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Q3 2025 | A Quarter in Review
- Konner DeLeon
- Oct 10
- 6 min read
2025 Q3 MARKET INSIGHTS
The third quarter of 2025 finished with strong returns in the US markets, foreign developed markets, and foreign emerging markets.
US Equities set record highs one in every three days during the third quarter, with broader fixed income also finishing positive.
As we approach the end of the year, geopolitical and fiscal considerations continue to be at the forefront of investors’ minds.
KEY TAKEAWAYS
Market Performance
U.S. markets rallied in the third quarter, led by technology and small cap stocks, as the Federal Reserve’s rate cut and further guidance boosted investor sentiment. Emerging markets outperformed, supported by a weak U.S. dollar and continued AI-driven growth.
Fixed Income & Bond Market
Fixed income was volatile in the third quarter as treasury yields fell and the yield curve steepened. This was reflective of both inflation and fiscal concerns. Corporate and emerging bonds posted gains to close the quarter.
Federal Reserve Guidance
The Fed held rates steady in July but cut them by 25 basis points in September. Inflation remained elevated, partly due to tariffs, while slowing job growth and GDP prompted a more cautious outlook.
Geopolitical & Fiscal Considerations
Geopolitical tensions continue to remain high, with war and tariffs on investors’ minds. In the fourth quarter, the Supreme Court’s ruling on the legality of the Trump Administration’s tariffs will be something to watch.
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INVESTMENT PHILOSOPHY & OUTLOOK
Geopolitical events continue to be in focus as we enter the fourth quarter of 2025, but it is unclear what impact this will have on investors.
Markets have continued to demonstrate their resilience by continuing to adjust to new information and benefiting investors who have stayed disciplined with a broadly diversified portfolio. This has been an effective way to capture long term growth potential.
Our approach continues to remain consistent as we rely on strategically constructed portfolios designed to weather volatility and provide liquidity when needed.
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Market Performance
The U.S. markets continued to rally in the third quarter with the technology sector leading the way. The Russell 2000 index, which tracks small cap companies, returned 12.02% in the third quarter. The S&P 500 returned 7.79%, the Nasdaq Composite returned 11.24%, and the Dow Jones Industrial Average returned 5.22%.
All four indices reached new record highs in the third quarter with the Russell 2000 doing so for the first time since November of 2021. This was mainly driven by the Federal Open Market Committee’s decision to cut rates and future guidance indicating the potential for two additional cuts before the end of the year.
US equity valuations continue to remain elevated while foreign developed and emerging markets are being seen by some as a longer-term value play. Looking at the MSCI All Country World Index, which encompasses the US markets along with foreign developed and emerging markets, it returned 7.79% over the same period.
Overall, in the US markets, large cap growth stocks continued to outpace large cap value stocks and small cap stocks saw a boost and outperformed their large cap counterparts with the most recent federal rate cut. In the third quarter, emerging markets and developed markets posted strong gains with Emerging markets outperforming both foreign developed and US markets.
The softer US dollar and continued AI innovation has helped to boost performance in foreign markets. The MSCI Emerging market index gained 10.2% and in the global markets, high profitability stocks were outpaced by low profitability stock with the opposite being true for Emerging markets.
Fixed Income & Bond Market
Fixed income assets were volatile in the third quarter with shifting inflation expectations having an impact. Treasury yields across the curve from short to long-term as the federal reserve reduced its overnight borrowing rate by 25 basis points.
With treasury yields falling across the board in the United States, the yield curve steepened in the third quarter signaling that investors are still being cautious over the long-term economic outlook as concerns over inflation, fiscal deficits, and tariffs have remained high.
Emerging market debt outperformed the United States in the third quarter. Similar to what we saw in the second quarter, corporate credit spreads continued to tighten. Both high yield and investment grade bonds experienced positive returns during the third quarter.
Federal Reserve Guidance
During the first Federal Open Market Committee (FOMC) meeting of the third quarter, they held the federal funds rate steady at 4.25-4.50%. Chair Powell continued to acknowledge the elevated uncertainty around a path forward, but unemployment continued to stay low and inflation remains elevated with tariffs pushing up prices in some categories of goods.
In the final meeting of the third quarter, the Fed cut interest rates by 25 basis points. This was the first cut after a 9 month pause. The FOMC signaled two more rate cuts before the year end but emphasized data dependance. Unemployment levels increased and the FOMC has shifted its focus from the inflations mandate to the unemployment mandate.
GDP rose at a rate of 1.5% in the first half of the year, down from 2.5% last year. The moderation in growth is largely due to the slowdown in consumer spending.
In contrast, business investment in equipment and intangibles has picked up pace while activity in the housing sector remains weak. The median FOMC projections for GDP rose to 1.6% this year and 1.8% next year, which is stronger than initially projected in June. Unemployment increased to 4.3% in August but still remains relatively low with minimal changes.
Payroll job gains have slowed significantly over the past three months, likely due to declines in labor force growth, immigration, and labor force participations. This has been unusual to see slowing in both the supply and demand side for workers. The median projection for the unemployment rate at the end of the year is 4.5%, with projections lowering after. Inflation is still down from its highs in mid-2022 but elevated with total PCE (Personal Consumption Expenditures) prices at 2.7% over the 12-month period ending in August and Core PCE, which excludes volatile food and energy prices, rising 2.9%.
Inflation expectations have moved up over news regarding tariffs, but longer-term inflation expectations remain in-line with the FOMC’s 2% target. The median projected PCE inflation is 3% this year, 2.6% next year, and 2.1% for 2027. Overall, there have been a lot of changes in government policies and the effects this will have on the economy continue to remain uncertain.
After this most recent rate cut, the FOMC is projecting two more cuts in 2025 with additional cuts in 2026. The impact of higher tariffs is beginning to be seen on the prices of some goods, but the overall impact on economic activity and inflation are continuing to unfold.
Geopolitical & Fiscal Considerations
Concerns over trade policy and broader geopolitical tensions heightened investor caution and introduced volatility to the markets in the third quarter. For the United States, trade negotiations continued with several deals being reached. All eyes are on Trump and Xi as they continue to navigate through high stakes negotiations.
In the coming months, something to watch is the US Supreme Court weighing in on a case to determine the validity of global tariffs that were imposed by the current administration.
Depending on the outcome, the market’s reaction could be complex if a full reversal and refund of collected tariffs were to incur. The result of this decision may introduce short-term volatility into the equity markets.
Geopolitical tensions continue to be heightened with military escalation between the U.S., Israel, and Iran. Additionally, the conflict between Russia and Ukraine has continued with no progress towards a ceasefire and a low probability of a ceasefire being reached in the short-term.
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DeLeon Wealth, LLC is a registered investment adviser. Information presented is for educational purposes only and does not intend to make an offer or solicitation for the sale or purchase of any specific securities, investments, or investment strategies. Investments involve risk and, unless otherwise stated, are not guaranteed. Be sure to first consult with a qualified financial adviser and/or tax professional before implementing any strategy discussed herein. Past performance is not indicative of future performance.
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