Third Quarter 2025 Recap: Investment Commentary Summary

Market Recap

Global stock markets continued to rise during the third quarter, appearing to shrug off concerns over tariffs and a looming government shutdown, to end the quarter near all-time highs.

U.S. large cap stocks (S&P 500) gained 8.1% in the third quarter, bringing its year-to-date total to just shy of 15%. Shares in the U.S. continue to be powered by strong earnings growth from the technology sector driven by optimism around Artificial Intelligence-related investment themes. U.S. smaller-cap stocks (Russell 2000) joined the party, rallying over 12% in the quarter amid hopes that lower interest rates would benefit the cyclically sensitive asset class.

Internationally, developed international stocks (MSCI EAFE) lagged the U.S. this quarter, finishing up 4.8%. On a year-to-date basis, however, they have returned over 25%. Emerging market stocks (MSCI EM) were the standout performer, clocking a 10.6% return for the quarter, bringing the year-to-date return to 27.5%.

In the U.S. fixed-income market, after holding rates steady for the first eight months of the year, the Federal Reserve resumed rate cuts in September. Against this backdrop, investment-grade core bonds (Bloomberg US Aggregate Bond Index) finished the quarter up 2.0%, while high-yield bonds were up 2.4% (ICE BofA US High Yield). On a year-to-date basis investment-grade bonds are now positive 6.1%, while high-yield is up 7.1%.

Investment Outlook and Portfolio Positioning

Markets are always reacting to news, but today it feels even more pronounced. Every data release, policy comment, or geopolitical headline seems to carry an outsized influence on investor sentiment. This heightened sensitivity seems justified, as investors try to determine the path forward. The fact that U.S. stocks are near all-time highs adds to the tension.

Against this backdrop, there are reasons for continued optimism. While we do not currently see clear signs of a recession, economic conditions could change as data evolve. The U.S. consumer remains strong, the labor market seems resilient, and company fundamentals add another layer of support. For example, corporate earnings grew 11.7% in the second quarter, making it the third consecutive quarter of double-digit growth. Many companies reported expanding profit margins, improved efficiency, and positive forward guidance on earnings. These results support higher equity valuations.

Monetary policy is another important tailwind. The Federal Reserve cut rates in September, after a prolonged pause, may provide a constructive backdrop for both stocks and bonds. Lower rates reduce borrowing costs for consumers and corporations, potentially fueling further investment and spending. History also offers perspective – a study by J.P. Morgan[1] found that when the Fed cuts rates with the S&P 500 within 1% of an all-time high, the index has on average risen 15% over the next 12-months.

Of course, risks remain. We are closely monitoring the labor market for signs of additional slowing. Key indicators such as quit rates, layoff rates, and initial unemployment claims have all flatlined. The labor market seems to be at stall speed, and conditions could shift either way, so we’re monitoring developments closely, especially the unemployment rate. And while lower rates should provide support for the economy, there is a risk that growth reaccelerates bringing with it inflation and higher long-term bond yields.

Valuations for U.S. stocks are another risk we’re closely monitoring. While we believe current elevated valuation multiples for U.S. stocks are somewhat justified given structural changes to the economy and composition of the index (i.e., higher weighting to technology stocks), we are mindful that exuberance can push valuations beyond reason.

Closing Thoughts

We enter the final quarter of the year seeing both opportunity and uncertainty. Equities are supported by resilient earnings, healthy consumer demand, and a more accommodative Fed, yet valuations remain elevated, and policy debates loom large. In fixed income, tight spreads reflect strong corporate fundamentals even as fiscal pressures and policy divergence create risks at the long end of the curve. Labor markets are softening but not collapsing, reinforcing the view that growth is slowing rather than outright stalling.

This is a time when discipline is especially important. Near-term volatility and policy noise will likely continue, but fundamentals (i.e., healthy balance sheets, consumer spending, and improving breadth in equity markets) provide a constructive backdrop. We continue to maintain diversified portfolios, balancing risk and opportunities, and positioning to benefit from long-term secular trends while staying alert to evolving macro and policy risks.

We thank you for your continued confidence.

The full commentary is available here: Third Quarter 2025 Investment Commentary

Important Disclosure

This material is provided by Litman Gregory Wealth Management, LLC (“LGWM”) for informational purposes only and is intended solely for institutional investors. Past performance is not indicative of future results. Any forward-looking statements or hypothetical projections are subject to change and do not represent guarantees. Investing involves risk, including the potential loss of principal. Nothing herein should be construed as personalized investment advice, an offer to buy or sell any security, or a solicitation to engage in any investment strategy. Certain information herein has been obtained from third-party sources believed reliable but is not guaranteed. Information is current as of the date indicated and subject to change without notice. For additional information, including LGWM’s Form ADV, please contact [email protected]  or visit adviserinfo.sec.gov.

Litman Gregory Wealth Management, LLC (“LGWM”) is an SEC-registered investment adviser with its principal place of business in California. Registration does not imply a certain level of skill or training. This material is provided for informational purposes only and should not be construed as investment advice. Past performance is not a guarantee of future results. All investing involves risk, including possible loss of principal.

Index Disclosure

Any reference to a market index is included for illustrative purposes only, as it is not possible to directly invest in an index. Indices are unmanaged, hypothetical vehicles that serve as market indicators and do not account for the deduction of management fees or transaction costs generally associated with investable products, which otherwise have the effect of reducing the performance of an actual investment portfolio.

Standard & Poor’s 500 Composite Stock Price Index is a capitalization-weighted index of 500 stocks intended to be a representative sample of leading companies in leading industries within the U.S. economy. Stocks in the Index are chosen for market size, liquidity, and industry group representation.

Russell 3000 Index measures the performance of the largest 3,000 U.S. companies representing approximately 96% of the investable U.S. equity market. Russell 2000 Index measures the performance of the 2,000 smaller companies included in the Russell 3000 Index.

The MSCI EAFE Index is an equity index which captures large and mid-cap representation across 21 Developed Markets countries* around the world, excluding the US and Canada. With 799 constituents, the index covers approximately 85% of the free float- adjusted market capitalization in each country.

The MSCI Emerging Markets Index is a free float-adjusted market capitalization index that is designed to measure equity market performance of emerging markets.  The MSCI Emerging Markets Index consists of the following 23 emerging market country indexes: Brazil, Chile, China, Colombia, Czech Republic, Egypt, Greece, Hungary, India, Indonesia, Korea, Malaysia, Mexico, Peru, Philippines, Poland, Qatar, Russia, South Africa, Taiwan, Thailand, Turkey and the United Arab Emirates.

Bloomberg U.S. Aggregate Bond Index measures the performance of investment grade, U.S. dollar-denominated, fixed-rate taxable bond market, including Treasuries, government-related and corporate securities, MBS (agency fixed-rate and hybrid ARM pass-throughs), ABS, and CMBS.

The ICE BofA US High Yield Index is market capitalization weighted and is designed to measure the performance of U.S. dollar denominated below investment grade (commonly referred to as “junk”) corporate debt publicly issued in the U.S. domestic market.

[1] Source: J.P. Morgan, as of September 2025.