Volatility in Growth Stocks Amid Macroeconomic Uncertainty: Sector Rotation and Momentum Shifts in 2025

The interplay between macroeconomic uncertainty and equity market dynamics has become a defining feature of the post-pandemic investment landscape. As we approach the end of 2025, growth stocks-long favored for their scalability and innovation-have exhibited pronounced volatility, driven by shifting sector rotations and momentum-driven investor behavior. This article dissects the forces shaping these trends, drawing on granular data from Q3 2025 and macroeconomic indicators like the Chicago Fed National Activity Index (CFNAI).

Macroeconomic Drivers and Sector-Specific Pressures

The 2023–2025 period has been marked by divergent macroeconomic narratives. On one hand, U.S. trade policy and tariff fluctuations have created headwinds for export-dependent sectors, while on the other, fiscal stimulus and monetary easing have buoyed consumption-driven industries. For instance, the Canadian lumber sector has faced existential challenges due to U.S. tariffs, prompting a $890 million government aid package to offset declining exports. Conversely, the U.S. food service sector has benefited from improved standalone strategies post-merger cancellations, with analysts projecting self-help momentum into 2026.

India's economic trajectory further illustrates this duality. S&P Global forecasts GDP growth of 6.5% in FY26 and 6.7% in FY27, driven by tax cuts and lower GST rates that are expected to amplify middle-class consumption. Such policies are likely to favor growth stocks in sectors like consumer discretionary and manufacturing, though export-oriented industries remain vulnerable to U.S. tariff policies.

The CFNAI and Sector Rotation: A Tug-of-War

The Chicago Fed Uncertainty Index (CFNAI) has emerged as a critical barometer for sector rotation. In Q3 2025, the index fluctuated between –0.19 and –0.12, reflecting mixed signals about economic momentum. These oscillations have directly influenced investor sentiment: when the CFNAI-MA3 improved to –0.18 in August 2025, it signaled tentative stabilization, prompting a shift toward industrial and cyclical sectors. Conversely, the July 2025 decline to –0.19-indicating below-trend growth-fueled defensive positioning in staples and utilities.

The correlation between the CFNAI and sector performance is stark. For example, the August 2025 CFNAI rebound coincided with a 12.75% surge in communication services stocks, as production and employment gains signaled stronger demand. Meanwhile, the July 2025 contraction saw consumer defensive stocks fall 2.71%, underscoring the index's role in amplifying sector-specific volatility.

Momentum Shifts and the Fed's Role

The Federal Reserve's policy uncertainty has further complicated momentum dynamics. Despite strong corporate fundamentals-healthy balance sheets and historically high margins-companies have delayed capital expenditures due to mixed messaging on trade and tariffs. This hesitancy has led to a rotation toward value stocks and defensive sectors, with the Morningstar US Value Index outperforming its growth counterpart by 0.53% in Q3 2025.

However, the Fed's potential rate cuts in 2025 have injected optimism into growth-oriented sectors. J.P. Morgan Research anticipates the S&P 500 closing near 6,000 by year-end 2025, supported by double-digit earnings growth. This optimism is most evident in small-cap growth stocks, which surged 8.54% in Q3 2025, outpacing mid-cap growth stocks (2.53%) and large-cap growth stocks (6.66%).

Conclusion: Navigating the New Normal

The 2023–2025 period underscores the importance of macroeconomic agility in equity investing. Growth stocks remain sensitive to sector-specific pressures and broader uncertainty indices like the CFNAI. For investors, the key lies in balancing exposure to high-growth sectors (e.g., tech, industrials) with defensive positioning in staples and utilities during periods of elevated uncertainty. As the Fed's policy clarity and global trade dynamics evolve, sector rotation will likely remain a pivotal tool for managing volatility in growth stocks.