- Stocks continued their ascent, setting new all-time highs.
- U.S. stocks regained strength relative to international stocks, including a dramatic surge in small-cap stocks performance.
- Bonds and mortgage rates benefited from falling interest rates.
A Rollercoaster Quarter
The investment markets prospered during the third quarter, despite concerns about tariffs, political tensions, and international conflicts. Investors who maintained a long-term focus in the wake of risks quickly weathered April’s downturn to enjoy handsome returns year-to-date.
Several stock indices set new all-time highs prior to the end of the third quarter. Domestically, the S&P 500 surpassed 6,600 for the first time. A dramatic surge in small-cap stocks pushed the Russell 2000 to a new peak. Broad international indices grew at a slower pace in the third quarter but also achieved new record highs.
Year-to-date investment returns (as of September 30, 2025) are as follows:
Bloomberg U.S. Aggregate (U.S. bonds) 6.13%
S&P 500 Index (large U.S. stocks) 14.83%
Russell 2000 (small U.S. stocks) 10.39%
MSCI All Country World Index ex-US 26.64%
(International Stocks)
Strong Performance in the Midst of Uncertainty
The year began with wide-spanning and significant changes implemented under the Trump administration. A whirlwind of uncertainty sent the U.S. dollar and stocks into sharp declines. Uncertainty remains as the long-term impact of many actions might not be known for months or years. However, the investment markets have poised a dramatic comeback. Many domestic and international stock markets have reached new highs; the value of the dollar has largely stabilized; and bonds are doing well as monies are again flowing into Treasuries.
Hence, the year demonstrates two key investment points. Periods of elevated risk do not always translate into market declines. Additionally, selling into panic can result in lost market recovery returns.
U.S. Stocks Regain Center Stage
The magnitude of recovery in U.S. stocks since late April has been astounding. The S&P 500 rallied by more than 30% from the market depth in April through September 30th.
On a year-to-date basis, international stocks have outperformed the U.S. markets. While it’s wonderful to see international stocks at the top of the heap after so many years, it’s worth noting that the majority of this year’s international performance is currency-driven. This is due to a precipitous drop in the value of the U.S. dollar that propped up international returns through late April. Since then, U.S. stocks have modestly outpaced international stocks as the U.S. dollar has stabilized.
Momentum in Artificial Intelligence (AI) and corporate earnings have been fueling stocks. A high percentage of companies have exceeded earnings expectations in recent months, giving investors the confidence to pay higher prices for stocks. While companies are doing well, it is worth noting that price-to-earnings (PE) multiples are high. This puts pressure on companies to maintain high earnings to justify stock prices. The impact of tariffs could make this challenging to achieve.
Fed Rate Cuts
The markets have been waiting and hoping for the Fed to resume interest rate cuts after a pause since December 2024. Their wish came true in September when the Fed cut rates by a quarter point. Fed rate cuts are always welcome as they often spur economic and investment growth. This is largely because they lower borrowing costs, which enables higher spending. As an example, mortgage rates have fallen by about 10% this year, down from approximately 7% to 6.3% on the 30-year mortgage.
Another Fed rate cut is largely expected in October due to a softening in the labor market. This is a key factor that the Fed has been waiting for relative to making further rate cut decisions.
The Economy: Inflation and Jobs
While a weakening in the job market increases the chances of a Fed rate cut, it is not great news for the economy. Employers only added 22,000 jobs in August and the unemployment rate ticked up to 4.3%. Inflation also notched higher, close to 3% in August, while consumer sentiment remained weak. These data points increase the risk of a recession.
Fortunately, the U.S. gross domestic product (GDP) rate, which measures economic growth, showed that real GDP increased at a respectable annual rate of 3.8% as of the end of June. The next upcoming GDP report scheduled to be released at the end of October will provide updated information about the strength of the economy.
Tariffs
Many tariffs went into effect over the summer, likely contributing to the rise in inflation. The full impact of tariffs will take time to determine. The implementation of some tariffs was delayed, some have been modified since being imposed, and some are still in negotiation. Companies have taken different approaches to managing higher tariff costs. Some are transferring the cost to the consumer by charging higher prices, while others are absorbing the costs to attract consumers and gain greater market share. The sustainability of both and the impact on corporate earnings are in the spotlight in the months ahead.
Congressional Actions and Inactions
One element of uncertainty was alleviated in July with the signing of the “One Big Beautiful Bill.” Tax rates that were scheduled to increase were maintained at lower rates. On the one hand, low tax rates help to support the economy as they increase after-tax income for discretionary spending. On the other hand, lower tax rates and other provisions of the Bill are forecast to increase debt and deficit levels in the long term.
While we gained clarity on the topic of taxes, uncertainty resurfaced when the government shut down on October 1 as Congress failed to reach an agreement on government funding. The shutdown ceased many government services and paychecks for government employees as Congress grapples about funding items, particularly the extension of Federal health care subsidies. Somewhat surprisingly, the investment markets posted positive returns as we entered the shutdown.
The Risks of Market Timing
Thus far, 2025 has again exemplified the risk of market timing and selling into risk and fear. If one sold during the downturn at the beginning of the year, they might have missed out on double-digit stock returns in the months following. Likewise, selling before the government shutdown could have resulted in lost returns. In fact, statistics show that missing only 10 to 20 days of the highest returns have cut S&P 500 index returns by close to half over the past two decades. In 2023, it only took missing the 5 highest days of return to cut the S&P 500 return virtually in half.
Looking Forward
We understand and recognize the prevalence of risks and potential opportunities domestically and abroad and the investment thoughts they beget. Determining an appropriate investment portfolio structure for you is one of the most important investment decisions. Despite widespread belief, your age and market risks are not the only determining factors. Your income needs, growth requirements and overall risk appetite are also important driving variables. We welcome discussing these considerations, your investment positioning and other topics with you.
