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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.

Mid-2025 Market Update: Navigating Volatility and Looking Ahead

The first half of 2025 proved to be quite a ride, marked by significant market volatility, including a sharp decline of over 10% in early April. A constant stream of unsettling headlines contributed to investor anxiety:

  • Recession predictions intensified, fueled by various economic indicators and expert analyses.
  • The risk of tariff-induced stagflation emerged as a key concern, with rising import costs potentially leading to slower growth and higher inflation.
  • Expectations for interest rate cuts diminished, as the Federal Reserve signaled a more cautious approach to monetary policy, emphasizing data dependency.
  • A notable public dispute between the President and the Federal Reserve added to policy uncertainty, creating headlines about central bank independence.
  • Geopolitical tensions escalated with the war between Iran and Israel, contributing to global instability and impacting energy markets.
  • Aggressive trade policies, including the implementation of 145% Chinese tariffs, significantly disrupted trade flows and global supply chains. These tariffs were a major factor in the 0.5% contraction of US GDP in Q1 2025¹, primarily due to a surge in imports as businesses rushed to stockpile goods before higher levies took effect, and a decrease in government spending. While imports are subtracted in GDP calculations, the rush to import indicates a proactive, albeit costly, maneuver by businesses to manage tariff impacts.

The President’s negotiating style, characterized by threatening “crazy action” to extract concessions from trade partners, has certainly weighed on investor sentiment and consumer confidence. While these metrics initially plunged, they have since shown some signs of recovery as a temporary de-escalation of tariffs between the US and China was announced in May, with US tariffs on Chinese goods reportedly dropping from 145% to 30% for a 90-day period². Markets, despite the rhetoric, appear to be betting that the President will ultimately avoid actions that cause serious damage to the economy.

Looking further ahead

The Road Ahead: The “Big Beautiful Bill” and the Bond Market

As we move into the second half of 2025, markets and interest rates will likely be heavily influenced by the proposed Big Beautiful Bill (H.R.1 – One Big Beautiful Bill Act) – the budget reconciliation bill currently making its way through the 119th United States Congress. The House of Representatives passed its version on May 22, 2025³. The Senate just passed their version today. Now both houses of Congress with go back and forth to reconcile differences.

As it stands, this bill, in its various forms, is projected to increase the national debt significantly. The Congressional Budget Office (CBO) has estimated that the House-passed version of H.R.1 would increase deficits by $2.8 trillion over the 2025-2034 period (including interest costs related to the additional debt) ⁵. Key provisions that could impact spending and the deficit include the extension of major provisions of the 2017 Tax Cuts and Jobs Act, increased defense spending, and proposed changes to programs like the Supplemental Nutrition Assistance Program (SNAP) and Medicaid⁶.

While the President continues to “jawbone” the Fed to lower interest rates, it’s crucial to remember that the Federal Reserve primarily controls short-term rates. The bond market, on the other hand, holds significant sway over longer-term rates. If the bond market starts to “sniff out” inflation due to increased government spending and a widening deficit, we could see longer-term rates – which are critical for driving economic development – begin to climb.

The question of when our ability to finance this increasing deficit will become an imminent problem is one that many have debated for years. However, the current trajectory suggests it bears close watching. I will be watching the bond market for clues as we navigate the remainder of the year.

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This information is for general purposes only and should not be considered investment advice. Investing involves risk, including possible loss of principle.

Footnotes:

¹ U.S. Bureau of Economic Analysis (BEA). Gross Domestic Product, 1st Quarter 2025 (Third Estimate). Released June 26, 2025. https://www.bea.gov/news/2025/gross-domestic-product-1st-quarter-2025-third-estimate-gdp-industry-and-corporate-profits

² Raymond James. “How does the US-China trade truce impact our market and economic views?” May 14, 2025. https://www.raymondjames.com/bvfs/resources/2025/05/14/how-does-the-us-china-trade-truce-impact-our-market-and-economic-views (Note: The KBOI article also confirms the truce, but Raymond James gives more detail on the tariff reduction percentage)

³ Congress.gov. H.R.1 – 119th Congress (2025-2026): One Big Beautiful Bill Act. https://www.congress.gov/bill/119th-congress/house-bill/1

⁴ Wikipedia. One Big Beautiful Bill Act. (Provides information on the Senate goal for passage). https://en.wikipedia.org/wiki/One_Big_Beautiful_Bill_Act (Also corroborated by news reports like AP and Club for Growth).

⁵ Congressional Budget Office (CBO). H.R. 1, One Big Beautiful Bill Act (Dynamic Estimate). Released June 18, 2025. https://www.cbo.gov/publication/61486

⁶ Committee for a Responsible Federal Budget. “Breaking Down the One Big Beautiful Bill.” June 4, 2025. https://www.crfb.org/blogs/breaking-down-one-big-beautiful-bill (Provides a detailed breakdown of provisions and their fiscal impact). Also, Wikipedia page on the Act (Source 4) lists key provisions.

Peak Uncertainty

I do not know how to write an apolitical market update when the main issue driving markets is politics. We can only hope that Trump’s tariffs ultimately lead to reciprocal elimination of tariffs on both sides. Otherwise, we are playing chicken with our economy and the outcome might not be pretty.

The administration speaks of bringing manufacturing back to the U.S. Autoworkers and unions believe the vision. It will not happen. If auto manufacturing returns to the U.S., it will be automated. If you haven’t been inside a modern car manufacturing plant lately, here’s a link to a 4-year-old video of the Porsche Taycan plant to illustrate. https://youtu.be/XnWYgKWHUwc

Tariffs are the issue, and until the administration clarifies its plans and objectives, there will be uncertainty (and we know markets do not like uncertainty). Is this about fentanyl or jobs? Other countries’ tariffs are not fair to the U.S., and we need to push back, but the lack of clear policy and blanket tariffs are maddening.

Other than that, earnings and jobs are holding up and inflation is down. If Liberation Day goes down as planned at 4 PM today, that will change. But the good news is, Trump can reverse course as economic conditions deteriorate. Businesses cannot re-engineer supply chains overnight. Hopefully, today’s announcement will indicate lower tariff increases and a willingness to negotiate. The longer it goes, the deeper the permanent damage.

Longer term, the question is not if, but when things get better.

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.

How High Is Too High?


The S&P 500 logged a stellar first quarter of 2024, rising just over 10% in 3 months. Moreover, it has gained more than 28% since the October low, just five months ago. It is likely that something will happen to trigger a sell-off from these levels. Trying to time a correction is not a good strategy. Sometimes momentum begets momentum. We could see another 10% rise before a reversal. The price of market returns is volatility. It might help to view part of the recent gains as “cushion” to offset a correction.

We’ve Come a Long Way

I am attempting to lean into rising risk by delaying new cash deployments and allocating new funds to value oriented positions. On the positive side, the Morningstar Market Valuation indicator suggests that the market is only 4% overvalued. That does not suggest a change in strategy, but I see significant parts of the S&P 500 trading at valuations that stretch my imagination.


Valuation and concentration risks are becoming elevated, but a correction is not inevitable in the near term. The key factor, as usual, is earnings and cash flow growth that provide fundamental support for market valuations. Another moderate risk factor would be fewer or delayed rate cuts. More impactful, but less likely factors include an inflation rebound or an earnings slowdown.

The overall outlook remains positive based on the four supporting themes including:

  1. Stable growth
  2. Falling inflation
  3. Impending Fed rate cuts
  4. AI enthusiasm

I will be watching these developments.

Past performance does not indicate future performance. Investing involves risk, including loss of investing principal.

Taking Stock of the Rally

The S&P 500 finished 2023 up 24.23% (Morningstar data source). Even though the index was positive throughout the year, the volatility was challenging.

(SPY is an ETF that tracks the S&P 500. Graph illustrates SPY performance for 2023)

Expectations of lower interest rates and a soft or no landing drove the rally during the past two months. Four important assumptions underpin current expectations.

The market consensus supporting valuations includes:
1. Six rate cuts for a 1.5% cut in the discount rate, bringing the year-end fed funds rate below 4%.
2. No economic slowdown/sustained earnings growth
3. Geopolitical conflicts do not worsen.
4. Domestic political situation does not deteriorate.

These assumptions are not necessarily wrong, but they may be optimistic. The issue is how events surrounding these issues unfold.

Other observations to keep in mind as 2024 kicks off. The Magnificent 7 large cap tech stocks that comprise about 28% of the market cap weighted index (as of 12/19/2023) overshadow the S&P 500 performance. Using the S&P 500 as a benchmark is problematic in that it skews the risk/return of the broader market. I expect the market to broaden as the rest of the market plays catchup and large cap tech cools.

Investing involves risk, including the possible loss of principal. Past experience does not predict future returns. I could go and and list all the other boilerplate language that regulators like to see, but I’ll stop here. If you have any questions about anthing inferred from this post, please consult with me or another investment advisor.

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 State of the Yield Curve

The yield curve is getting a lot of attention because it has flattened 65 basis points this year. Although the yield curve is a good indicator of where we are in the economic cycle, it does not indicate a recession is likely. Fundamental data are supportive of economic expansion.

(Source: Bloomberg, NBER, GSAM, as of 11/30/2107)

Beware the Pundits

Not much has changed since my last blog post, and I don’t have any revelations to share. Trump is still talking about the same issues he mentioned in his campaign. Real change happens slowly. But the drift is real, and that has unleashed animal spirits in the markets.

The gains to date are not purely about valuation. Currently, 70% of companies have reported 4Q earnings, and 2/3 have beaten estimates, according to Forbes. Earnings are improving and the real question is how steep and how long the trend will run.

All things being equal, higher valuations increase risk. If price-to-earnings multiples expand faster than earnings growth, the risk of a correction increases. Without calling names, geopolitical risk seems to be an ongoing factor, so it seems a matter of time until a crisis scares the bejeepers out of the market and everyone scurries to cash.

A Buffet saying comes to mind, “Be fearful when others are greedy, and greedy when others are fearful.” I’m sensing an increase in the greed factor as investors hate missing a rally. This might be a good time to think about harvesting positions you wouldn’t buy at today’s prices, and be very picky about your reinvestment options. Dry powder can go a long way in a correction.

Longer-term, the table is set for sustained and perhaps accelerating, earnings growth. In the 90’s, everyone thought the market would average 12% forever. Now the pundits agree 8% seems ambitious. When have the pundits ever gotten it right?

Finally, recognize that volatility is the price we pay for equity returns. Plan accordingly and stay the course.

Post Election Outlook

The election is finally over.  Markets are beginning to price in the upside potential of a shift to a pro-growth government led infrastructure-led fiscal spending.  This is something I have cited over the past couple of years as the missing piece of policy that could stimulate the economy, given that monetary policy has run its course.

Trump didn’t include a lot of detail in his campaign rhetoric.  Maybe he doesn’t know the details, but we can certainly ascertain his drift.  We do know an administration is a lot more than one person, and collectively, these others will bring the expertise to Trump’s agenda.

We can expect an increase in infrastructure spending.

Trump is known for putting his name on large buildings.  Just imagine if he were President.  According to Capital Group, the spending he has suggested would add up to half a percent per year to GDP over the next four years.

Trump has pledged to lower tax rates for individuals and corporations.  One way to pay for cuts would be to expand the amount subject to tax, which points to a deal for repatriation of the estimated $2 trillion of US corporate earnings held overseas.

Trade is the area most directly controlled by the President.  Trump’s threats to bully concessions from trading partners might work, but also carry the risk of starting trade wars or worse.  However, as occurred with Brexit and Grexit, the votes and threats created leverage, and pressure for concessions.  Perhaps he can negotiate a better deal.

Trump likes to negotiate from a position of strength and has emphasized the need for a strong military.  Increased defense spending to beef up homeland security and offensive capabilities should benefit defense contractors and industrial suppliers.

Health care is another area of focus.  Trump campaigned on repealing the Affordable Care Act.  It is unlikely the 20 million people added to health insurance rolls will be dumped, but the program will be rebranded and modified to reduce the worst imbalances.  Insurance companies will muddle through changes and pharmaceutical companies will still contend with pressure for price regulation.  While more positive than we would have expected a Clinton administration, the outcome is not clear.

He says he wants to repeal Graham-Dodd.  Banking regulation has placed serious regulatory burdens on financial companies.  Some question whether the regulations are adequate, but there is evidence of overreach and unnecessary compliance overhead.  It would be nice to see fewer rules based institutional regulations and more principles-based enforcement of laws to control individuals that compromise the public interest.

It might be best to view the Trump impact as a change in drift, not a full overhaul.