October 2, 2025
Market Review: 3Q 2025
In the third quarter, financial markets built on the momentum of the post-Liberation Day recovery. The fear that gripped markets in early Q2 quickly gave way to exuberance as the rally progressed. More risky areas of global stock markets, such as small company stocks and emerging market stocks, led this rally in the third quarter, alongside other speculative stalwarts such as cryptocurrencies and unprofitable companies. In some ways, comparisons to the environment of the late 1990s feel increasingly relevant—a revolutionary technology is spurring significant investment in related infrastructure and an appetite for speculation in financial markets.
In the U.S., major macroeconomic variables such as economic growth and inflation remain muddied by policy uncertainty. Uncertainty regarding the labor market and immigration, and tariffs and inflation, have made divining where we are in the economic cycle, an already difficult task, increasingly challenging. While the picture has improved from the prior quarter, clarity around policy has been incremental. Notwithstanding the issues mentioned above, the economy continues to show resilience, buoyed by spending among high-income earners and a strong investment cycle related to artificial intelligence infrastructure.
In the face of policy uncertainty, U.S. corporations surprised analysts when they delivered second quarter earnings reports. Profit growth came in firmly above expectations and margins increased as well. Companies generally gave an upbeat message on expectations for the next quarter and, for the most part, indicated ability to manage the new tariff environment.
Looking abroad, international stocks continue to have a good year. While developed market stocks outside of the U.S. took a bit of a breather during the quarter, emerging market stocks picked up steam. Stock markets in Asia saw notable strength, with China leading the way in emerging markets and Japan leading the way in developed markets.
Bond markets also participated in the rally as expectations of the Federal Reserve lowering interest rates turned into reality. In another sign of investor appetite for risk, corporate borrowers of both high and low quality now can borrow at some of the lowest rates relative to the U.S. government in the past few decades. In fact, some corporations are borrowing at lower interest rates than the U.S. government.
As we peer into the final quarter of the year, we see a few elements to watch: the policy environment is incrementally positive, corporate earnings have momentum, and market participants seem to be in a risk-taking mood. Juxtaposed with a stock market nearing the highest valuations of the last five years, it begs the question of what happens when the heightened expectations of risk-seeking investors experience some sort of reality check. History suggests that the nascent government shutdown should have little impact on markets, but the stakes are elevated this time and that could lead to unforeseen outcomes.
Volatility may create tactical buying opportunities for investors. We remain committed to disciplined portfolio management, balancing opportunities with risks on your behalf. Please reach out to your advisor with any questions or concerns about your portfolio and the impact of market changes on your long-term plans.
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