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