Q3 2025: Market View Quarterly
The U.S. economy remained resilient in the third quarter of 2025 despite several headwinds. The period began with optimism as the government extended trade tariff negotiations, delaying additional import taxes beyond the original July 9 deadline. Although a 10% import levy remained, postponing further tariffs helped calm investors. Markets responded positively, supported by solid consumer spending and steady personal income growth. Economic momentum continued, with second-quarter GDP revised up to 3.8%, signaling stronger activity. Third quarter GDP is expected to come in at 3.9%, which would mark a second straight quarter above the 2% average as economic growth continues. In September, the Federal Reserve cut interest rates for the first time this year, lowering the federal funds rate to 4.00–4.25% to cushion a labor market showing early signs of slowing. Geopolitical tensions in the Middle East flared briefly but eased without disrupting oil markets, keeping energy prices relatively stable. Despite global uncertainty and shifting policy signals, U.S. equities held firm, buoyed by improved trade conditions and steady investor sentiment. Overall, the quarter highlighted an economy that remains steady and adaptable in the face of evolving risks.
Domestic Equities¹
U.S. equities extended their momentum in the third quarter as risk-on assets continued to be rewarded. The S&P 500 gained 8.12% in the third quarter and notched its strongest September since 2010 and reached several new all-time highs, though the rally left large-cap valuations looking stretched. Early strength in equity markets came from progress on trade negotiations and reduced uncertainty for businesses and consumers. Corporate earnings beat expectations and consumer spending stayed resilient, easing concerns about tariffs and recession risk.
Late in the quarter, the Federal Reserve’s rate cut reinforced the supportive backdrop, fueling markets to run another leg higher. The rally was broad-based, with 10 of 11 S&P 500 sectors posting gains. Technology and Communication Services led as enthusiasm around artificial intelligence continued to lift large-cap growth. Importantly, market leadership broadened, with small-cap stocks joining the advance; small caps outperformed large caps by 4.40%, supported by lower interest rate expectations and more attractive valuations.
International Equities¹
Developed international markets, measured by the MSCI EAFE Index, rose 4.77% in the third quarter, trailing U.S. equities after leading earlier in the year. A stable U.S. dollar, softer earnings momentum, and rising geopolitical tensions in Europe weighed on returns. Earlier tailwinds — stronger foreign currencies and expanding valuations — faded as the quarter progressed, limiting upside.
By contrast, emerging markets outperformed, returning 10.64% for the quarter. Gains were driven by China and other Asian markets, supported by robust consumer demand, optimism around global Artificial Intelligence (“AI”) adoption, and improving earnings expectations. While U.S. stocks outpaced developed markets in the third quarter, fiscal policy changes in Europe and expected earnings growth in 2026 keep international markets attractive for diversification and long-term return potential.
Fixed Income¹
Fixed income markets performed well over the last three months, with the Bloomberg Aggregate Bond Index advancing 2.03% through Q3 (up 6.13% for the year), supported by expectations that the Federal Reserve (“the Fed”) would resume rate cuts, a move confirmed at the September meeting. The Fed lowered the federal funds rate by 0.25% to 4.00-4.25%, and Chair Powell indicated the Committee now views rising unemployment as a more pressing risk than renewed inflation, with the average Fed official still anticipating two additional quarter-point cuts this year.
Bond market conditions improved as rates fell, and the economy remained on solid footing. Softer labor data, including a major downward revision to the number of jobs added to the economy, reinforced expectations for a lower interest rate path, easing price swings. The 10-year treasury has rebounded to 4.15% from its April low of 3.99%, but remains below January’s high of 4.79%. The additional return that investors demand for investing in riskier bonds has – the outlook for bonds is bright.
Real Estate¹
The U.S. housing market remains sluggish, with the median existing home price near $428,500 and sales constrained by affordability challenges and a lack of supply. Existing homeowners are staying put because they have locked in low mortgage rates, with nearly 80% of outstanding mortgages locked in below 5%. Builders have used discounts and mortgage incentives to support new home sales, creating short-term activity but not a lasting turnaround. Price growth has slowed and stabilized, and while gradually lower mortgage rates could aid a slow, uneven recovery, a return to the frenzied pace of recent years appears unlikely.
Conclusion
Markets advanced to new highs in Q3 2025, recovering quickly from early-summer weakness. The S&P 500 and Nasdaq set record levels, fueled by strong earnings and AI-driven enthusiasm. While trade tensions remain a factor, investor focus has shifted to how tariffs could impact growth, inflation, and federal revenue. Domestically, mixed data — especially signs of a cooling labor market — have drawn attention, but both stocks and bonds remain supported by strong performance and a more accommodative Fed. The fourth quarter also tends to be the strongest for the stock market, averaging roughly +6% since 1990, representing roughly half the annualized return.² As shown earlier this year, staying invested and diversified remains one of the most effective ways to navigate market volatility and pursue long-term goals.