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Quarterly Market Review: Q3 2025

October 1, 2025

The third quarter of 2025 proved to be another period of remarkable—and perhaps unnerving—strength in the U.S. equity market, defying traditional seasonal weakness. The S&P 500 index rallied approximately 7% during the quarter, bringing its year-to-date gain to nearly 14%. The technology-heavy Nasdaq Composite led the way with gains exceeding 17% for the year, largely fueled by continued enthusiasm and significant investment in artificial intelligence (AI)-related equities. This performance pushed market exposure among households and nonprofits to historic highs, indicating that confidence remains robust, even as valuations hover near record levels.

The Federal Reserve and Economic Data

Monetary policy was a key driver, as the Federal Reserve implemented a widely anticipated 25-basis point rate cut in mid-September. This was the first cut of the year, bringing the Federal Funds Rate to the 4% – 4.25% range, and was motivated by evidence of a cooling labor market, with the unemployment rate hovering around 4.3%. The economic outlook, however, remains mixed. While recession fears have subsided compared to Q2, rising trade tariffs have created uncertainty. Core inflation remains somewhat elevated, with August CPI rising 2.9% year-over-year, keeping the Fed vigilant about its 2% target. The market is currently pricing in expectations for one or two further rate cuts before year-end, though this remains entirely dependent on incoming inflation and jobs data.

Sector Dynamics and Global Headwinds

Performance within the equity market remains highly concentrated. Information Technology and Communication Services were the primary beneficiaries of the AI infrastructure boom, leading the large-cap rally. Conversely, defensive sectors like Energy and Health Care lagged the major indices. We also saw notable currency volatility, with the U.S. Dollar showing weakness against global currencies, which may increase the attractiveness of non-U.S. assets that have lagged in recent years. The primary source of global uncertainty remains U.S. trade policy, where tariffs are expected to dampen global growth.

Outlook for Q4 2025

As we move into the final quarter, I remain focused on disciplined, long-term strategies. The key risks are a potential correction in highly valued AI-focused growth stocks, and the ongoing tug-of-war between strong corporate earnings and inflation. Value and small-cap stocks, currently trading at a relative discount, may offer attractive opportunities if the economy slows and the Fed continues its easing cycle.

Disclosure: Index performance data from Morningstar. Investing involves risk, including potential loss of principal. Past performance does not guarantee future returns.

Top Investment Risks and Opportunities for 2025

2024 Stock Market Performance Summary

2024 was a remarkable year for the stock market, with major indices reaching new heights. The Nasdaq Composite surged by 30%, the S&P 500 climbed over 23%, and the Dow Jones Industrial Average rose by 13%. The Federal Reserve’s first interest rate cut in four years, strong corporate earnings, and a changing political landscape contributed to this bullish trend. The “Magnificent Seven” tech stocks, including Nvidia, Tesla, Alphabet, Amazon, Apple, Microsoft, and Meta, played a significant role in driving market gains.

Key Investment Risks for 2025

  1. Trade Wars: Escalating protectionism and its impact on global supply chains remain a significant concern.
  2. Inflation: Persistent price pressures and the uncertain trajectory of monetary policy responses could pose challenges.
  3. Equity Sector Concentration and High Valuations: The dominance of a few sectors or companies could pose systemic risks if valuations falter.
  4. Geopolitical Tensions: Ongoing geopolitical issues, such as the Middle East crisis and tensions around Taiwan, could impact market stability.

Key Investment Opportunities for 2025

  1. Technological Innovation: Continued advancements in artificial intelligence and other technologies are expected to drive growth, particularly in the tech sector.
  2. Emerging Markets: Non-US equity markets, especially in emerging regions, offer compelling relative valuations.
  3. Mergers and Acquisitions (M&A): Increased M&A activity could lead to a more dynamic market and broader equity engagement.

As we move into 2025, investors should remain vigilant and adaptable, balancing risks and opportunities to navigate the evolving market landscape.

Finally, the transition to the Altruist Financial LLC platform is complete. One benefit is the Cash Account Altruist offers. It is FDIC-insured and currently yields 4.0% with daily liquidity. It can hold excess cash from non-retirement accounts, or you can connect it to your bank account to earn higher interest or pay investment management fees on retirement accounts at Altruist (rather than use funds from inside the IRA account).

Data source: Morningstar.com

Past performance is not indicative of future returns. Investing involves risk, including loss of principal. If you don’t know what you’re doing, please seek professional help. Bonus: This applies to many things other than investing, too.

And So the 4th Quarter Begins

The stock market fear gage, the VIX, is flashing extreme pessimism. If you follow the news flow, it is easy to see why. It’s a constant barrage of negativity. It’s important to note that crises and the stock market have coexisted for decades. Crises come and go, while the stock market has always been volatile, yet sustains a positive trend.

Near-term indications suggest that the market is challenged by the Fed interest rate policy but appears reasonably valued all things considered.

My favorite bottom-up indicator, the Morningstar Market Valuation chart, puts the US market at 91% of fair value on 9/30/23, suggesting slight undervaluation. On a deeper level, growth is slowing, but it is very debatable how much it will slow. For now, it appears that the answer is “not too much.”

Part of the reason the market pulled back from its recent high at the beginning of August is that the Fed signaled that it is likely to keep rates higher for longer. Higher yields translate into lower stock price multiples. Ultimately this will reverse when the Fed sees the threat of persistent inflation above target diminishing.

In the absence of an upside catalyst, I expect the market to remain rangebound (S&P 500 between 4,220–4,560) until either the positive scenario occurs with the economy’s slowing stops, the Fed becomes dovish, and disinflation proves successful. On the downside, if either of these factors deteriorates, the market could break to the downside.

This morning’s job report (Tuesday, October 3, 2023) sent interest rates higher. Accordingly, stocks dropped. The knee jerk reaction to a data point illustrates the market’s myopia in seeing the trees instead of peering through the forest. Every data point is extrapolated far into the future when we’re pretty sure that won’t be the case. That suggests the long-term outlook just went up by the amount of today’s decline.

A Chat GPT forest

I’ll also comment about Congressional dysfunction after this past weekend’s drama. A Government that can’t govern is not helpful given the fiscal state of this country. It can only create uncertainty in the Treasury market. Stocks will not go up with interest rates increasing from this level. Let’s hope Congress gets its act together sooner than later.

Last quarter I noted that the market “appears to be approaching fair value” after being up 15.91% in the first half of the year. The 3rd quarter pullback was not surprising.

The bottom line is that the S&P 500 went up 13.03% YTD through the 3rd quarter according to Morningstar. The 4th quarter should be interesting.

Investing involves risk, including loss of principal. Past performance is not indicative of future returns.

1st Half Results

The first half of 2023 is behind us. The Fed’s discount rate has gone from 4.5% to 5.23%. We had 3 bank failures that heightened awareness of the vulnerability of banks that take excessive interest rate risk. Inflation has remained higher and stickier than central banks would like. The Russian war with Ukraine drags on while China threatens to invade Taiwan, potentially destroying a huge chunk of the world’s semiconductor supply. Meanwhile, the debate about hard or soft landing is tilting away from recession since the Fed’s recent pause on the next interest rate hike. Political discord continues.

Seems mostly grim. But notice that the S&P 500 was up 8.3% in the second quarter, and 15.91% year-to-date according to Morningstar. If this is what happens when things are bad, image what would happen if we could all get along?

Short-term market forecasts are subject to the vagaries of news flow and emotions. Over the long term, economic reality matters. While the recent runup feels nice, the market appears to be approaching fair value. Part of the rebound is from the discount it suffered last year when rising interest rates and surging inflation caught the market off guard. Now it appears inflation has peaked, and further interest rate increases will be modest, if they are necessary at all. The issue now is when inflation will recede to the Fed’s 2% target. Economic data will drive the Fed’s decisions as well as the market.

Closer to the Bottom than the Top

In January I said we should expect a 20% correction. I believe the Fed’s hawkish response to inflation has driven markets to over-shoot to the downside. I think the interest rate shock will slow the economy sufficiently to break the rapid rise in inflation and the Fed will pivot to a more dovish stance. We need positive real interest rates with low inflation, so stock prices can normalize. How long this take to play out is probably measured in quarters, not years.

Everyday millions of people vote on the value of companies by buying and selling. Many are influenced by the latest interview on CNBC. The only thing I know with certainty is that none of the pundits know what will happen. If watching the gut-wrenching volatility affects your happiness, you should probably spend your time watching something else. A quarterly review will tell you what you need to know.

Interest rates influence the value of stocks. Stocks are worth less with higher real interest rates than low rates. The artificially low rates we had until recently are the main reason stocks were overvalued in January.

There is a probable way out for stocks. Watch the following: Inflation will eventually recede, the Fed signals a pause, a Russia/Ukraine ceasefire occurs (which will happen at some point, even if it’s a Korean War-type solution where the war never actually ends and there’s a demilitarized zone). Then, China realizes that an economic collapse is worse than COVID and the U.K. accepts the reality that one can’t solve a problem partially caused by too much money via throwing more money at it (this already happened over the weekend – I wrote this on Friday afternoon and guess what, the markets are up about 3% mid-Monday afternoon). These things can happen, and they can happen fast. When they do, stocks should stage a massive, legitimate, well-rounded rebound.

Like Ian, I believe this storm shall pass.

Inveting involve risk, including loss of principal. Past results do not guarantee future results. The opinions expressed here are my own.

The Eye of the Storm

The first half of 2022 was ugly, but at least there are signs that the worst is behind us.

Only six times has the S&P 500 lost more than 15% in the first half of the year since 1932. The result should not be a surprise, given the headwinds facing the economy:

  1. Inflation above 8% per year (highest since 1982).
  2. Aggressive tightening by the Fed (1.5% rate increase thus far with more pending)
  3. Slowing growth expectations
  4. Rising risk of recession
  5. Persistent conflict in Ukraine

The S&P 500 officially entered a bear market on June 13, with a 20% decline from the peak. Keep in mind that the market appeared overvalued at the beginning of the year, and now looks to be about 17% undervalued. From these levels, with forward PE ratios between 16 -17x, the greatest risk to the market would be an extended recession with persistently lower earnings. Earnings moderation is priced-in, earnings collapse is not.

I believe this is a good time to add to equity investments. Short term result can vary wildly, but as the time horizon extends to 5 years or more, the chances of attractive returns increase dramatically, particularly from current valuation levels.

Higher Still?

The good news is the stock market had another great year. The S&P 500 was up 26.84% in 2021. That is on top of the 16.26% in 2020 and 28.88% in 2019. That’s quite a run, even if it started on the back of a down year in 2018.

On the other hand, the S&P 500 is overvalued by most standards. By comparison, the Vanguard Total International Stock ETF, was up only 9%. More telling is the price to earnings ratio. The S&P 500 trades for 21.15 times earnings while the non-US Vanguard ETF, VXUS, trades for 13.2 times earnings, a 37.6% relative discount. (based on Morningstar data)

If you have a diversified portfolio, your investor returns have lagged the S&P 500, where performance was driven by large cap tech stocks.

When will things reverse? I cannot say when, but I can imagine how it might happen. In the words of John Maynard Keynes, “The market can stay irrational longer than you can stay solvent,” the timing is unpredictable. The predictable factor is that it will likely require a catalyst to put the market on sounder footing.

Potential catalysts include:

  1. A worsening COVID scenario with new variants and higher case counts
  2. Persistently high inflation
  3. A Fed policy mistake (watching the yield spread between 2- and 10-year Treasuries)
  4. Slowing earnings growth as Fed stimulus recedes.

If one or more of these events occur and earnings expectations decline, I think a 20% correction would be reasonable. The math of a 4% decline in earnings and an 18 P/E multiple fits such a scenario. But things can go right too, so timing a correction is not a sound strategy.

The prudent course is to plan for liquidity needs and maintain a diversified portfolio and perhaps more cash than usual. Think of cash as an option to buy stocks cheaper if they go down. A 20% correction is not fun, but it is to be expected. When it happens, a little cash goes a long way. One more thing… when the market goes down 20%, you only lose 20% if you sell low. The bigger issue is how long it takes to recover. It has always recovered. Whatever you do, don’t sell low

The Pause that Refreshes

The S&P 500 closed the 3rd quarter with a gain of about 14.7% YTD, despite recent volatility that brought it down about 5% off the highs. (International holdings continued to lag, causing diversified portfolios to generally come in a bit lower.) There are several issues creating enough headlines to spook the market, including inflation, the debt ceiling and potential Government shutdown, tax increases, supply chain disruptions, Fed tapering and the yield curve, and the continuing Covid pandemic. What could go wrong?

I could analyze each issue and explain why they might be more bark than bite, or why they are probably already factored into the market. However, I do have a real concern that the market will have to reckon with, valuation. The market is priced to perfection at about 20x 2022 earnings. Interest rates need to go up for long-term economic stability, and the market valuation math means the market valuation multiple needs to decline. The decline in valuation will not be absolute since it will be offset by presumably rising earnings. Theoretically the multiple could contract without a nominal decline in the market, given sufficient earnings growth, especially in an environment with a healthy dose of inflation. However, I expect interest rates will go up and the market will have an adjustment on the order of a 10% decline sometime within the next 6 – 12 months.

That would be a healthy part of normalization and allow for better long-term returns. Part of the past 3 years gains can be attributed to the Fed’s persistent stimulus. We may be beginning the pause that refreshes. The underlying economy is sound. Supply constraints are preferable to waning demand.

Investing involves risk, including possible loss of principal. Choose wisely.

The Underlying Strength of the Economy Is Unchanged

The underlying strength of the market has not changed. The pandemic is likely to end soon, perhaps by Memorial Day. Disbursement of the just passed $1.9 trillion stimulus is pending, with an additional likely $2.2 trillion coming with Biden’s just proposed American Jobs Plan to be spent over the next 10 years. Finally, the Fed remains committed to keeping rates low until they can persistently hit the inflation target of 2%.

With rising inflation concerns and a 4th COVID wave, crosscurrents made it a bumpy ride. At the end of the first quarter of 2021 the S&P 500 gained about 6.2%. I will spare you the economic scenario analysis and leave it at this. The long-term trend is up, but the short-term is impossible to know. I think the US equity markets are about 5% overvalued. Given the amount of stimulus and the fading pandemic, valuation is not a big concern.

About That Little Correction

I attribute every stock market correction or bear market to one of two reasons. Either valuations were too high and needed to correct to reconnect valuations with reality, or there could be a real-world problem (pandemic, war, recession, taxes, regulation, rising interest rates, etc.) that creates concern about the value of future cash flows.

In my last quarterly update from July 1, I observed, “Near term, the market does not seem to have a lot of upside until we have a Covid-19 vaccine.” Now we know how bad I missed on that prediction. The S&P 500 rallied 14.9% from July 1 to September 2, with the help of the best August returns in about 30 years.

Using the Morningstar Market Valuation chart, the market was about 1% overvalued on July 1. Earnings in July and August were strong, and analysts’ estimates moved higher. Still, by September 2, the chart indicated that the market was overvalued by 8%. The greater the variance of the market from fair value, the more likely the market price is to correct to the analysts’ more rational view. That is what just happened. As of the close on September 8, the market was back to 1% over fair value. However, the S&P 500 was still 6.9% higher than on July 1, when the quarter started. The difference is that earnings exceeded analysts’ estimates and fair value estimates were adjusted accordingly.

What does this mean? It means we need to buckle up for the ride, considering all the reasons to run for the hills. Volatility will not hurt you. As I described, that uncomfortable market experience you just had made you better off. Today the S&P 500 tacked on another 2.01% gain to rebound from part of the correction. That puts us about 3% over fair value, but well within the normal range. For reference, I usually cite 10% above or below fair value as a level to make tactical allocation adjustments, sometimes called market timing, because I think risk becomes materially asymmetric.

Let’s hope the 3rd quarter ends on a good note.

Investing involves risk, including loss of principal. Past performance does not guarantee future returns. Sources include Yahoo Finance and Morningstar.