Fed Cuts, AI Power Demand, and Global Defense: 2025’s Defining Themes

October 9th, 2025 by Cory Large

As 2025 enters its final stretch, we remain constructive but cautious. Our view is rooted in a few central theses: the Federal Reserve is entering the pivot zone, structural tailwinds are forming around defense and AI infrastructure, and selective flexibility will be essential. Below is how we see the landscape, where we’re leaning, and how we’re positioning portfolios accordingly.

Macro Backdrop: The Turning Tide

The Fed, Rates & the Labor Market

• At its September meeting, the FOMC cut the federal funds rate by 25 basis points, bringing the range to 4.00% – 4.25%.
• The Committee noted that “downside risks to employment have risen,” reflecting a shift in the risk balance.
• Chair Powell has emphasized the difficult calibration ahead: easing too quickly might reignite inflation, while over-retaining restrictive policy could overly dampen job growth.
• Over the first half of 2025, U.S. real GDP (adjusted for inflation) growth averaged ~1.4% annualized, a soft pace relative to past norms.
• In recent months, monthly job growth has slowed. Over the last three months, U.S. employers have averaged just ~29,000 jobs per month, one of the slowest stretches in recent memory.

Implication: The Fed is now in a more defensive position. With inflation gradually easing (though still above target) and labor momentum softening, we believe the market is correctly pricing in additional cuts (perhaps another 50 bps before year-end).

One external viewpoint worth noting: the OECD sees room for as many as three more rate cuts through spring 2026, with the Fed funds rate possibly falling toward the 3.25–3.50% area.

Another nuance: some Fed officials (e.g., Dallas Fed’s Lorie Logan) have cautioned against overreacting; they argue inflation control still matters, and thus further cuts will need strong evidentiary backing.

Structural and Thematic Tailwinds

AI, Data Infrastructure & Electric Load Growth

• The energy demands of AI and data center expansion are reshaping power markets. The EIA forecasts U.S. electricity consumption will rise from 4,097 billion kWh in 2024 to 4,193 billion kWh in 2025, and then 4,283 billion kWh in 2026. Reuters
• In the commercial sector, electricity demand is projected to grow by ~3% in 2025 and ~5% in 2026, revisions largely driven by data center growth. EEPower
• The U.S. Department of Energy (via LBNL) suggests that data center load growth has tripled over the past decade and is projected to double or triple again by 2028. The Department of Energy’s Energy.gov
• In parallel, utilities are responding: CenterPoint recently announced a $65 billion capital plan (2026–2035) to support data center load and grid expansion, projecting peak demand to rise ~50% by 2031. Reuters
• Grid planning metrics are flashing higher demand: Grid Strategies estimates that five-year summer peak demand forecasts rose from ~38 GW in 2023 to ~128 GW in 2024. World Resources Institute

Investment Implication: The AI/data center buildout is not just a buzzword; it is materially reshaping the capital expenditure cycle for power plants, transmission, storage, and grid modernization. Names involved in utilities, electric grid infrastructure, energy storage, high-efficiency cooling, and specialized data center REITs offer differentiated exposure.

Defense & Geopolitics

• Governments globally are recommitting to defense modernization. The U.S. FY 2026 proposed budget includes record-level allocations.
• Europe, through its “Rearm Europe” initiative, is planning sweeping investment to bolster military readiness and deterrence.
• These multi-year, government-backed spending programs favor secular exposure to aerospace & defense names that combine scale, technological competitiveness, and contract durability.

Financials & Yield Curve Normalization

• A steepening or normalized yield curve works in favor of banks. As short rates fall relative to longer rates, net interest margins widen.
• Deregulation tailwinds, in particular potential reductions in capital constraints or easing of systemic rules, could amplify returns in large cap banks.
• Historically, when cuts begin in a modest disinflation regime, financials often lead the equity rally from the turn. We believe this dynamic remains in our favor.

Portfolio Posture & Positioning

 

Portfolio Segment	Tilt / Weighting	Rationale
Fixed Income / Credit	Overweight corporate IG and extension beyond the short end with Treasuries	Capturing higher yields now, with interest rates likely to fall and reinvestment risk elevated
U.S. Equities	Overweight vs. ex-U.S.	U.S. still leads in innovation, regulatory clarity, capital access; we remain selective in ex-U.S. exposure
Growth / Thematic	Allocate to AI infrastructure, power/utilities, defense names, large cap financials	Capitalizes on long-duration secular tailwinds that are underpenetrated by general equity markets
Alternatives / Private	Continue to emphasize private credit, private equity, and structured credit (where eligible)	Diversification, illiquidity premium, and non-correlated return sources

 

We believe the environment is still favorable for a well-calibrated balance of defensive yield capture and targeted growth exposure. Portfolios need not be extreme; the art is in choosing asymmetric upside while controlling risk.

Risks & Watch Points

• Sticky Inflation: If inflation refuses to moderate, the Fed could re-tighten or delay cuts, undermining growth expectations. Powell has underscored this in recent remarks. Federal Reserve+1
• Data “Blackout” / Policy Uncertainty: The current U.S. government shutdown is delaying key economic data (e.g., BLS/CPI releases), complicating Fed signaling and market interpretation. Investopedia+1
• Global Growth Slowdown / Trade Disruption: Slower demand in Asia or renewed tariff escalation could dampen cyclical exposures and compress margins.
• Long-duration Growth Premium Compressions: If broader sentiment turns risk-off, expensive growth names may get hit disproportionately.

Final Thoughts

We believe the next leg of the market cycle will be defined by transition, not a simple continuation of the past. The window of opportunity lies in capturing yield on the way down while selectively favoring structural themes gaining budgetary and political momentum (defense, AI infrastructure, grid modernization).

For our clients and prospects, we see the ideal posture as active, flexible, and theme-aware; not anchored to legacy allocations. Over the coming months, we plan to lean into sectors where policy, capital spending, and secular reinvestment intersect.