging signals emerging for PE and M&A despite a mixed macroeconomic backdrop.

The economy

According to the U.S. Bureau of Economic Analysis, U.S. real gross domestic product (GDP) expanded at a quarter-over-quarter annualized rate of 3.8% in second quarter 2025. Driven by a surge in imports, which are a subtraction in the GDP growth calculation, first quarter GDP declined as companies bought goods ahead of the Trump administration’s tariff policy.

Second quarter 2025 real GDP growth was driven by a decline in imports and an increase in consumer spending. The personal consumption expenditure (PCE) component of GDP – which drives 70% of GDP over the long run – advanced 2.5%, an acceleration of the 0.6% growth reported in the first quarter, with increases in both services and goods.

Shifting to the U.S. labor market, after downward revisions to May and June, the three-month average gain in nonfarm payrolls declined to 29,000 in August,¹ the lowest in more than five years. The U.S. labor market is beginning to show more softness, particularly as the number of U.S. job openings has declined to 7.2 million, down by roughly 40% from its March 2022 peak and roughly 1% below its pre-COVID-19 peak set in January 2019.

Meanwhile, small business optimism, according to the NFIB Small Business Optimism Index, decreased by 2.0 points in September to 98.8. This was the first decline in three months, though it remains above the survey’s 52-year average of 98.

Expectations for economic growth, lower inflation, and positive business conditions have improved under the pro-business policies of the Trump administration. While small business optimism has remained above the long-term average, 18% of business owners cited labor quality as the most important issue their businesses are facing today.²

From 2025 to 2027, the Federal Reserve (the Fed) estimates real GDP growth of 1.6% in 2025, 1.8% in 2026, and 1.9% in 2027, down from a 2.8% real GDP growth rate in 2024, on expectations that tariffs may impact consumer spending and business investment. However, the Fed estimates reflect accelerating real GDP growth, suggesting 2025 may be the trough in economic growth. As such, the Fed does not currently forecast a recession over the next three years.

Macro data suggests the economy is expected to remain in expansion territory, which sets a positive backdrop for companies’ earnings growth. The S&P 500 is estimated to generate earnings per share growth of 10.4% in 2025, 13.6% in 2026, and 13.6% in 2027.³

As it relates to monetary policy, in October 2025 the Federal Open Market Committee (FOMC) continued its interest rate-cutting cycle, after initiating its first rate cut of 2025 in September, by lowering its fed funds rate by an additional 25 basis points (bps)⁴ to a target range of 3.75% to 4.0%. In the post-meeting press conference, Chairman Jerome Powell noted that the outlook for employment and inflation has not changed since the Fed's meeting in September. However, he stated that a rate cut in December 2025 is not a guarantee. Nonetheless, the Fed has now rejoined global central banks in cutting rates; year to date as of October 29, 2025, global central banks cut rates 118 times vs. 22 rate hikes, continuing the trend from 2024, when global central banks cut rates 198 times vs. 31 rate hikes.

As of October 29, 2025, the fed funds futures curve is pricing in that the fed funds rate ends 2026 at 3.0%. This implies a target range of 3.0% to 3.25%, which is below the Fed’s target range rate guidance of 3.25% to 3.5% estimated in its September 2025 economic projections release.

There is much underway as we progress through the end of 2025 and enter 2026 – ongoing tensions in the Middle East, ongoing economic uncertainty in China, President Trump’s policies (tariffs, immigration), and the impact of artificial intelligence (AI) on economic growth, to name just a few – and we will be watching inflation and global growth developments closely.

The credit market

Despite the “fog” lingering on the Fed’s windshield, the FOMC’s tendency to normalize interest rates over the coming policy meetings was evident in the latest “Summary of Economic Projections” (released September 2025) before the government shutdown. The nearby dot plot showed that most FOMC members (10 of 19) expected at least one more interest rate cut at the December meeting, with the median forecast suggesting a range of 3.50% to 3.75% by the end of the year. Although there was greater dispersion, the dot plot forecasts rates to fall further to 3.25% to 3.50% by the end of 2026, implying only one 25-bp cut.

While Powell previously referred to future monetary policy decisions as a “meeting-by-meeting situation,” assessing the impacts of a cooling labor market combined with persistent inflation, the absence of new economic data has led the FOMC chair to push for a slowdown.

History suggests that the Fed’s overnight lending policy rates have a meaningful influence on the yield curve for shorter maturities of approximately two years or less, while the market’s expectations of economic growth, inflation, and monetary policy take the lead for medium- and longer-term yields. The nearby chart of U.S. Treasury yield curves across various maturities illustrates this phenomenon.

Despite the Fed’s control of the overnight lending window, shorter-term yields mostly declined ahead of the September and October 2025 meetings, as FOMC commentary, along with recent economic data suggesting rate cuts, spurred early market speculations on rates.

In contrast, longer-term yields experienced modest volatility over the past 13 months as investor sentiment fluctuated between pre-election uncertainty, post-election optimism, tariff concerns, and anticipation of economic growth fueled by tax cuts. Most recently, the yield on 10-year Treasuries decreased by 12 bps between the September FOMC meeting and the days following the October meeting, as investors adjusted their expectations following the Fed’s comments on the lack of precise data to guide its December policy decision. Still, longer-term yields have generally steepened since the beginning of the year, possibly reflecting the market’s outlook on stable or improving economic conditions and rising inflation.

Likewise, corporate bond prices have risen as investors anticipate yields to decline amid the Fed’s potential rate normalization cycle. As shown in the nearby chart, yield compression has occurred across investment grade to junk bonds throughout 2025, with corporate spreads in September close to their narrowest levels in the past year. This trend signals that investors remain optimistic about the economy and corporate prospects and have increased confidence in lower credit risk across different bond categories.

As of October 31, 2025, spreads for bonds rated high yield, BBB, and A stood at 2.7%, 1.1%, and 0.8%, respectively, compared with 3.1%, 1.2%, and 0.8% at the same time last year. For context, the current spread compression compares to the pre-Great Recession lows (2005 to 2006) of 2.3%, 1.2%, and 0.7%, respectively.

U.S. banks remain cautious, in contrast with these positive movements in the yield curve and corporate spreads. The nearby chart shows the historical trend in commercial and industrial (C&I) loans outstanding, along with the net percentage of U.S. banks that have adjusted their credit standards for loans to large and middle-market firms, according to the Fed’s Senior Loan Officer Opinion Survey (SLOOS) on Bank Lending Practices.

As with the previous two reports, the July 2025 SLOOS indicated that a majority of banks (net 9.5%) reported tighter standards during the quarter, citing economic uncertainty; industry-specific challenges; and legislation, regulation, and accounting changes. The combination of stricter standards and reducing corporate investment correlates with most respondents reporting weaker demand across all borrower types.

As seen in the opportunities presented to BBH, many banks have adopted a flight-to-safety approach to partially curb lower demand, including sacrificing risk-adjusted yields and modestly loosening terms for the highest-quality borrowers.

Given the comparatively stringent standards for traditional bank lending over the recent cycle relative to the past two decades, private credit has grown rapidly , now approaching $2 trillion in lending balances – 10 times the level in 2009. The shift comes as private credit takes on more risk than traditional banking lending, albeit at higher adjusted yields to accommodate that risk posture. At BBH, the Corporate Banking team remains focused on partnering with premier, private companies, prudently growing with our clients, and helping them steadfastly navigate economic uncertainty, just as we have been doing for over 200 years.

The private equity and mergers and acquisitions markets

Over the past several months, general partners (GPs) have focused on evaluating the impact of tariffs across their portfolios by analyzing input costs, supply chain manufacturing footprints, pricing strategies, and related dynamics. While most firms reported having a solid understanding of how tariffs are affecting their holdings, a meaningful minority continue to work closely with portfolio companies to fully gauge the scope and long-term implications.⁶

As the year progresses, sentiment continues to shift toward a risk-on posture. The rebound in market volatility following “Liberation Day” on April 2, 2025, coupled with the Fed’s mid-September rate cut, has laid the groundwork for the exit window to begin to reopen. If exit activity accelerates in the final months of 2025, PE could re-enter the cycle of distributions, fundraising, and investment that underpins the asset class.⁷

PE entered 2025 riding the momentum of its late-2024 rebound. The year began with promising signs for dealmakers: Credit markets were open, financing costs were easing, inflation appeared contained, and interest rates were on a downward path. The optimism that carried through to first quarter 2025 faded in the second quarter. Uncertainty intensified following the tariff policy announcements on April 2, sparking volatility across global capital markets.⁸

In third quarter 2025, the macroeconomic backdrop remained mixed, but encouraging signals have emerged. The Fed’s measured rate cuts have propelled the major U.S. equity indices, reinforcing investor appetite for risk. The quarter closed with an estimated 2,347 announced and closed deals (including estimates), which are up 3.7% and 11.7%, respectively, from the prior year. Including estimates, aggregate deal value totaled $331.1 billion, representing a 28% quarter-over-quarter increase and an even stronger 38% year-over-year rise. Year-to-date deal value climbed to $869.4 billion, up 36.6% year over year and driven largely by megadeals valued at over $1 billion. Total transaction volume through third quarter 2025 reached 6,862, a 9.7% increase in volume vs. the same period in 2024.

The elevated mix of billion-dollar transactions, combined with sustained strength from first quarter 2025, has been the primary driver behind 2025’s impressive growth in total deal value. Dry powder, which surpassed $1 trillion in 2023, has moved slightly lower as deal activity has increased. At 27.8% of total assets under management (AUM), dry powder now sits at its lowest share on record, signaling improved deployment efficiency.⁹

The slowdown in exit activity in 2025 reflects the renewed uncertainty weighing on long-term investment models. Over the past five years, investors have weathered a series of disruptive shocks, ranging from the COVID-19 pandemic and the war in Ukraine to persistent inflation and rapid interest rate hikes. Just as confidence was beginning to recover, tariff volatility reintroduced instability, once again complicating projections and exit timing.¹⁰ In a recent BDO survey, 84% of respondents stated that their average holding period increased over the last year.¹¹

In third quarter 2025, total exit value declined for the third consecutive quarter, falling nearly 40% from first quarter levels. However, exit counts rose 22.4% quarter over quarter, marking the first increase since 2021, suggesting that more portfolio companies are beginning to cycle through the market. On an annualized basis, exit volume is expected to exceed 2024 levels, setting the stage for another strong year of realizations.

Despite the recent dip in quarterly exit value, 2025 has already surpassed full-year 2024 totals due to megasized exits that have contributed a disproportionate share of overall value. IPO activity also regained momentum in the third quarter, with several notable listings; however, the government shutdown that began in October has temporarily halted IPO approvals, stalling what had been a slow but promising recovery in the public exit channel.¹²

The recent uptick in exit activity comes at a critical time, and investors are growing increasingly concerned about its implications for fundraising. Sentiment indicators point to a market under mounting pressure. In a recent EY survey, limited partners (LPs) cited fundraising as their biggest concern.¹³

Through third quarter 2025, 244 U.S. PE funds closed, raising $214.4 billion, a mixed bag compared with the same period in 2024. While the number of fund closings increased, total capital raised declined, underscoring a broader structural shift in the market. LPs, constrained by allocation pressures, are concentrating commitments among established managers – particularly megafunds with $5 billion or more in committed capital – while reducing exposure to smaller or first-time funds. In addition, roughly 76% of funds closed so far in 2025 have exceeded the size of their predecessor vehicles, with a median step-up of 43.4%, the strongest in several years. This reflects a widening gap between large, successful closings and the continuing challenges faced by smaller or emerging managers. The overall fundraising landscape is likely to remain constrained into 2026.¹⁴

In second quarter 2025, North American M&A activity cooled slightly from the prior quarter but remained strong year over year, with total deal value reaching $596.8 billion across announced and completed transactions. While aggregate value declined 32% quarter over quarter, it rose 313% year over year as a result of several large transactions. Deal count dipped 0.8% quarter over quarter but climbed 10.7% year over year, reflecting steady appetite for dealmaking despite persistent volatility and recession concerns.

Market sentiment fluctuated sharply during second quarter 2025: Equities retreated in April amid renewed trade and recession fears before rebounding toward prior highs in June. M&A mirrored this trajectory and regained momentum in May as confidence improved. The top 10 North American deals in second quarter 2025 totaled $155.5 billion, up 53.2% year over year vs. second quarter 2024. The technology sector led the way, accounting for the two largest deals and three of the top 10 overall. However, sector representation was broad, with financial services and business-to-business (B2B) each contributing two major transactions and energy, healthcare, and business-to-consumer (B2C) each contributing one. ¹⁵

Conclusion

As 2025 draws to a close, the business environment continues to be shaped by global tensions, evolving policies, and technological change. The Fed’s recent rate cut and cautious banking stance reflect ongoing uncertainty, while investor confidence is seen in compressed credit spreads and the growth of private lending. PE and M&A activity remain resilient, with strong deal volume and fundraising among established managers pointing to renewed optimism despite a mixed macroeconomic backdrop.