Quarterly Market Outlook
Q3 2025
Author
Chief Investment Officer
We have absorbed and learned a lot over the last quarter—both in terms of the tariff policy coming from the Trump administration, but also willingness to stomach risk market reactions to such broad trade measures.
Policy uncertainty remains the new norm, though it is becoming clear that only so much change can be reasonably achieved without creating more turmoil than is bearable. Risk markets have all but shaken off the “liberation day” announcements, as these are now recognized to be more negotiating tactic than rule.
The impact of changes to both immigration and trade policy are most likely inflationary impulses, and although the most extreme outcomes may be avoided, when coupled with growing budget deficits the risk of higher inflation, lower growth, and labor market disruptions increases.
The Fed is caught at a crossroads, with cracks in the FOMC on how best to interpret the evidentiary data and plan for future monetary policy. The current complexities of uncertain fiscal and trade policy and their impact on the delicate balance between inflation and employment are perhaps unprecedented for the US economy.
Our current forecast has the Fed cutting base rates three times by mid 2026, though we feel the risk remains to the downside in rates if we see a mild recession.
In the prior quarter we meaningfully shifted the likelihood of a recession up to 30%, and the prospects of above trend growth in the bull case down to 15%. We continue to maintain this stance, with a soft landing still the most likely outcome, albeit in an environment where risks remain skewed significantly to the downside.
Credit market fundamentals remain strong, but there are small but noticeable pockets of concern that are coming into view. We are closely monitoring these as the cycle evolves.
Spreads have tightened in several credit markets despite a maturing business cycle. This phenomenon calls for partially shifting to an up-in-credit quality approach—potentially accessing higher quality credits with moderate structural leverage in order to meet long-term return objectives, rather than buying newly originated, unlevered lower quality credit. This is something that we will be keeping an eye on in coming quarters, in line with our surveillance on delinquencies, defaults and other credit events.
At the margin, we see delinquencies picking up in several of the consumer and household markets that we track. The credit contraction that has been underway since rates began to rise in 2023 is slowing, but not yet complete. The consumer is entering into this period of volatility with a strong balance sheet at the aggregate level, though the pace of savings is running low and credit is still tightening quite significantly for borrowers at the lower end of the credit spectrum.
We continue to target investments in asset-based corporate transactions, real estate, and consumer lending where we look to select origination channels for sourcing and collateral with high levels of homeowner equity.
Real estate, in our view, continues to provide the best opportunity set of 2025. Risk-reward in commercial bridge lending, residential transition loans, home improvement loans, and home equity lines of credit (HELOCs) stand out. In multifamily, the delivery of new supply is beginning to moderate, and demand remains healthy in key metros, supporting both rent growth and a constructive lending outlook.
Continued volatility in public markets warrants continued exposure to sources of stable income, and we see this as an opportune time to increase allocations to strategies such as private credit. Although the growth outlook may have lowered, we still anticipate a soft landing where equity valuations may be challenged, and income-oriented investments offer, in our view, the best relative value.
Corporate Direct Lending
- The average default rate (as defined by loan covenant defaults) has continually increased since 3Q24, reaching 2.9% in 1Q25.
- Spreads have continued to tighten, particularly for LBO financings. Return compression (despite mixed borrower performance) is in large part due to the relatively small number of transactions being chased by an ever-growing supply of capital.
Real Estate Lending
- Residential real estate fundamentals remain solid, supported by tight inventory, high replacement costs, and steady household formation. Despite affordability challenges, constrained supply continues to underpin home prices in most markets.
- The CRE landscape is showing signs of stabilization, with sectors such as industrial, data centers, and well-located multifamily continuing to demonstrate resilience.
- The broader CRE market is adjusting to the higher rate environment through repricing, recapitalizations, and a slowdown in new development activity.
Asset-Based Consumer Lending
- Spreads in consumer-backed securitized bonds snapped back after the shock of “liberation day” passed and several tariff-related announcements reversed. Softening data points to higher delinquencies and elevated losses.
- Net losses in both prime and subprime auto loans for recent vintage years (2022–2024) are tracking higher than preceding vintages indicating a combination of potentially stretched borrowers, lower recoveries and/or looser underwriting standards.
The views expressed in this chart are those of the Investment Team of Nomura Capital Management LLC and are based on the Investment Team’s forward-looking assessment of credit markets as of the date referenced above. The views expressed herein are subject to change at any time following the publication of this report. The arrows in the chart reflect the change in the Investment Team’s outlook of each credit market since its prior quarterly market commentary. This chart is provided for informational purposes only and is not intended to represent a recommendation from Nomura Capital Management LLC to invest in, or divest from, the credit market asset classes referenced herein.
The views expressed in this chart are those of the Investment Team of Nomura Capital Management LLC and are based on the Investment Team’s forward-looking assessment of the general macroeconomic environment as of the date of this report. The Bull/Base/Bear Market (“Market Scenarios”) outcome probabilities noted in this report reflect the Investment Team’s forward-looking estimate of the probability of each Market Scenario occurring within the next 12-18 months from the date of this report. The market metrics noted within this report (Growth, Inflation, Unemployment, Risk Assets, Base Rates and Volatility) represent the Investment Team’s forward-looking estimate of each market metric resulting from the corresponding Market Scenario. All views and estimates contained within this report are as of the date of this report and are subject to change at any time following the publication of this report.
Data sourced from Bloomberg, Federal Reserve Bank of St Louis, US Census Bureau, Zillow Home Value Index
Source: J.P. Morgan, U.S. Census, National Association of Home Builders, American Association of Private Lenders
Data sourced from Bloomberg
CPI = The Consumer Price Index; PCE = Personal consumption expenditures; Cleveland Fed NTRR = Federal Reserve Bank of Cleveland New Tenants Repeat Rent Index; CPI OER = Consumer Price Index Owners’ Equivalent Rent
CPI is a measure of inflation compiled by the US Bureau of Labor Studies. PCE stands for Personal Consumption Expenditures, which is a measure of how much money US households spend on goods and services. It’s a key indicator of economic growth and inflation.
Data sourced from Bloomberg
CPI = The Consumer Price Index; PCE = Personal consumption expenditures; Cleveland Fed NTRR = Federal Reserve Bank of Cleveland New Tenants Repeat Rent
Index; CPI OER = Consumer Price Index Owners’ Equivalent Rent CPI is a measure of inflation compiled by the US Bureau of Labor Studies. PCE stands for Personal Consumption Expenditures, which is a measure of how much money US households spend on goods and services. It’s a key indicator of economic growth and inflation.
Data from Bloomberg, Lincoln VOG Proprietary Market Database
C&I Large = Commercial & Industrial Large Energy Users; C&I Small = Commercial & Industrial Small Energy Users
Income and Spending: Weakness in consumer spending showing in non-durable goods. Consumption strength may be tested by tariff-driven impacts working their way into durable goods.
Labor market: Hiring and employment key to demand and growth; size of the labor force and participation rates are rapidly changing due to lower net immigration and record retirement of baby boomers.
Tariffs: Trade agenda is creating inflation and policy uncertainty for both consumer and corporations, with demand in different sectors either being pulled forward or pushed back.
FOMC: Trade and fiscal policy impact on inflation creating a high level of uncertainty in setting monetary policy.
Geopolitics: Resignation of middle east turmoil could reverse stable and low oil prices, quickly negating a glut in global oil production and stoking inflation.
We are adding:
Asset-based corporate loans: Collateralized loans for management of liquidity, receivables and project completion.Residential Real Estate: HELOCs, transitional loans and other home loan products in high HPA geographies backed by healthy levels of borrower equity.Commercial Real Estate: Short-duration bridge and gap loans for multifamily, student housing and warehouses.Specialty Finance: Specialty Finance: Cash flows backed by intellectual property, royalties, and equipment leasing.Diversity: Across ABL products and across origination channels with a focus on solid underwriting.We are avoiding:
Lower quality consumer credit: Unseen fat-tail risks in newer vintage unsecured consumer lending where the use of proceeds is unknown and the origination channel unvetted.Direct lending corporate loans: Rewards incommensurate with risks in unsecured corporate lending with spreads tightening despite a maturing business cycle.Volatility: Own the cash flows, disown the volatility of public markets. Stable income strategies such as private credit warrant an increase in allocation in this environment. This is for informational purposes only and is not intended to represent a recommendation from Nomura Capital Management LLC to invest in, or divest from, the credit market asset classes or security types referenced herein.
These materials reflect the opinion of NCM on the date of production. Opinions and statements of financial market trends that are based on current market conditions constitute our judgement and are subject to change without notice. Past performance does not guarantee future results. Where data is presented that is prepared by third parties, such information will be cited, and these sources have been deemed to be reliable. However, NCM does not independently verify or otherwise warrant the accuracy of this information. All investments are subject to risks, including the risk of loss of principal.